WASHINGTON, D.C. –With the election of Donald Trump as the 45th President of the U.S. come questions about the likely effect of his administration and policies on the rest of the world. One question in particular, is what will be the Trump policy effects on emerging markets and their ability to combat poverty within their borders?
Prior to the election, one World Bank executive, Alex Peuker, hypothesized that the effect might not be very helpful. His contention was that populism and isolationism, which president-elect Trump represents, could lead to worsening poverty and income inequality in emerging market nations. That could be the result, he said, if these “sentiments proliferate in the United States, Europe and elsewhere” and “negatively impact trade and transmission mechanisms in emerging market economies”.
Early results in the stock markets around the world suggest that many investors share this view of the Trump policy effects on emerging markets. The consensus opinion among investors was that emerging market stocks would be “some of the biggest losers, at least in the short term”. Moreover, the longer-term ability of emerging market nations to attract investment capital was seen as jeopardized by a few Trump policies that we know about at this stage: a fiscal stimulus package looking toward home and a protectionist trade stance looking abroad.
The fiscal stimulus package at home will likely lead to higher yields on U.S. Treasury bonds which will likely attract capital away from emerging markets. Protectionist trade policies could reverse development in emerging markets that have benefited from open trade rules. Open rules produced economic growth that created and enlarged middles classes in emerging markets. The expanding middle classes meant that there were new customers for goods and services produced by companies in those markets and in their trading partners.
This scenario, of course, depends on Trump both further developing his policies toward emerging markets and having those policies pass Congress. Getting Congressional support, especially for protectionist policies, may not be easy because many Republicans still favor free trade.
Moreover, other analysts argue that Trump’s policies may actually turn out to be good for emerging markets. For example, his promise in his victory speech that he would rebuild U.S.’s infrastructure, including roads, bridges, schools and hospitals lifted commodities that the U.S. imports. After the speech copper prices reached a 16-month high. And zinc, aluminum and nickel prices all spiked.
Trump’s potential policies may also be good for emerging markets as sources of cheaper labor. Two policies, in particular, are liable to drive up the cost of labor in the U.S. One is Trump’s promise to raise the Federal minimum wage by 38 percent, which could drive similar increases in the states. The other policy is Trump’s promise to deport the undocumented migrant workforce. They make up 7 percent of the U.S. workforce and generally provide low-cost labor. If Trump takes these two actions, analysts believe some U.S. exporters would move production out of the U.S. to lower-cost labor locations in emerging markets.
In sum, Trump policy effects on emerging markets look like they are more mixed than initial reports indicated. His policies could pull investor capital away from emerging markets and slow down their economies, which have been dependent on open trade. His policies could drive up demand for commodities from emerging markets needed to rebuild the U.S. infrastructure. Said policies could create a cheaper labor pool in emerging markets to which U.S. companies could migrate.
– Robert Cornet