J-Money, October 2016
During the first US Presidential debate between Donald Trump and Hillary Clinton on September 27, something interesting started happening to foreign exchange rates and assets. As the markets decided that Clinton was winning, the Mexican peso started strengthening radically and Asian stock markets began moving upwards.
This tells us something useful about what the two possible outcomes of the US election would mean for world markets, including Japan’s. We can see from this response that world markets equate a Clinton victory with stability and, more or less, the status quo; and that a Trump victory would mean uncertainty, and therefore volatility in markets.
From Japan’s perspective, though, it’s possible that either winner is a step backwards, and this is because of the Trans-Pacific Partnership. President Barack Obama wants to get the TPP through and into law before he leaves; if he doesn’t, both Trump and Clinton have said they are against the deal as it stands.
TPP is generally considered to be good for Asian economies, including Japan. “The Trans-Pacific Partnership promises to be one of the most significant trade deals in history, covering 40% of global GDP,” says Mike Sell, head of Asian investments at Alquity, the fund manager. “This is another tailwind that will push long term economic growth across Asia, on top of the secular growth and economic reform stories already unfolding.”
He argues that Vietnam will probably benefit more than anyone, but it is largely accepted that TPP is at its heart a free trade deal between the US and Japan, which between them account for 60% of the group’s economic benefits. Indeed, both countries already have bilateral free trade agreements with most of the other constituents but not with each other; TPP is in some sense a way for the US and Japan to develop a bilateral deal within a broader umbrella.
Indeed, the Peterson Institute for International Economics says that by 2025 Japan’s exports and imports will grow by $140 billion annually each, and its national income by more than $100 billion, which is far more than any other member state. Measured in this way, Japan will gain more from TPP than anyone else (though in percentage terms one can argue Vietnam or Malaysia are affected more).
So what, then, are the consequences of the next leader? Although both are nominally against TPP, they have very different levels of conviction on the subject. Trump is flat-out against it and would, given the opportunity, stop it coming in to effect.
Clinton’s position is more nuanced. She initially supported the idea, then said that she would oppose it. In the run-up to the election she has tried to say that she is unequivocally against it and will remain so, but there remains a sense that she might support it if certain elements of TPP are modified. If that is the case, then a Clinton victory could be more positive for Japan than a Trump victory.
Quite apart from TPP, Clinton has an established track record as Secretary of State which Japan can assess. Her time in office, during Obama’s first time, was characterized by rebalancing towards Asia, including Japan. In her foreign policy experience, she has always seen the US-Japan alliance as important and worth protecting.
The problem with Trump is not so much that he feels differently, as the fact that it can be very hard to work out what he feels at all on foreign policy issues, and what he might do. Since there is no track record in foreign policy to assess, Japan simply would not know what it would get from a Trump president. It could be good or bad, and in the absence of certainty, markets and economies tend to assume the worst.
It should be said, though, that even a President Clinton might be less free trade friendly than Secretary of State Clinton, reflecting the fact that Americans in general seem to have become less interested in foreign engagement and more suspicious of foreign trade agreements. Japan should probably expect more cautious policy in terms of foreign free trade no matter who wins the election.
More broadly, there is the question of how the two possible presidential outcomes would affect world markets, and this is where the movements of currencies and stocks during the first debate is instructive. It seems likely that a Trump victory would cause a great deal of volatility at first, while the world tried to work out just what that meant in policy terms.
Based on what we do know of policy, however, Trump wouldn’t necessarily be bad for America in economic terms. Trump is all about tax cuts on both the personal and the corporate side, and plenty of spending on infrastructure. “Many of his economic policies could actually provide a big boost to the US economy,” says Shane Oliver, chief investment officer at AMP Capital Investors. “The Reaganesque combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and with reduced regulation, a bit of a supply side boost.” Reagan is probably the closest parallel for what a Trump presidency would resemble – lots and lots of spending.
In that interpretation, a stronger American economy is good for world growth, and therefore for Japan.
The problem is what comes next. Trump’s policies would blow out the budget deficit, and if his public statements about trade translate into protectionist tariff hikes (particularly with China and Mexico), it might also trigger a trade war and higher consumer prices. He also wants to be tough on immigration, which could slow the labour force growth and increase costs. “All of which,” says Oliver, “could mean higher inflation, interest rates and US dollar, and a hit to growth.” That’s before talking about any geopolitical shocks, or wars that he might engage in. Under this scenario, US growth would be impeded, which would be bad for global growth and Japan.
One thing that should be remembered by those who are nervous about the possibility of a Trump presidency is that, if it happens, he will still be kept in check by Congress, just as Obama was. “I suspect Congress can be relied on to ensure that Trump does not go off the rails and economic and political reality would force him to the centre, but this would take time,” Oliver says. No president can get outlandish ideas into action without getting them through Congress, although this partly depends on the balance of power in Congress after the Congressional elections, and Congress has in recent years leaned more towards Republicans than Democrats.
Predicting anything from an election is difficult. “With too many variables still unknown, including the election winner, the make-up of Congress, or how proposals will morph into policy, long-term market implications are uncertain,” says David Lafferty, chief market strategist at Natixis. “However, we still believe that Mr Trump’s newcomer status and lack of policy history make him the source of more short-term volatility.”
Generally, a Clinton victory looks better for Japan than a Trump one, but either way there will be a period of adjustment ahead with ramifications for TPP and the whole US-Japan relationship.