Donald Trump is only the second US President to have returned to the White House after a period out of power. Non-consecutive terms are almost unprecedented.
Having had four years in power, and another four to plot his return, there’s no doubt that the new President will be quick out of the blocks this week. Some measures require Congressional approval. Others, though, can be implemented by executive order.
Tariffs are delayed, not dismissed
Despite the absence of tariffs in Trump’s initial raft of executive orders, he has announced over the weekend that America will impose a 25% tariff on goods from Canada and Mexico, as well as a10% duty Chinese imports from the 3rd of February. Plans to create an “External Revenue Service”, a new government agency to collect all tariffs, duties and revenues from foreign sources, were also announced.
He also said he wanted to reverse the US trade deficit with the EU through tariffs or more US energy exports.
Trump’s protectionist stance risks stoking inflation
There is a possibility that Trump’s policies such as tariffs, tax cuts and mass-deportations could all be inflationary. If US inflation remains elevated, or starts rising again, the Federal Reserve will be less likely to cut rates, which was their policy decision late last week, i.e. no change.
This may affect other central banking polices around the world. For example, if the RBA lowers interest rates and eases monetary policy conditions it would likely result in a weaker AUD. This is the same in many parts of Europe.
Emerging Markets
Emerging markets will be affected through trade, interest rates, foreign exchange and capital flows, all of which can impact growth. These markets are very diversified in terms of resilience, vulnerabilities and sensitivities to tariffs.
Also, as emerging markets span the globe across regions, there are different exposures to trading partners and their ability to attract capital flows.
For example, many countries in Asia, such as Vietnam and India, have benefited from near-shoring flows, which have contributed to their higher value-added manufacturing and export base.
These flows have come from countries in the region, China, and the West, including from the US. Such investments may be in the crosshairs of the trade war but could also be used as a bargaining tool.
Mexico and other Latin American countries, as well as Central and Eastern European countries such as Hungary, Romania and Serbia, have also benefited from investment flows, which underscores how integrated such emerging markets are with the economies of their main trading partners, like the US and in Europe.
Moreover, one should expect varying degrees of retaliation or reaction. China has indicated they will reinforce and augment their fiscal and monetary policy stimulus measures to counteract the tariffs. While China is expected to retaliate and the Asia region should be more sensitive, we think Europe will be willing to negotiate with Trump.
On their own, emerging market fundamentals are relatively sound.
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