Trumpasaurus Rex

Prior to last week, it was to many thinking people one of:

(a) a joke;
(b) a sick joke; or
(c) just sick.

But last week – following his emphatic New Hampshire win, with another one this coming weekend in South Carolina on the cards – it became a possible outcome that can no longer be considered an outlier.

To what are we referring ? The prospect of Donald J Trump becoming the next president of the United States.

“No, you’re wrong, Las Vegas has The Donald at 4-1 but Clinton is evens”, I hear you shouting. Well yes, you’re right. But MM is calling the bookies’ odds wrong. Trump has electric appeal to many and if more terrorism, and/or tragedy in the Middle East, takes place in the months leading up to November, then he could easily erase his current single-digit-poll-deficit to Clinton.

Hilary Clinton’s trustworthiness ratings are so low – and it’s easy to see why. She flip-flops on key issues so transparently, based on latest voter mood. TPP? For it (and at the very centre of the government that negotiated it !), then against it. Wall Street? She’s suddenly, on the turn of a dime, gone all “Bernie” now, following her embarrassing margin of defeat in New Hampshire. Her stump speeches have the content and delivery of a wet rag. She’s the soggy insider in an election where most voters are yearning for a true outsider. No wonder voters are mostly unenthused with her. It would be great to break the ultimate glass ceiling and have a woman president, but that’s got to wait for a more inspiring candidate, is MM’s guess.

Michael Bloomberg is a grand irrelevance. If he runs, he’ll win every properly thinking person’s vote – but that’s no good, as the old Adlai Stevenson joke went, he needs a majority – or actually in this case a plurality as it would be a three-horse race. No chance.

That leaves Trump to, very possibly, win the White House.

So we think it is not premature to begin asking what a Trump presidency would mean for Vietnam. We’ve thought of five things:-

* Bye-bye TPP. Trump is against the Trans-Pacific Partnership trade agreement, he says. He is campaigning for greater protection against cheap imports in general. ‘No TPP’ would be a disappointment for Vietnam, since it would be a strong beneficiary of the deal, to the tune of perhaps an extra one percentage point of GDP growth per year over the next 10-20 years. However, the Vietnam manufacturing-centred growth story doesn’t get derailed by TPP not happening. Moreover, Vietnamese seafood and textile exports to the US are unlikely to be targeted; the attention would be more likely in heavier and more sophisticated industrial sectors, like steel, cars, and the solar industry, where Vietnam is largely absent as an exporter to the US. Regarding Trump’s purported economic nationalism in general, the sage joke in Texas is that if he really does want to build that wall, he’ll have to throw open the border first, in order to get in anywhere near the amount of labour that is needed to build it.

* Vietnam reform momentum: dented slightly ? If TPP didn’t happen, its impetus to impose reforms on Vietnam would also be gone. The new Vietnamese leadership of Messrs Trong and Phuc seems to be slightly less reform oriented than the previous administration, and slightly more likely to be close to autocratic-brother-in-arms China. An arrogant occupant of the White House might serve to reinforce these Vietnamese attitudes.

* Muscularity versus China. Trump is likely to fashion himself as a strongman. This would have the most impact on Russia and China, the US’s two big geopolitical rivals. Increased US stiffness against Chinese expansionism in the South China Sea would of course be helpful to Vietnam, lessening the chances of a recurrence of episodes like that of May 2014, when deadly riots erupted in Vietnam, tourism from China collapsed, and the Vietnamese stock market took a quick 16% plunge – all because of a Chinese oil rig being placed in contested waters near the Paracels.

* Fewer free lunches. Perhaps in slight contradiction to the preceding point, for many years Trump has made the argument that countries that rely on US security should pay for it to a much greater extent than they do. He has mainly made this in reference to wealthy Europe and Japan. It’s doubtful that a change in military burden-sharing would affect Vietnam much. However, there might be a scarcer availability of concessional loans and other overseas development assistance from largely-US-funded multilateral organisations like the IMF and World Bank. To an extent, this trend will occur anyway as Vietnam has now reached definitions of “middle income status” and is therefore beginning to lose access to programmes designed for the very poorest countries.

