(Gage Skidmore, CC BY-SA)
The long period of disinflation resulting in decreasing interest rates is probably coming to an end. Globalization also faces a crisis. In many places of the world nationalist and protectionist sentiment is increasing. Mr. Trump’s policy may strengthen both those tendencies.
Destabilization of financial markets
Trump’s policy will trigger significant changes in the American economy whose effects will be experienced by the whole world, including the European Union. The most important effects will include growth in the budget deficit and accelerated growth of the public debt.
The US budget deficit planned for the fiscal year 2016 will amount to USD550bn, i.e. 3.3 per cent of GDP. According to some economists, the deficit will grow to USD1 trillion in the coming years, which will also significantly affect the global economy.
In May 2016 Trump stated that the US debt could be partly defaulted (not repaid fully). He has never referred to this idea again, but in his business career he resorted to so-called Prepackaged Bankruptcy. Should Mr. Trump really propose such a solution, it would mean an enormous shock for global financial markets which could trigger another financial crisis. The value of US debt securities would decline, which would place European banks in a difficult situation. Many of them hold US assets in their portfolios.
- Growing inflation triggered by the fiscal impulse.
- Growth in interest rates and yields on US bonds.
- Strengthening of the dollar as a result of the growth in interest rates. The depreciation of the euro against the dollar will foster European Union exports. The issue of whether the United States will respond by imposing restrictions on imports from Europe will remain open.
The strengthening of the dollar and inflation growth in the USA will support inflation in the European Union, as imports of oil and gas, and certain other commodities are settled in dollars.
The inconsistency of the monetary policy between the USA and the EU and the significant growth in interest rates may backfire on emerging markets. Growth in interest rates may trigger sudden capital outflows from countries belonging to this group. The debt crisis in the 1980s, as well as the crisis in Mexico in 1994-1995, and in Eastern Asia in 1997-1998, resulted partly from the change in the US monetary policy. The wave of financial crises on emerging markets would have obvious adverse consequences for the European Union economies. Under such circumstances, the Polish currency could weaken significantly.
A “hard landing” of the Chinese economy, as a result of a trade war with the USA, would pose similar adverse effects. A slowdown in China would affect commodity markets, causing, among others, declines in coal and copper prices.
Trade will tremble
The introduction of tariffs and renegotiation or termination of trade treaties will directly affect the global and European economy. As a consequence, mutual turnover of the USA and the EU may suffer.
The European Union and USA are the most economically developed areas of the contemporary world. Jointly they constitute the richest and most absorptive market worldwide: the GDP they generate accounts for almost 46 per cent of a global one. Both used to be linked by commonly observed values on which their social order and major economic policy rules rely – mainly, the freedom of establishment and limited state intervention in economy.
Trump’s policy of curbing globalization will affect turnover between both regions separated by the Atlantic. The President has not yet taken a decision concerning the continuation of the Transatlantic Trade and Investment Partnership (TTiP) negotiations, however, it is almost certain that the talks will be at least suspended.
Germany will become one of the first victims
According to Maciej Cybulski, the President of the Polish-American Chamber of Commerce in Warsaw, the trade war between the USA and the European Union will not take place; nevertheless, potential exporters will experience more difficult times.
The decline in the US-EU trade turnover will have an adverse impact in the economic growth of both areas; however, it will not necessarily mean a shock to the European economy. Intra-Community trade is twice as high as trade with external partners. Exports of EU goods and services to the USA account for only 3.6 per cent of the European Union’s GDP. For the United States, exports of goods and services to the European Union account for only 2.6 per cent of GDP.
For the United States the importance of the European Union as a trade partner will decrease following the Brexit. Until now, the UK was the second US trade partner, following Germany. The turnover is balanced although in 2015 the USA recorded a deficit in the trade of goods slightly exceeding USD2bn. On the other hand, the trade deficit with Germany amounted to as much as USD68bn. The United States records a higher deficit only in trade with China. Therefore, it is likely that Germany will become one of the first victims of Trump’s protectionist policies.
In 2016, US exports of goods to the European Union reached USD247.4bn, whereas imports amounted to USD381.5bn. The United States recorded a deficit of USD134.1bn. As compared to 2015, US exports decreased by almost 10 per cent, whereas imports dropped by over 10 per cent. The European Union is the most important sales market for US goods and the second biggest supplier of goods to the US market (following China).
On the other hand, the United States has a positive balance of trade in services with the European Union. In 2015 it reached USD54bn. The United States exported services worth USD226.8bn to the European Union and imported goods for USD172.8bn (data derived from the Census Bureau, U.S. Bureau of Economic Analysis, U.S. Department of Commerce).
