Global Trends by Martin Khor

Monday 21 November 2016

Aftershocks after the Trump earthquake

Even before taking office, President-Elect Donald Trump and the policies he promised during his campaign are already having a worldwide impact in at least three areas – global finance, trade and climate change.


Following the elections earthquake that produced Donald Trump as the next United States President, the aftershocks have begun to be felt.

These are in at least three important areas:   the global economy, trade, and climate change.

Global funds are starting to move out of developing countries, affecting their currencies and causing great uncertainty, as seen in the case of Malaysia.  

The Trans-Pacific Partnership (TPP) looks like it will fade away, as President Obama, seeing the signs on the wall, gave up on efforts to give it a final push through Congress.   

And delegates meeting at the annual UN climate conference in the last two weeks were all speculating whether a President Trump would pull the US out of the Paris Agreement or even the Climate Convention, and what would then happen to future international climate action.

These are only some of initial effects in anticipation of a Trump presidency.   As the President Elect appointed a controversial extreme conservative to be his White House chief strategist, the world also wondered what is in store with regard to new US policies on immigration, the UN, the Middle East, Asia and even NATO.

The first concrete real-world effect was on currencies and the flow of funds in emerging economies.

In Malaysia, foreign funds withdrew RM800 million of equities in the second week of November, following RM948 million the week before, according to MIDF Research, and were also reported to have sold off bonds, contributing to a significant fall of the ringgit against the dollar.

What happened in Malaysia is part of a more general trend.  The US dollar has strengthened in expectations that Trump will spend massively on infrastructure, thus increasing inflationary pressures and leading the Federal Reserve to raise interest rates earlier than expected.

Many billions of dollars of funds that had moved to emerging economies in search for higher yield are returning to the now-attractive USA, and this reverse flow is expected to quicken.

This can cause volatility and havoc in many emerging economies, in the wake of an exit of a sizable portion of the hundreds of billions of dollars of foreign funds.

Malaysia is also vulnerable as foreign funds own about half of the government bonds and have quite high stakes in stock market.  As outflows continue, the ringgit could weaken further.  The lesson from the boom-bust financial cycle is that what comes in as short-term funds will most likely move out when conditions change. 

On the TPP, the effects of the US elections came swiftly. The US Congress must ratify the TPP for it to come into effect and the last opportunity is during the “lame duck” session before Trump’s inauguration on January 20.

But immediately after the elections, Senate majority leader Mitch McConnell Dougall announced there would be no vote on the TPP during this year.

Sensing there is no hope for a TPP bill to succeed, Obama signaled he would give up the effort.  As Obama is the true, and often lonely, champion of the TPP, while Trump had pledged to kill it during his campaign, there is almost no prospect for the TPP to be ratified in the US.

This turn of events goes beyond Trump. The public mood in the US has become so strongly against such trade agreements that both Trump and Hillary Clinton opposed the TPP in their campaigns, and it was unlikely there would be enough votes in Congress to see it through, whoever won the election.

Without the US on board the TPP cannot survive, as at least six countries with 85% of the combined GDP of all the 13 TPP countries need to ratify the agreement for it to come into effect.     

A larger issue is what overall trade policy Trump will adopt.  He has vowed to slap on huge tariffs on imports from China and Mexico.  Doing so would be against basic World Trade Organisation rules, so Trump might have to discard his campaign threats – or else hell will break loose at the WTO.

Thus the Trump presidency will have a potentially huge impact on the future of bilateral free trade agreements as well as on the multilateral trading system.

Even more is at stake in climate change, widely described as the biggest crisis facing the world.  During the campaign, Trump described climate change as a hoax and vowed to pull the US out from the Paris Agreement, which Obama had joined with other countries to ratify and which came into force in record time on 4 November.

There was a sombre mood at the UN Climate Convention meeting in Morocco in the past fortnight.  Delegates and activists alike speculated in the corridors on what would happen if the US leaves the Paris Agreement.

French President Francois Hollande told the conference that “the United States, the second largest greenhouse gas emitter, must respect the commitments it has undertaken,” stressing that the agreement was “irreversible”.

If the US leaves the Paris Agreement or the Climate Convention, the effects would be disastrous.  Other major countries might follow suit, as happened when the US left the Kyoto Protocol.

Freed from the commitment the US made to cut its Greenhouse Gas emissions by 26-28 percent below 2005 levels by 2025, a Trump administration might un-do Obama’s executive orders and the Environment Protection Agency rules to cut emissions from existing power plants.

These very possible developments is so depressing that hope flickers that Trump will still change his mind and prove to be a climate co-operant if not exactly a champion.

The chances of that happening there are not good.  Trump has announced that his choice for EPA head is Myron Ebelle, known for his skeptical views on the “myths of climate change.”   

These three aftershocks after the election earthquake are quick signs that confirm that not only Americans but the world at large are in for uncertain and uncomfortable times ahead.  

We are in for a roller coaster ride, and the world as well as the world order may never be the same again.