US poll could help emerging markets
Setback for Trump may offer a reprieve from isolationism
● Donald Trump’s first two years as US president have to a large extent been an unrestrained reign. For emerging-market economies such as SA’s, this week’s midterm elections would determine whether he would have checks and balances imposed on a presidency that has pushed for increased protectionism and trade wars; or whether he would get greater licence to pursue his “Make America Great Again” strategy, which has proved isolationist.
While Trump has been quick to proclaim a victory for his Republican party, as it increased control of the Senate, the party lost control of the House of Representatives to the Democrats.
The loss “will be perceived to allow for additional checks and balances on President Trump”, US-based economists Mickey Levy and Roiana Reid of Berenberg Capital Markets told Business Times. The rand is the most liquid of emerging-market currencies and rallied on the outcome of the polls, breaking through the R14/$ mark for the first time since August.
Trump and his base of supporters are largely against free trade. Through his colourful brand of “diplomacy”, he has caused tensions around the world with old enemies and traditional trading partners, particularly China.
This has stoked fears of a trade war, where countries or regions use rounds of trade policy to inflict economic harm on each other.
Fears over a trade war and rising interest rates in the US have fed into global uncertainties around growth, which have fed into weak equity markets. London’s FTSE 100 is about 12% off its high for this year, while the JSE All Share is more alarmingly 18% off its January highs.
Among a host of issues, the US wants China to trim its trade surplus and to change the way it deals with US intellectual property. China wants the US to drop its tariff threats and ease bans on cellphone-makers ZTE and Huawei.
Emerging markets have particularly felt the brunt of this aggression between the two largest global economies.
Trump “has been active in escalating USChina trade tensions by instituting tariffs and so fears of slower global growth ensued — resulting in rising market risk aversion, which has translated into some currency weakness for emerging markets”, says Investec economist Annabel Bishop.
When the world sneezes, SA is like that person left with a soggy shirt sleeve because they were standing too close. That is the nature of operating an open economy that aggressively trades with the rest of the world.
About 41% of rand-denominated bonds are foreign held, and as such the economy is susceptible to movements and shocks in global markets. This proportion of foreignowned bonds is the highest among the emerging-market nations.
When Trump won the presidency two years ago, emerging-market nations initially benefited from the confusion stoked by his victory. No-one was sure how serious he’d be about implementing his radical campaign promises.
Despite the introduction of some levels of accountability to the White House after this week’s polls, economists still expect Trump to beat the drums of trade war.
“Trump’s approach to trade policies will remain unchanged, particularly his brassknuckle negotiating tactics with China,” said Levy and Reid.
The reality of the election results is that Trump and the Republicans have not been fully neutralised. As they still control the Senate, they are likely to make use of their veto power and executive orders to drive their policy agenda. Their position on trade is unlikely to change, with some Democrats actually being in support of the antifree-trade agenda.
The US says that American jobs are being exported to China, as the world’s secondbiggest economy still relies on its exports to keep its vast populace employed and to ensure it maintains high growth rates.
The most valuable US company, Apple, with a market valuation above $1-trillion, manufactures its products in China. On the back of an iPhone, it reads: “Designed by Apple in California. Assembled in China.”
During his presidency, Trump has introduced tariffs amounting to billions of dollars on Chinese goods.
However, these protectionist measures have hurt a number of his supporters, such as soybean farmers who have seen the price of their produce rise by 25%, making it less attractive on the world market.
The US’s attitude to China is indicative of its attitude to emerging markets as a whole, including SA, which trades heavily with both economic superpowers, particularly China.
Escalating trade tensions, which are already feeding into slowing growth rates in China, will have a severe impact on commodity prices such as gold, platinum and copper.
The SA-China relationship is an important economic lifeline for SA, with bilateral trade between the two nations reaching around $40bn last year.
SA is already at risk of being downgraded by Moody’s after finance minister Tito Mboweni’s inaugural mid-term budget in October. The ratings agency issued a warning that SA, like Turkey, Argentina and Brazil, faced heightened geopolitical risks.
Trump has been active in escalating US-China trade tensions
Annabel Bishop
Investec economist