* Much a-do about nothing. Though many people around the world will cringe (or worse) at the thought of a Trump presidency, wise heads are beginning to point out that one shouldn’t divine all that much from his bombast on the campaign trail. After all, pretty much every candidate since Bill Clinton in 1992 has excoriated China on trade and vowed to be tougher on it. Once in power, the candidate-turned-president has to live in the real world again. The game – especially in America – is to talk big guff to win, then sober up and run the country. Moreover, the American system makes it very difficult for the president by himself to achieve much anyway. Trump’s long term flexibility of views tends to suggest that, in reality, he’s mostly a pragmatic moderate in terms of his actual likely policymaking.
Mekong Man

The Four Horsemen of the Renaissance

Four great ideas that should happen but – sadly – probably won’t


#1: Hike taxes on oil now

Last week, President Obama proposed a USD 10 additional tax on every barrel of oil (the idea is “dead on arrival” given the Republican controlled congress). Oil prices are very low and the president wants to lead on climate change mitigation. This is a very sound idea for anyone serious about weaning the world off oil and its damaging environmental effects. Even if you do not believe in the need to mitigate climate change, or even the science behind it, this would still be a sound measure environmentally for simply reducing the smog that emanates from burning oil – consisting of the carbon monoxide, nitrogen oxide, sulphur dioxide, and hydrocarbons created by the workings of the internal combustion engine. Such smogs cause headaches, breathing problems, and cancer – so we clearly would be much better off without them. It is odd to MM that US and other politicians spend such great effort fighting about the issue of climate change, when actually you don’t even need to “go there” to make the slam-dunk argument for the merits of clean energy over oil and coal.

Oil is on its back right now: an additional tax right now would be a great way to “kick it when it’s down” and thereby prevent currently mothballed oil exploration and production investments from ever seeing the light of day. The US economy is doing okay even with oil laid low, and was doing okay in 2014 with oil at USD 100, so it isn’t a good enough argument to say that the US can’t afford such a tax. Consumers can afford to pay more for their gasoline (or get on their bikes to slim down – how good would that be for “quantitively eased” American waistlines!), and the shift in demand towards much cleaner electric vehicles would accelerate. If the US led on this issue, it isn’t so difficult to imagine the EU also further raising its already much higher petrol taxes too. Countries that are taxing oil (a sunset industry) to the max will be helping their chances to be industry leaders in clean tech (a dynamic growth industry): a wise trade if there ever was one.

And as regards Vietnam: Just under ten years ago, crude oil was about a fifth of Vietnam’s exports and peaked at a fifth of government revenues in 2012, but that’s all changed now. It accounts for only about 5% of government revenues at present, and just 2% of exports. Raising taxes on oil would admittedly probably be an injudicious stretch for a less developed country like Vietnam right now. However, it should be focused on becoming a clean tech economy, using the advantage of underdevelopment to leapfrog the dirty technologies of the 20th century to the greatest extent possible.

In January, Vietnam’s average petrol pump price was around USD 0.76 per litre, between the US’s USD 0.58 and the world average of USD 0.97. Something of the order of 14 cents of the US figure is tax in one form or the other, so Vietnam is actually taxing petrol at a somewhat higher level than the US, net-net, not subsidising it.

Coal and oil account for just over 40% of total Vietnam final energy demand, compared to c. 60% for Japan and c. 80% for China. So Vietnam’s not doing too badly here, relatively. Transport accounts for roughly a quarter of greenhouse gas emissions in Vietnam, a similar ratio to the US. [Sources for data: World Bank, World Resources Institute, US Environmental Protection Agency,]


#2: Tax multinational corporations on [country sales x average global pre-tax profit margin]

