Many woke up to a surprise turn of events on November 9th when Donald Trump, business man and television personality, was voted in as the next President of the United States.
Trump’s win, and subsequent actions, have held much to speculate on what would be the future of one of the most powerful nations in the world and it’ impact on the global market.
Jamal Hejazi, Professor of Economics for the Global Manager and Chief Economist for Gowlings WLG, facilitated a master class on Monday September 10th and cut through the rhetoric of the past 18 months and discussed the actions taken by the Trump administration.
Hejazi, who believes that Trump is a smart man and has generated some smart policies to move the US forward on the domestic front, examined some of global consequences of his policies.
Despite the US adding 1.4 million jobs to the economy in 2015, there was a feeling by some that jobs had not grown since the 2008 financial crisis. Particularly in sectors like manufacturing, a sector that had once been the backbone of America. This lack of good paying jobs for lower skilled labour is what brought Donald Trump into power.
Through the succession of multiple free trade agreements, there was a complacency by previous governments to take certain groups for granted. These were the groups that became unemployed as manufacturing factories moved out of America and into other countries offering cheaper costs.
“It was not their intention, but in terms of policies [implemented], it happened.” Explained Hejazi.
These governments neglected to address those who were negatively affected by the free trade agreements. Trump was able to tap into the anger of these groups and successfully gained their vote in 2016.
Since then Trump has been challenging the views of previous US governments who committed to free trade, and is implementing his own policies focusing on fair trade – expecting the surplus of any trade to reside within the American economy.
Since taking power, the US economy has dropped to a 3.9% unemployment rate and has seen a growth in GDP of 4.2 %. The Trump administration has positioned this as the positive outcome of his policies.
But was it Trump or Obama? This has yet to be seen according to Hejazi, “It takes 6 to 8 quarters to see the full impact of monetary policy or fiscal policy. In this case, [these factors] could have been the impact of the Obama administration. It has yet to be seen if Trump is the genius he says he is”
If the Trump policies are responsible for producing this short-term growth, can they be sustained in the long-term? Is 4.2% growth sustainable?
While there are potential contributing factors to the GDP growth that could be related to Trump’s policies on tax cuts and his the implementation of tariffs, these policies only have a short-term impact in nature.
Tax cuts are often a short-term stimulus where people have more money to spend following the cuts, but it is not meant to produce long term growth. The second factor, that was a consequence of pending tariffs, is China’s anticipated response where the country bought a surplus of soy-beans. A one-time purchase that will likely not happen again.
When the impact of Trump’s policies reach maturity at the 6-8 quarter timeframe, what will continue the growth has yet to be seen.
Will his idea of returning to the domestic powerhouse ideology work?
Trump’s now infamous campaign platform of “Make America Great Again” is drawing from the ideology of the mid-20th century. His attempting to bring back the glory days of the 50’s, 60’s and 70’s when American workers were the whole supply chain. This was the time that automotive manufacturing was flourishing in the United States; when people were being paid a strong wage to fasten a bolt.
This was an era before the global economy had the strong integration in domestic markets that it does today. The days of high wage for low skill employees are gone for the United States and will not be resurrected notes Hejazi for one key reason: The investment from organizations is no longer going into the manufacturing phase.
“The lion’s share of the profits goes to the parent company because they control the R&D.” noted Hejazi.
The production of automotive are not going to move back to the United States. The corporate tax cut incentives nor the repatriation tax on corporate taxes for US companies that move overseas are not going to work. The vehicles are still going to be imported from the countries with the lowest cost of manufacturing. The winning companies are the ones taking the surplus from lower manufacturing costs and invest it into R&D.
“America is doing well now but a lot of jobs [of the past] are gone forever. Ford Motor Company will not bring production back to the USA. Ford’s recent example to not make cars in the United States which are currently being done in China [is evidence of this]. Noted Hejazi, “Trump thinks he can invest and revive an old industry but it’s not going to happen. Widgets are gone forever. It is now about services, intellectual property and innovation.”
“Supply chains are strong that tax cuts” Hejazi concluded.
How does his policies threaten domestic growth in the long-run?
It is clear that Trump’s objective, through his economic policies, is to entice America’s industries to produce domestically and hire local talent while keeping unskilled illegals out of the country.
On the domestic front Trump is doing well with removing barriers for companies to look at the United States as an opportunity to grow. He has cut corporate taxes from 35% to 15% and is removing the red tape, both of which had been reasons for companies to shift headquarters offshore. But is his near-sighted focus of domestic growth through the deregulation of the banking industry too aggressive that it could create a recipe for a repeat of the 2008 financial crisis? Will lending become reckless?
Trump’s focus is one main goal: “He is trying to make the economy lean, tax friendly, light on regulations and challenge trade. But, it shows his lack of maturity, what he knows about history and the respect for details.” Noted Hejazi.
Again, Trump’s intentions for his immigration policies are to bring jobs in America back to Americans. However the skill level required for the current and next generation of jobs are not held by those who are currently unemployed.
