Investors have generally been “risk on” since Donald Trump’s victory on 8 November. Are they right?
Most investors seem to be primarily focused on President-elect Trump’s “Goldilocks” mix of pro-growth economic policies that includes tax reform, infrastructure spending and broad deregulation – which may be expedited by Republican one-party control in Washington. But when it comes to Trump’s more draconian policies on trade and immigration, many investors seem to assume his rhetoric is just that – rhetoric.
Yet, trade and immigration are areas where the president has broad powers to act unilaterally – i.e., without congressional approval. This is particularly the case on trade policy. Both the Constitution and subsequent powers granted by Congress provide broad powers to the presidency to enact trade policy with little check from the legislative branch.
For instance, while Congress needs to approve new trade agreements, a Trump White House could unilaterally withdraw from many existing trade agreements, such as the North American Free Trade Agreement (NAFTA). A Trump White House would also have the authority to impose tariffs on specific industries and to label certain countries “currency manipulators.” Trump would also have broad powers over foreign assets and terms of trade should his administration determine national security is in jeopardy.
Tit for tat?
While protectionist policies could potentially harm the U.S. economy, retaliation from trading partners could be an even more serious risk. Trading partners could impose countervailing tariffs or retaliate in other ways; China, for instance, could sell its holdings of U.S. Treasuries.
“A more differentiated view of the potential long-term economic and policy consequences of President-elect Trump must take on board both the considerable uncertainties still surrounding the next U.S. administration’s economic policies and the global links between economies and markets (which have become closer over the years),” is how my colleague Joachim Fels put it in “Mr. Market, Dr. Strangelove and President Trump.”
In market terms, right tail risks – which would result from supportive economic policies – have increased. But left tail risks – which could result from policy missteps – may be just as fat, if not fatter.
All the president’s men
Investors have been looking to Trump’s Cabinet-level appointments for clues to how policy will actually be implemented. Understandably, all eyes are on who will fill the top posts at the Treasury and Commerce departments, but it would also behoove investors to pay attention to a lower-profile, but important office – the United States Trade Representative.
This individual will not only help define Trump’s trade policy but also be on the front lines to execute it. Many advisors who are currently leading the Trump transition on trade seem to share the protectionist views that President-elect Trump advocated on the campaign trail.
If the USTR post is filled with one of these advisors, those buying the “Trump trade” – at least as it relates to trade – may have buyers’ remorse.