WASHINGTON, D.C. — As President Trump begins his second hundred days in office, analysts remain divided in their views about the likely effects his trade and tax policies will have on emerging markets and their rising middle classes. Some analysts see the policies harming emerging markets, which could slow the growth of the middle classes, and some see them helping emerging markets. In the meantime, investors themselves are giving a vote of confidence to emerging markets by fueling the best yearly start for emerging market stocks and currencies in 11 years.
What very well may be at stake for emerging markets is the continued rise in their middle classes. By many accounts, including a study by the consulting firm Ernst and Young, the world is in the midst of its third great expansion of the middle class since the beginning of the 19th century. Nearly all the expansion is taking place in emerging countries. In just the two years between 2014 and 2016 more than 100 million households moved into the middle class, nearly all in emerging countries.
Forecasters predict for emerging markets and their rising middle classes that another three billion people will escape poverty and enter the middle class by 2030. The growth will be especially strong in Asia, where one analyst says 88 percent of the next billion newcomers to the middle class will live. If these forecasts are correct, the growth of middle classes outside Europe and the United States will have profound effects on geopolitics and trade, even, as the Ernst and Young study put it, going so far as to “rescue the global economy.”
Across this picture of thriving economies and a growing middle class in emerging markets, a shadow could fall in the form of U.S. President Trump’s trade and tax policies. While concerns in the earliest days of his presidency had to do mostly with his proposed protectionist trade policies, more recent concerns have to do with Trump’s proposed domestic tax policies.
As the president’s first 100 days came to a close, he issued a proposal to drastically cut U.S. corporate taxes. All corporations would be taxed at a 15 percent rate, down from 35 percent for large, public corporations and from 39.6 percent for small businesses. If enacted by Congress, the new rate would take the U.S. from being among the highest taxed in the group of 20 countries to among the lowest taxed. That would both strengthen the U.S. dollar and make the U.S. a more attractive country for investment.
Both of those things could have deleterious effects on emerging markets and their rising middle classes. The dollar-denominated debt of emerging market companies and countries would get more expensive and investors would move their money from emerging market companies to U.S. companies, which would now have greater profitability because of the tax cuts.
That seems to be the consensus view of the effect on emerging markets and their rising middle classes of Trump’s proposed tax cuts. But a minority of analysts are less worried about the tax cut proposals. Some argue that the tax cuts would even be good for emerging markets. They reason that if U.S. companies had more money as a result of the tax cut, then they would use at least some of that money to invest in emerging market companies.
Others argue that Trump’s proposals are not likely to harm emerging markets and their rising middle classes because, so far, Trump has not had a good track record for getting his proposals through Congress. As one put it, “Investors have scaled back their initial optimism over Trump’s spending plans and tax cuts as the president stumbles in his initial efforts to push through his policies.”
However different analysts see the effects of the Trump agenda on emerging markets and their rising middle classes, investors themselves do seem to be favoring emerging markets, despite what Trump is proposing. Emerging market stocks are having their best year-to-date start in 11 years and their dollar-denominated bonds are setting records.
– Robert Cornet