Donald Trump’s “America First” ideology is one of many manifestations of a break in the process of globalization. The incremental increase in open markets for trade, capital and labor which for decades was promoted by the U.S. now faces opposition from domestic interest groups that have been left behind. Politicians are exploiting the built-up resentment of “silent majorities” which feel that they have been exploited by a darwinian system that combines market fundamentalism with meritocracy to promote the interests of a self-serving elite. At the same time, this new global elite, a “noisy minority” with highly progressive views on social issues, has clashed with a “silent majority” which identifies with traditional conservative social values. Trump has masterfully played upon this resentment, by espousing anti-globalization positions on trade, immigration and climate change, and by touting “politically incorrect” views on foreigners, immigrants and minority groups.
The resentment is not only a U.S. phenomenon, but also obvious in Brexit, Italian and German political instability, the rise of strongmen in Turkey, Poland and the Philippines, etc… The consolidation of Xi’s power in China also is rooted in the same soil, as the Communist Party recognized that the enormous rise in wealth concentration in China would inevitably cause political chaos without the re-imposition of order by strong reins. The process continues around the world with or without the democratic process; Erdogan’s supremacy was confirmed in Turkey last Sunday, and both Mexico and Brazil are headed for controversial elections which are likely to mean decisive breaks with the past.
These powerful domestic political forces can play out in unexpected ways. In France, disruption has produced Macron and a shift to the right. Something similar may happen in Brazil, where the current leader in the polls, Jair Bolsonaro, promises a sharp turn to the right. Brazil has been a reluctant participant in trade liberalization, choosing to pursue long-standing protectionist policies. On the other hand, for decades it has fully embraced financial liberalization and a highly orthodox (i.e. U.S. determined) monetary framework. The result has been an over-sized financial sector, a rapid process of premature de-industrialization, wealth concentration and economic stagnation. Several generations of the best students from Brazilian universities have flocked to banks (Brazil’s leading bank, Itau, prides itself on its engineering culture.) Into this mess has stepped Bolsonaro, with a message of “Law and Order” and support for traditional “family values” which appeals to a “silent majority” heavily influenced by evangelical churches. Ironically, in highly bureaucratized, statist, leftist Brazil, change means a move to entrepreneurial freedom, and Bolsonaro, so far, has espoused a very pro-business, economic-freedom agenda.
The new resistance to globalization has several important consequences.
First, over the short-term it may favor the U.S.. This is certainly Trump’s political calculus. As the largest economy in the world, the U.S. relies less on trade than almost any other country, and it can move to self-sufficiency more quickly than others can. As the largest consumer market in the world and the prominent importer, it can largely impose its own terms on those seeking access to its market.
The opposite goes for small countries with export-oriented economies. The big losers are countries like Taiwan, Korea, Thailand and Mexico, all of which are key players in global value chains. For example, those most hurt by Trump’s proposed tariffs against Chinese imports, aside from the American consumer, will be the Taiwanese and Korean producers of electronic parts. Ironically, as more countries favor nationalistic approaches over global connectivity, large protectionist economies such as Brazil and India may now gain a significant edge in attracting investment.
Second, Trump’s policies are inflationary. They will push wages up, which will benefit Trump politically. The Federal Reserve is likely to be compliant and allow inflation to rise, as it is in the interest of the U.S. to see nominal GDP higher than nominal interest rates. However, higher nominal rates and a rising dollar will be a heavy burden on EM countries that have borrowed heavily in U.S. dollars and on those that need foreign funds to finance current account and fiscal deficits.
Third, higher wages will accelerate the trend towards robotization in developed countries. This is already happening in an accelerated fashion in Japan with its declining work-force, and it will spread quickly to the U.S. Trump’s “America First” protectionism is happening exactly at a time when automation technology is making it increasingly practical to “reshore” supply chains and final-stage manufacturing back to the U.S. Interestingly, this week Foxconn, the world’s largest electronics contract manufacturer, broke ground on a $10 billion investment to manufacture flat-screen liquid crystal display panels in Wisconsin, its first investment outside of Asia.
The disruption in supply chains will be extremely disruptive to those EM countries that actively participated in them. Once again, the small export-led economies will suffer the most. However, large EM economies with big domestic markets like Brazil and India have the least to lose. China will combine automation with a rapid move up manufacturing value chains in order to increase the in-sourcing of intermediate goods, creating more pressure on small export-led economies.
Fourth, as the U.S. increasingly flaunts the rules of global trade to promote ”America First,” it will seek to impose bilateral deals on exporters wanting to access the its market. Other large economies will do the same, reluctant to export consumer demand. Regional blocks will increase in importance, with China determined to dominate an Asian trading block. If the U.S. pursues its popular “cold war” against Chinese technology companies it will force Beijing to double-down on its efforts to dominate frontier technologies. The result may be a strange new tech world which revolves around two separate ecosystems, one dominated by Silicon Valley, the other by Beijing. The current structure of the technology venture capital system which now invests with equal eagerness in both countries may be completely disrupted. We may see the same happening in the auto sector, with the industry revolving around the two largest markets China and the U.S., with separate supply chains.
Fifth, as regional trading blocks gain traction, U.S. dollar supremacy is likely to decline. In particular, the Chinese yuan will gradually gain space as China becomes the key player in Asian trade. China has already replaced the U.S. has the largest importer of hydrocarbons and will increasingly insist on having contracts priced in yuan. The U.S.’s heavy handed implementation of trade and financial sanctions, such as those on Iran, Russia and North Korea, also will accelerate the acceptance of yuan-based contracts.
Fed Watch:
India Watch:
- India’s national strategy for artificial intelligence (NITI.Gov)
- A look at the value factor in the Indian stock market (Indexology)
China Watch:
- A look at Chinese ETFs (ETF.com)
- Xi tells CEOs he will strike back at the U.S. (WSJ)
- Beijing’s big idea for southern China (SCMP)
- How China secured a port in Sri Lanka (NYtimes)
- JPMorgan on MSCI A share inclusion (SCMP)
China Technology Watch
- China extends lead in most powerful computers (NYtimes)
- Google invests in JD.com (CNBC)
- U.S. faces unprecedented threat from China tech (bloomberg)
- CATL, the rise of China’s new EV battery champion (Technology Review)
- Competition in energy storage markets (McKinsey)
- The disruption of battery storage technology (McKinsey)
EM Investor Watch
- The Erdogan Supremacy (NYtimes)
- Erdogan’s bet pays off (Brookings)
- India’s shaky reforms (FT)
- Now Erdogan faces his economic mess (NYtimes)
- The roots of Argentina’s surprise crisis (Project Syndicate)
- The rise of strongmen in global politics (Time)
Tech Watch
Seven reasons why the internal combustion engine is dead (Tomraftery)