Donald Trump’s plans to ‘Make America Great Again’ might not come to pass if he continues his swashbuckling style of tearing up trade pacts and erecting walls between countries. The US President’s decisions on immigration and foreign policy have clearly realigned Washington’s role in world affairs. But one has to wonder whether Trump, who is bent on honouring his campaign promises, might prove to be disastrous to US’ future.
Walking the Plank
The US is proposing to levy import duties on goods produced in Mexico and China. But this could backfire. In levying such a protectionist duty, the US will be making life miserable for itself. It has to realize it is a costly manufacturing base and will thrive in its role as a marketplace than as a producer. It net imported goods worth USD 500 billion in 2016. Keeping domestic manufacturers in good humour will only lead to inflationary pressure on the economy as costs go up.
Once inflation kicks in, can rate hikes be far behind?
In order to control inflation, the US Fed Reserve will hike interest rates at a faster pace. Ten-year bond yields in the US are already near a one-year high, and they could move further up.
There is a silver lining for the US. A higher interest rate will make investors pull money out of emerging markets and plough them back into the US. But listen to this: the US dollar will strengthen further which is not a healthy sign for US exports.
Aakash Prakash of Amansa Capital had recently pointed out in an article that Trump will not like to work in a strong dollar environment. Trump had in an interview with The Wall Street Journal complained about the strength of the US dollar.
Prakash adds that the only way to prevent the dollar from strengthening is for Trump to prevail on the US Fed to delay hiking interest rates. Any such intervention by a head of state in a central Bank’s affairs will, however, be subject to who follows Janet Yellen as the Fed Chair. A delay will keep the foreign funds invested in emerging markets. However, it will weaken the dollar. And a weak currency will lead to increased imports, thus pouring cold water over Trump’s goal of protectionism.
IT is not so bad
Closer home, the Indian IT industry, which derives 65 percent of its revenues from the US, is gearing up for what could be a cold winter.
Media reports say that the Trump administration is looking to limit legal immigration to protect American jobs by curbs anti-immigration visas. While nothing has been formalized yet, IT companies here are preparing for the worst. There is expected to be a rush for H1B visas when counters at the US embassies open on April 1.
Broking firm Nomura has said that the move will affect the viability of offshoring business model of Indian companies. But India is not entirely in a tight spot. Companies like Infosys, TCS and HCL Tech have worked out alternative action plan: they have started hiring locally in the US.
Trump’s recent move to ban entry of workforce from 7 Muslim majority countries around the US have been condemned by world leaders and IT companies. Though India is not affected by this move, Trump’s intention of protecting the domestic economy at any cost is not inspiring.
Given the poor optics that Trump has been receiving on his policies so far, it will be worth his while to take a pause and assess the consequences of his office. At stake is the US consumer who will end up with a higher cost of living and little money in their savings.
A big price to pay.