Stocks Special Reports LICs Credit Technical Analysis Funds ETFs Tools SMSFs
Learn
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features Technical Analysis SMSFs Learn
About

News

The Trump trade: rhetoric versus reality

Libby Cantrill  |  23 Nov 2016Text size  Decrease  Increase  |  

Page 1 of 1

While Trump's protectionist policies could potentially harm the US economy, retaliation from trading partners could be an even more serious risk, according to PIMCO.

 

Investors have generally been "risk on" since Donald Trump's victory on 8 November. Are they right?

Most investors seem to be primarily focused on President-elect Trump's "Goldilocks" mix of pro-growth economic policies that includes tax reform, infrastructure spending and broad deregulation--which may be expedited by Republican one-party control in Washington.

But when it comes to Trump's more draconian policies on trade and immigration, many investors seem to assume his rhetoric is just that--rhetoric.

Yet, trade and immigration are areas where the president has broad powers to act unilaterally--that is, without congressional approval.

This is particularly the case on trade policy. Both the Constitution and subsequent powers granted by Congress provide broad powers to the presidency to enact trade policy with little check from the legislative branch.

For instance, while Congress needs to approve new trade agreements, a Trump White House could unilaterally withdraw from many existing trade agreements, such as the North American Free Trade Agreement (NAFTA).

A Trump White House would also have the authority to impose tariffs on specific industries and to label certain countries "currency manipulators".

Trump would also have broad powers over foreign assets and terms of trade should his administration determine national security is in jeopardy.

Tit for tat?

While protectionist policies could potentially harm the US economy, retaliation from trading partners could be an even more serious risk. Trading partners could impose countervailing tariffs or retaliate in other ways; China, for instance, could sell its holdings of US Treasuries.

"A more differentiated view of the potential long-term economic and policy consequences of President-elect Trump must take on board both the considerable uncertainties still surrounding the next US administration's economic policies and the global links between economies and markets (which have become closer over the years)," is how my colleague Joachim Fels put it in "Mr Market, Dr Strangelove and President Trump."

In market terms, right tail risks--which would result from supportive economic policies--have increased. But left tail risks--which could result from policy missteps--may be just as fat, if not fatter.

All the president's men

Investors have been looking to Trump's Cabinet-level appointments for clues to how policy will actually be implemented.

Understandably, all eyes are on who will fill the top posts at the Treasury and Commerce departments, but it would also behoove investors to pay attention to a lower-profile, but important office--the United States Trade Representative (USTR).

This individual will not only help define Trump's trade policy but also be on the front lines to execute it. Many advisors who are currently leading the Trump transition on trade seem to share the protectionist views that President-elect Trump advocated on the campaign trail.

If the USTR post is filled with one of these advisors, those buying the "Trump trade"--at least as it relates to trade--may have buyers' remorse.

More from Morningstar

• Populism takes a wrong turn

• Italy braces for referendum that risks Brexit-style consequences

 

Libby Cantrill is PIMCO's head of public policy and a regular contributor to the PIMCO Blog. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.