There has been considerable speculation on what the Trump administration, which will take over in January, would mean to the rest of the world, including India. During the election campaign, several messages were conveyed. But how seriously does one take such rhetoric? While his articulation tends to be aggressive, it is consistent and not different from what it was in his first stint. Nevertheless, some conjectures can be made on what lies in store.
The ‘Make America Great Again’ or ‘America First’ campaign is likely to be at the forefront of all policies. First, the issue of immigration has been high on the agenda of the Republican Party which has overtly stated that jobs need to be created more for the local population.
While the target appears to be the southern border, strict laws for the world are a likely corollary. This can make it challenging for US companies to hire relatively cheaper workers from outside. And, this could have an impact on India’s IT sector, for which US is a major destination. There can be some concerns here for India’s services exports, which have grown at remarkable rate in the last few years. The fine-print of the policy which sifts skilled and unskilled workers would be important. Stringent policies on hiring of immigrant labour can lead to a labour crunch internally, leading to higher wage-pull inflation.
Second, there has been a frontal attack on China for using unfair means to dump goods in the US. This would mean high tariffs on goods from China. The extent of increase would vary across goods to ensure that it would make sense for domestic buyers to choose locally produced goods. What is being spoken of is 10-20 per cent additional tariff on all imports, 60-100 per cent for those from China, and even higher for auto imports from Mexico. Given that the US is the largest export destination for non-oil products from India, we must pay attention to any action taken on imports in general. While the US reducing dependence on China for goods can be an opportunity for India, Trump’s rhetoric with respect to other countries would also be critical.
Third, the threat of higher tariffs on China has already spurred the country to roll out stimulus measures, which can have implications for global trade. China would look to other markets, and hence India has to be prepared with counter-measures to ensure that cheap goods are not dumped.
The overall growth pattern of China will be important because global commodity prices will be driven by this. As China seeks to grow faster, commodity prices would ratchet upwards. China’s stimulus measures are already leading to a reversal in the trend of low commodity prices.
Fourth, higher tariffs in the US would mean higher inflation. Higher inflation would also come in the way of how the US Fed sees the economic trade-off between growth and inflation. Trying to support growth through tariffs would end up pushing up inflation which, in turn, will come in the way of lowering interest rates. This is a conundrum the Fed faces, especially as the dot plot already indicates that there would be another 100 basis point cut in rates in 2025, which will be the first year of the new President.
Fifth, Trump has always been for lower corporate taxes and is considered to be pro-industry, and this is why there has been overwhelming support for him from the corporate sector. But lower taxes and maintenance of healthcare will mean larger deficits and borrowing costs. And this is already being reflected in terms of bond yields moving up. There will be additional pressure on the Fed when it comes to tackling inflation.
Imported inflation
The RBI has often reiterated that the decision on repo rate is based on domestic inflation considerations. But actions taken in the US have the potential to affect global inflation too, which will feed into the system through imported inflation and hence cannot be ignored, especially when core inflation is already inching upwards.
Sixth, the status of the dollar will be uncertain. Higher inflation will mean higher interest rates for longer periods, which will keep the dollar stronger. And this is already visible since the election results were out.
However, there are also arguments for a weaker dollar, to ensure there is an export advantage for the US. Either of these two situations would mean work for central banks across the world. A stronger dollar will mean that central banks have to defend their currencies. A weaker dollar would mean ensuring that countries do not lose their competitive advantage.
From the point of view of markets, Trump regime could mean more volatility. As far as FPI flows are concerned, they would tend to be less predictable. A stimulus earlier by China saw major withdrawals from emerging markets. Actions as well as intentions announced by the US would tend to drive sentiment, which in turn has the potential to have an influence on global currencies.
The world would have to be prepared for a new normal with Donald Trump taking over. His stance at the time of campaign was no different from the action taken when he was President earlier. Therefore, consistency can be expected, though the extent could get tempered given the new world economic order. But for sure, all governments and central banks have to remain vigilant when the world’s largest economy targets the second largest.
The writer is Chief Economist, Bank of Baroda. Views are personal