For all of Donald Trump’s 'America First' pro-growth rhetoric, analysts don’t think the global economy can afford the US president’s protectionist policies.
At the heart of Trump’s protectionist policies is the notion that free trade and globalization have not benefited the middle and lower class, and created further income inequality. But economists argue that Trump turning his back on globalization in favor of protectionism can hurt the US’s economy, especially the very social classes Trump vowed to help, news outlets reported.
Alp Eke, senior economist at the National Bank of Abu Dhabi, cited the International Monetary Fund and other research institutions, saying that protectionist policies “will definitely be counterproductive and will hinder growth and cause uncertainty.”
“Uncertainty about the future will slow down investment, and eventually, consumption as business will reduce jobs. Right-wing candidates are gaining popularity in Europe as well, which may mean more protectionist/populist measures are expected."
"This development is worrisome at a time where expansionary monetary policies coupled with negative interest rates started to reach its limits and further measures will be ineffective,” he said.
While talks of protectionism have centered on Trump’s policies, Europe is witnessing a similar trend. The UK’s decision to leave the European Union was also backed by protectionist rhetoric, with right-wing movements in France and Germany voicing similar interests.
Obama Forecast Rosier Than Trump
Virtually the whole world is beating up on the administration of President Donald Trump for daring to predict that low marginal tax rates, regulatory rollbacks, and the repeal of Obamacare will generate 3% to 3.5% economic growth in the years ahead.
In a CNBC interview last week, Treasury Secretary Steven Mnuchin held the line on this forecast. He also argued the need for dynamic budget scoring to capture the effects of faster growth. Good for him.
But what's so interesting about all the economic-growth naysaying today is that former president Barack Obama's first budget forecast roughly eight years ago was rosier than Trump's. And there was no peep of criticism from the mainstream-media outlets and the consensus of economists.
One after another, Trump's critics argue that because there was 2% growth over the past ten years or so, we are doomed to continue that forever. This is nonsense.
Long-Term Impact
After just a few days into office, Trump signed an executive order to pull the US out of the Trans-Pacific Partnership, a 12-nation trade deal that includes some of the world’s largest economies. The countries remaining in the pact are Canada, Japan, Australia, New Zealand, Peru, Malaysia, Mexico, Vietnam, Chile, Singapore, and Brunei.
A report issued by HSBC’s global research division on January 26 said the US’s withdrawal from TPP is having a negative impact on business sentiment “at a time the global economy can ill afford it".
“From some news reports, it appears that the withdrawal may have emboldened advocates of protectionism in the United States and potentially elsewhere—a development that could prove even more costly to the economy.
In its report, HSBC said the economic damage from the cancellation of the TPP in its current form will come from “forgone future gains in the region, translating into lower rates and less innovation than would have otherwise been the case.”
“Those lost gains may not be obvious to some observers, but they are real. Slow growth in the TPP region could spill over into other regions through low TPP-country import demand,” the report said.
Naeem Aslam, chief market analyst at Think Markets, agreed with that view, saying it was difficult to knit a scenario under which protectionist policies could stimulate growth.
“Here we are … and both Donald Trump and Theresa May (UK Prime Minister) are in the driving seat. Perhaps they will be able to carve some deal which could be beneficial for their own countries, but for global growth, it is not beneficial. We will not see the impact of these protectionist policies for a few years to come,” he said.