US under Trump: Diminished or unambiguously worse

The poll results are a stark contrast to Trump’s surprise victory in the 2016 elections, where he moved a despairing electorate sick of broken promises with his vow to “Make America Great Again”. While strong growth in the first three years of his presidency appeared to suggest “Promises Made, Promises Kept”, Trump’s poor handling of the Covid-19 pandemic has left the US economy — but not its stock markets — on life support. The unprecedented speed of the White House revolving door suggested a loss of confidence from even his closest allies in Washington.

“Over more than two centuries, the United States has stirred a very wide range of feelings in the rest of the world: love and hatred, fear and hope, envy and contempt, awe and anger. But there is one emotion that has never been directed towards the US until now: pity,” writes Irish Times columnist Fintan O’Toole. Obviously, not all criticisms are as scathing and Trump still has plenty of supporters, but quite indisputably, no other White House occupant in living memory had provoked the same level of controversy. The Edge Singapore examines how Trump’s America has come to this.

Smoke and mirrors?

Just two years ago, it seemed that the good times had returned to America, as the US economy grew 3.8% q-o-q in 1Q2018. In September 2019, unemployment fell to 3.5% — its lowest ever rate since December 1969 — from the double-digit figures at the start of the decade. “We have the greatest economy in the history of America,” Trump bragged to reporters on June 15, 2018, a refrain that he would continue to maintain on his Twitter account in subsequent years. The Heritage Foundation, a conservative think tank, called it the strongest economy in a quarter-century.

But Insead economist Pushan Dutt points out that GDP growth and stock market performance did not vary much from the preceding Obama years. Michael Dyer, multi-asset investment director at M&G Investments, says that growth under Obama averaged around 2.25% per year while Trump averaged slightly higher at 2.5%. While the S&P 500 gained at an annualised rate of 14.5% and the Nasdaq and technology sector 18% under Obama, these indices gained 14.6% and 20% to 25% respectively under Trump, with the latter skewed by a recent surge in technology stocks.

Of course, Trump was lucky to preside over the tail end of the longest US economic expansion in history, which was kicked off by Obama’s US$831 billion ($1.13 trillion) fiscal stimulus in 2009. Economic growth and unemployment trend lines show no significant deviation from that of the Obama years.

Still, Trump does have some successes to his name. For example, a Wall Street Journal op-ed pointed out that the NFIB Small Business Optimism Index, which languished below 100 for all but one month of Obama’s tenure, jumped 10 points to nearly 106 in December 2016 — weeks after Trump beat Hilary Clinton.

Sherry Madera, chief industry and government affairs officer at Refinitiv, attributes this to Trump’s more pro-business signalling. Record low unemployment rates and wage growth of around 6% is nothing to scoff at even if they were won off Obama’s coat-tails too.

For investors, Trump is best remembered for cutting corporate tax rates from 35% to 21%, which fuelled sustained growth of the US markets. But the cuts, says the Tax Policy Center, will add some US$1–2 trillion to the already huge US national debt and flies in the face of typical Republican fiscal discipline. Insead’s Dutt argues that this threatens to explode Washington’s burgeoning public debt — already the world’s largest at US$26.9 trillion as of September.

Dutt is also sceptical about the real long-term economic benefits of these cuts even if Covid-19 had not reared its ugly head. The tax cut was promised to supercharge hiring, wages, growth rates and investment by companies. “But if you take a look at the data, you find that a bunch of the tax cuts were used for stock buybacks by companies,” he remarks. Very little of this fiscal stimulus has actually affected macroeconomic fundamentals in the US, though it did perhaps exacerbate what Harvard economist Larry Summers calls a “sugar high” in US stock markets.

In fact, Jean-Louis Nakamura, Asia chief investment officer of Lombard Odier, sees the tax cuts as a poisoned chalice for financial markets due to their indirect impact on US monetary policy. Typically used to jumpstart the economy in times of recession, the tax cuts were applied to an economy well on its post-Global Financial Crisis recovery trajectory. Fears of runaway inflation thus saw the US Federal Reserve — which sets monetary policy independently — raising interest rates to a peak of 2.42% in April 2019, unsettling financial markets used to low rates post-2008.

One thing that may have benefited the economy though was deregulation, as Trump eased restrictions on oil pipelines and simplified some financial regulations. “US financial deregulation will push community banks to win back credit market shares [and] help US SMEs and foster growth,” says a report by Allianz and Euler Hermes while the Wall Street Journal points out that fossil fuel deregulation has seen the US become a net oil producer. But this comes at the cost of heightened financial risks to investors and a worsening of the present climate crisis.

On the flipside, however, the Trump administration’s inaction on climate change could deny the US access to the immense economic potential of ESG (Environmental, Social and Corporate Governance) investing. Despite growing international interest in sustainable investing, the US is on the backfoot regarding deploying capital to this potential growth area. US regulators and investors are also not yet fully compliant with emerging ESG standards. If Washington does not take steps to come into ESG compliance, Madera of Refinitiv warns, investors could divert capital to countries that do.

