Donald Trump’s victory in the race to become the next president of the United States will have economic consequences for the rest of the world that are likely to be profound and quite immediate.
As world leaders congratulated him, Trump said on Wednesday that he had received a “powerful mandate” to govern.
If he implements just a fraction of his promises — from higher trade tariffs to deregulation, more oil drilling and more demands on America’s partners in the Western military alliance North Atlantic Treaty Organization (NATO) — the pressure on Government finances, inflation, economic growth and interest rates will be felt in every corner of the world.
Trump’s Republican Party also secured control of the US Senate and was making gains in the House of Representatives, which could make it easier for the president to legislate his proposals and approve key appointments.
“Trump’s fiscal promises are seriously troubling — for the U.S. economy and global financial markets — as they promise to greatly expand an already excessive deficit, even as he threatens to undermine important institutions,” said Erik Nielsen, chief economic adviser. of the UniCredit Group.
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“It must be concluded that Trump poses a serious — and so far greatly underestimated — threat to the US Treasury market and therefore global financial stability,” Nielsen said.
Import tariffs, including a universal 10% tariff on imports from all foreign countries and a 60% tariff on imports from China, are a major pillar of Trump’s policies and will likely have the biggest global impact.
Tariffs inhibit global trade, reduce exporter growth and weigh on public finances for all parties involved. They are likely to increase inflation in the United States, forcing the Federal Reserve to act with tighter monetary policy.
The International Monetary Fund (IMF) has already characterized global growth as weak, with most nations producing “weak” expansion. A further hit to global trade is likely to pose a downside risk to its 3.2% GDP growth projection for next year.
Companies mostly pass import costs on to the customer, so tariffs are likely to be inflationary for U.S. consumers, forcing the Fed to keep interest rates high longer or even reverse policy. course and increase borrowing costs once again.
That will be even more likely if Trump keeps his spending and tax promises, which could increase U.S. debt by $7.75 trillion by 2035, according to the nonpartisan Committee for a Responsible Federal Budget.
“Higher inflation would weigh on domestic demand, especially as it would require a restrictive monetary policy response, with a negative impact on growth,” said Anis Bensaidani of BNP Paribas.
China and Mexico come into focus
For emerging markets that rely on dollar financing, this policy mix will make borrowing more expensive, causing a double whammy on top of lost exports.
The same forces that could drive up U.S. inflation could weigh on prices elsewhere, especially if Trump imposes excessive tariffs on China as he has promised.
As the world’s biggest exporter, China is desperate to revive growth and so may look for new markets for products that stop going to the US and dump products elsewhere, especially in Europe.
Central banks are likely to react quickly as business sentiment, especially for trade-dependent open economies, will deteriorate quickly.
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“The ECB (European Central Bank) may be tempted to accelerate its rate cuts to a neutral rate of 2% and, once US tariff policies become clearer, it would be reasonable to cut rates below the neutral rate,” said Greg Fuzesi of JP Morgan.
It is also likely that governments will retaliate against any US import tariffs, further inhibiting trade and further reducing global growth.
The Fed’s high rates and lower borrowing costs elsewhere would also boost the dollar — as evidenced by the 1.5% drop in the value of the euro and yen during the early hours of Wednesday — further hurting emerging markets, since more than 60% of international debt is denominated in dollars.
Mexico could be the hardest hit country, given Trump’s rhetoric about closing the border, which comes against an already deteriorating domestic outlook.
“Mexico is at the greatest risk,” said Jon Harrison of TSLombard, as the Mexican peso fell 3% against the dollar.
Mexico is especially vulnerable because trade tensions and threats of deportations can exacerbate domestic problems such as cartel activity and the government’s failure to contain violence, Harrison added.
Among the potential winners, Brazil could see increased trade with China, as Beijing replaced all of its U.S. soybean imports with Brazilian soybeans when trade tensions rose during Trump’s first term.
But Europe could also suffer the additional blow of rising defense costs if Trump reduces support for NATO.
The continent has relied on a US military presence since the end of World War II, and with no end in sight to Russia’s war in Ukraine, Europe will be forced to fill any gaps left by a US withdrawal.
But government debt in Europe is already close to 90% of GDP, so finances are strained and governments will find it difficult to stimulate an economy suffering from trade barriers and, at the same time, finance military spending.
Trump’s deregulation efforts are likely to extend over a longer period, but internationally agreed proposals aimed at making banks more resilient, commonly known as Basel 3, could be the first casualty.
The new rules are due to apply from January 1 and policymakers are already debating whether they should go ahead even if the US withdraws.