In January the British government belatedly got Google to cough up GBP 130m in ten years’ worth of back corporation taxes, a deal justifiably widely derided, since this sum implies probably a low single digit percentage tax rate on the company’s UK profits over the period. With multinationals having such a large presence in the modern world, the hundred year old central principle of corporate taxation – that taxes are paid on profits earned in a given jurisdiction – is no longer fit for purpose. Rather than wasting great time and expense drafting complicated new rules in order to try to crack down on multinationals’ complicated tax avoidance strategies, it is time for a simple, universal new approach: corporate tax becomes a tax based on sales revenue in the given country. Profits in each jurisdiction could be imputed with reference to the company’s global pre-tax profit margin, and the tax calculated as a percentage of these imputed profits, so that the amount of tax paid was linked to global profits made. The US and EU could jointly implement this together, leaving the rest of the world to fall into line with the new system over time. Countries would decide their own percentage rate for the tax on the imputed profits of companies. This idea would be a move towards greater tax justice and towards fairer competition: both are very important causes for most citizens’ perceptions of a fair and just society, and both have been neglected in recent decades. This neglect has been one important reason for the rising popularity of extremist or anti-establishment politicians in both the EU and US.

And as regards Vietnam: Corporation tax accounts for roughly 45% of Vietnamese government revenues (the latter are c. 20% of GDP), in three roughly equal chunks from SOEs, Vietnamese private businesses, and foreign businesses. Transfer pricing to minimise taxes has been practiced by many foreign companies in Vietnam, so moving to the system recommended above would likely benefit Vietnamese tax receipts. Export shipments from Vietnam would count towards a given multinational’s country sales total for Vietnam.


#3: Ban all state-owned enterprises from buying private businesses

February has brought the announcement of the largest ever foreign takeover by a Chinese firm: state-owned ChemChina buying Switzerland’s Syngenta. It is curious to MM that most people agree that state owned enterprises are a bad idea in the vast majority of cases, yet some of those same people do not seem to mind a foreign SOE buying a successful private business in a given country. On the basis simply of SOEs being a bad idea in general, the authorities in Bern and/or Washington should block the USD 43bn bid. If on top of that somebody wants to question the wisdom of letting dictator Xi Jinping ultimately control the formulae for American genetically modified crops and sophisticated pesticides, fair enough – it seems a pretty sensible question to think carefully about.

And as regards Vietnam: Certain Vietnamese SOEs and state-owned banks have invested abroad, but MM can’t think of any actual foreign takeovers by such businesses. Most SOE expansion inside Vietnam has been organic rather than by M&A. Vietnamese SOEs are still gobbling up more than 40% of total system credit; this is very bad for the country, particularly for the locally-owned private sector, and is the worst single blemish to the overall Vietnam investment case.


#4: Improve QE by directing it in useful ways, eg Syrian refugee camps

Various commentary including by us has pointed out that central bank quantitative easing has tended to increase income and wealth inequality in society. Some have proposed the radical-sounding idea that QE funds, rather than simply going towards buying government bonds, should instead be focused directly on needed things, for example infrastructure or cheques in the mail for poorer people. Such ideas could threaten the very good principle of central bank independence from politicians, but this could be solved through careful delineation of responsibilities: if the central bank deems the creation of more money desirable for the fulfilment of its 2% (or whatever) inflation mandate, it alone decides this; but the governing politicians are allowed to decide where this money is directed. So here is the way it currently should be directed: to Syrian refugee camps in Turkey, Jordan, and if practical Syria itself. The goal would be to build urban infrastructure in such areas and to give grants and loans to new businesses there that created sustainable jobs. This would be the best way to meaningfully help Syria’s refugees, and to help stop the heavy flow of refugees into the EU that is causing so much difficulty there and worryingly adding to the appeal of ugly nativist politicians. Is this a crackpot idea from a bleeding-heart socialist who has no idea of realpolitik? Well, no, we’ve done far greater things before – one such was called the Marshall Plan, and it worked jolly well. The recent London conference that amassed USD 11bn of commitments for Syrian refugees was very good, but Mario Draghi’s EUR 60bn per month bazooka is far more impressive. There are almost five million displaced Syrians in the region: so every USD 10bn is only USD 2000 per head. Big money is badly needed.

And as regards Vietnam: This issue isn’t so relevant to Vietnam, since there is no sensible scope for QE-type measures there. Although Vietnamese inflation is currently under 1%, this is a welcome break from its inflationary past, and any hint of QE from the State Bank of Vietnam would blow away that institution’s hard-won recent credibility gains. Nor does the state budget offer any new pots of money for good causes, since the budget deficit has consistently averaged a hefty 5-6% of GDP in recent years, a figure that best go down rather than up.


Mekong Man