The perils of America First
Ironically for a man who vowed to “Make America Great Again”, Trump’s erratic and unilateral foreign policy appears to have left the US diminished in the eyes of the world. A Pew Research Centre survey of 13 countries found that positive perceptions of the US had reached a two-decade low of 34%. ISEAS-Yusof Ishak’s State of Southeast Asia 2020 survey found that 47% of respondents expressed a lack of confidence in the US as a strategic partner. This is in part due to Trump’s abdication of global leadership and insistence on an “America First” foreign policy — often to the detriment of regional markets.

“Over the last four years, Trump’s unconventional management of foreign policy has led to volatility across Asian markets. China has borne the brunt of it with the imposition of tariffs and confrontational approach regarding trade. But this has also meant that the rest of Asia feels the impact as many in the region are export-oriented,” says Mary Nicola, portfolio manager, global multi-asset at PineBridge Investments. Thomas Gitzel, chief economist at VP Bank, fears that another Trump term would further escalate US-China tensions. He sees these hurting Asian economies.

“In terms of geopolitics, I think the record looks unambiguously worse as the big legacy of the Trump administration will be the trade war,” says Insead’s Dutt. On top of the damage to China’s businesses and America’s consumers, the trade war undermined global trade institutions like the World Trade Organization (WTO). Admittedly, Asian countries outside of China could benefit from trade diversion in the short run while China’s shift towards a consumption-based economy has helped it cope with the tariffs. But these largely export-driven economies are likely to lose out more economically from a global trade slowdown while a Bank of Finland model sees current tariffs slowing global GDP growth by 0.7%.

Cedomir Nestorovic, professor of geopolitics at Essec Business School, also highlights Trump’s rejection of multilateral trading agreements like the Trans-Pacific Partnership (TPP), which he says allow smaller states greater agency to shape the final agreement in their favour. Instead, Trump has favoured bilateral agreements, putting smaller states at a disadvantage vis-a-vis stronger states. Deborah Elms, executive director of the Asian Trade Centre (ATC), argues that bilateral agreements are often less effective than multilateral agreements as most supply chains span several markets rather than just two.

“A stampede back to bilaterals could … compound the difficulties of getting to yes with a larger group of members in the future. This is because each layer of agreement between members adds to the complexity of the new deal,” Elms warned in ATC’s Talking Trade blog back in 2015. Admittedly, this trend towards more parochial trading arrangements had begun since the collapse of the WTO Doha Round, with states increasingly using regional rather than global trade agreements. But by abdicating Washington’s traditional role as a defender of free trade, Trump has accelerated this trend.

Other states are emulating Trump’s trade unilateralism. Angered by a South Korean court ruling that major Japanese firms must compensate the families of South Koreans pressed into force labour under Japanese colonialism, Tokyo retaliated by removing Korea from Japan’s export white list, which eases export procedures for preferred economies. Trump’s unilateralism may have created a negative precedent for states to use trade restrictions for geopolitical advantage, initiating greater supply chain and political risks.

Trump’s regulations hindering Chinese firms listing in the US could, says Refinitiv’s Madera, have significant implications for foreign access to US capital markets. US markets are deep and liquid, she says, and dipping into this reservoir of financing is often a powerful impetus for growth. “If we are starting to become more bifurcated and “America First” … will [these capital markets] be as efficient as they can be, and where do business leaders go to access their capital?” she wonders. Restricting access to US capital, she worries, could threaten the robustness of the international financial system and financial centres like Singapore.

But while Trump has diminished the US’s standing in Asia, the region still considers Washington a key regional security partner. Essec’s Nestorovic points out that despite growing concerns about Washington’s erratic behaviour, China is still seen as a bigger threat. ISEAS-Yusof Ishak’s State of Southeast Asia survey reveals that 71.9% of regional elites fear China’s growing influence. Trump’s excesses will be tolerated as long as the US balances Beijing. As it is, states like India and Japan welcome Trump’s tougher China policy.

The shadow of Covid-19
M&G’s Dyer says Trump’s presidency has been a game of two halves, with the latter arguably having a larger influence on his legacy. While his first three years showed mixed results, these small victories have been erased by his mismanagement of Covid-19 throughout this year. Though Trump cannot be blamed for Covid-19 and the recession, the US economy may have fared better had he not downplayed the Covid-19 threat and acted more quickly to control the virus.

When the world looked to Washington for leadership against Covid-19, Trump abandoned the The World Health Organization. Instead of acting to coordinate a global solution for the distribution of medical equipment, his administration allegedly moved to hijack facemask shipments to other countries, with ally Germany accusing Washington of “piracy”. Meanwhile, the White House’s failure to contain the virus has denied the global economy its engine.

It was on the back of building the liberal international order and exercising global leadership that the US cemented its global preponderance as the world rebuilt from the Second World War. For now, the world will continue to respect the US for its power, wealth and benign reputation. But many may find it difficult to disagree with Biden’s assessment that Trump is the worst president that America has ever had.