“When you look back at what has made America great, it has been the openness, its innovation and free flow of ideas, so cutting the amount of talent [coming into the country] is a bad thing.“ noted Hejazi. “There is a need to make sure there is not a skill gap, by bringing in those who have the [needed] skills into the economy.”
Hejazi agreed that there is a need to create policies to stop illegal immigration however the focus needs to be on bringing in the right people – ‘smart immigration’ explained Hejazi.
“Get rid of the red tape on H1 visas, give them a reason to immigrate to the country as they’re going to stay in your country and help you grow it.”
Is short-term gain worth the lasting effects on global relationships?
There is no doubt that Trump’s short-term outlook on his economic policies will have likely have lasting effect globally.
“On the domestic front his is doing a great job” noted Hejazi “he isn’t a fool but [he] lacks the knowledge of history that is going to predict the tougher times in the future.”
“The idea of trying to move away from the global economy will be negative... He needs to remember that there are 8 billion people on earth, and only 300 million of those are Americans.”
Hejazi believes that on the global front, like with the domestic deregulation, Trump is being too aggressive and that the policies he is implementing are not going to give him the outcomes that he is expecting.
“GDP is not going to sky rocket over the next 3-5 years, it will be a normal growth, but he has made a lot of enemies [in a global context] and he has done America no favours.”
He has shaken the faith of the world in America’s promises and changed the political and economic orders by going against NATO and going against the decorum of free trade such as TPP and NAFTA. No one has confidence in the loyalty an allied agreement with United States. This is especially true through Trump’s proposals of sunset clauses within agreements that would allow nations to withdraw from agreements every five years.
“Factories don’t just get up and move for short-term gain” noted Hejazi “They are thinking 100 years, not in five year intervals.” Companies are going to invest where there is long-term opportunity.
Is Trump biting the hand that is feeding his economy?
The 21st century has been about the growth of Asia, and, in Hejazi’s view, Trump is trying to prevent that - but it is too late.
When the US opted out of the TPP, Trump was trying to counter China’s influence but it didn’t work. China now has free reign of free trade agreements as the largest economy within the new CPTPP.
“People are now looking at China as the responsible long-term partner now” noted Hejazi.
China’s dictatorship landscape lends a hand, in their consistent growth that Trump perceives as a threat. The Chinese government does not think in four year successions of terms but plans for long-term outlooks Hejazi explained. It’s a difference in philosophy.
“[China] sees a lot of growth because the government is so outbound and thinking 10 years from now. They’re investing in Cuba, Africa and Asia. Trump isn’t even at this stage.” Noted Hejazi
“[China] investing everywhere and they are very disciplined at it. That is why in the next decade I believe they are going to be the next superpower” predicted Hejazi.
But this is not Trump’s intention. Trump’s goal is to slow the Chinese economy so that they give concessions to tariffs and allow the Unites States to maintain their economic strength on the global-stage. The implications of this goal, however, will be felt negatively world-wide.
If Trump’s Administration plans to move forward with the implementation of next round of tariffs may be the tipping point for a global recession through three central factors; oil, commodities and supply chains.
China’s falling demand for oil has greatly contributed to the oversupply of oil, thus dropping the price of oil and affecting Russian, OPEC and US economies.
A slower Chinese economy will also lessen the demand of other commodities they import from other countries. China is the world’s largest consumer of commodities and a reduction in imports will affect the nations who depend on China to buy from them, especially Australia, Brazil, Peru, Indonesia and South Africa.
Chinese goods have long helped keep prices down for Americans through supply chain. While China is not the world’s engine for growth it does play a large part in the ecosystem of global supply chains. In 2014 China alone accounted for 10% of the global trade.
“Countries that are dependent on trade with China will feel the impact on falling demand, which will spill over to countries that are not dependent on trade with China.” Noted Hejazi “Supply chains increase how productive you are. The lower the supply chain cost, the more you can spend on R&D. You’re more productive.”
It will be the domino effect. Falling demand is going to hit companies who have direct and indirect exposure to China. Every company in America is going to feel the pain of a slowing economy in China through their supply chains. American companies that sell to China are directly exposed”
New Order with a Strong Potential for Negative Consequence?
Professor Hejazi’s master class presented a new world order where President Trump has gone against the old political and economic orders that have been developed over many decades. He has set a precedent for the next President of the United States.
He has put a strain on long standing political and economic alliances. Old allies, such as NATO, are uncertain about the loyalty of the Trump Administration and it is causing uncertainty in the future of trade agreements with historic allies, including Canada.
While President Trump views his short-term actions against powerhouses such as China will as long-term gains for his country, the uncertainly in the global market is leading to the opposite effect. It is reducing economic activity and putting a strain on businesses world-wide.
The Trump Administration may mean well in the short term but there is a strong potential of a negative long term impact globally – including the interests of the United States.
Only time will provide the conclusive evidence of Trump’s impact as the 45th President of the United States.