According to the preliminary data of the Polish Ministry of Economic Development, in January-November 2016 the value of Polish exports to the USA amounted to EUR4bn, whereas the value of imports from the USA reached EUR4,6bn. The United States is the 12th consumer of Polish goods and the 8th supplier to the Polish market. The share of exports to the USA accounts for 2.36 per cent of the total exports, and the share of imports from the USA – 2.84 per cent of the total imports.
The American Challenge
The French political scientist and economist Jean-Jacques Servan-Schreiber, in his book, “The American Challenge”, which was famous 50 years ago and is now rather forgotten, recognized that American corporations deployed in Europe represent the second world power. The overwhelming dominance of American enterprises in Europe had a major impact on the development of post-war Europe. It enabled the reduction of the technological distance, also influencing European regulations related to the operation of various industries. European corporations gradually started to play a more and more important role in the USA.
US companies have so far invested in the EU countries three times as much as in Asia, whereas the value of EU expenditure in the US is eight times as high as the EU’s total investment in China and India.
Since the beginning of the 20th century Europe has been the main destination of US investment, and since 1945 European foreign investment has been mainly deployed in the United States. In 2000-2013, Europe accounted for approximately 56 per cent of US direct investments – by 2013 investments of US companies in the EU countries amounted to EUR1,7bn, while – on the other hand – European firms invested EUR1,7bn in the USA.
In the European Union such US banks as J.P.Morgan, Citigroup, and Morgan Stanley are present. Many well-known international, non-financial corporations also operate, such as General Electric, Penske Automotive Group, PPL Corporation, PRA Health Sciences, Invesco, Xerox, Ford MotorCopart Inc, CBRE Group Genesee & Wyoming Inc, eBay Inc, Google, Microsoft, and Apple.
Among others, corporations with their headquarters in the EU countries, which have establishments in the United States, include Royal Dutch Shell, BP, Volkswagen, Daimler AIG, Siemens, Enel SpA, and several European banks, such as Deutsche Bank.
In the automotive sector, the competition between the USA, Japan and Europe continued for years following the World War II. For many years, General Motors was the number one in the sector; however, America lost in competition with European and Asian companies.
Today, American companies – Apple, Google and Amazon – are leaders in the ICT sector.
On both sides of the Atlantic, huge corporations must adjust to local regulations and rules. Last year Apple was punished by the European Commission with a fine of EUR13bn for tax evasion. The Commission is also pursuing proceedings against Google, accusing the company of monopolistic practices.
On the other hand, EU companies, for example BP, Volkswagen, and Deutsche Bank, were punished in the USA with huge fines for violation of regulations. Their expansion to the opposite side of the Atlantic depends, to a major extent, on the friendly climate. If the relations between the EU and USA become strained as a result of the new President’s policies, foreign corporations would become victims.
Donald Trump’s statements concerning (not only) economic policy are often inconsistent, and it is impossible to say which ideas will be implemented in practice and with how much determination.
On the one hand, Trump has announced deregulation of the economy and tax reductions, which may recall the supply-based economy of the 1980s. He is a strong supporter of elimination of regulations hindering shale and oil extraction, and he is skeptical about costly programs related to combating global warming. The USA has become the world’s largest oil producer and it is able to control prices of this commodity in the global market.
Relatively cheap energy is the advantage of the US economy, enabling it to attract foreign production companies. The European Union, with its significantly more expensive energy – not only due to the shortage of its own commodities but mainly as a result of different regulations – is unable to compete with the United States in many branches (e.g. in the chemical industry). Trump’s policy will strengthen this situation, although the President’s dreams of creating as many jobs in industry as in the 1950s and 1960s are unrealistic.
Relying on internal market deregulation, Trump simultaneously criticizes globalization, the beneficiaries of which include many emerging countries, including the EU member states from Central and Southeast Europe. He also threatens to undertake individual interventions in relation to companies which fail to comply with the government’s expectations.
In December 2016, the manufacturer of air conditioners and heating equipment, Carrier Corp. (an Australian company) abandoned plans to close its factory in Indianapolis and move the production to Mexico after Trump threatened that tax advantages would be lifted and high border tax would be introduced on Carrier products exported to the USA. The President’s supporters recognized this as the first success of his policy of re-industrialization and maintaining jobs in the USA.
The United States is a market which is too big for global corporations to ignore it. Raising duties may force foreign corporations to invest in the United States in order to have access to that market. According to Reuters agency, the Korean Samsung, which has already invested USD17bn in Austin, Texas, announced further investment in the United States. Trump thanked the Korean corporation for the investment using Twitter. Another Korean company, LG Electronics, is considering investing in the state of Tennessee.
Should Trump start a serious crusade against globalization, leading to paralysis of the World Trade Organization, this would have an enormous effect on the standing of the European economy. On the other hand, it cannot be excluded that the deregulation will result in a recovery in the USA and other countries will follow the same road, returning to liberal management rules.
We need to take contradictory scenarios of Trumponomics into consideration, since after two months in office the 45th President of the United States is still a huge unknown.