Vietnam and The Donald: Peering through the fog

It is difficult to gage how many of Trump’s outlandish policy proposals made during the campaign will now be dialled back. We take some guesses here in our updated analysis of what his presidency means for Vietnam. We see four important effects: (a) on currencies, interest rates, and fund flows; (b) on restricted trade – albeit with US bark worse than bite; (c) on US-sponsored security; and (d) on climate change – worse under Trump. Overall the effect of Trump is more likely to be bad than good for the rest of the world, including Vietnam. We also refer readers to our earlier article on Trump – scroll down to 17 February. Our 17 Feb article was highly prescient, but our 7 Nov one was the opposite!

US fiscal loosening, and tightening money

US fiscal policy will loosen in the coming four years. His USD 1tn mooted fiscal stimulus includes both spending increases and tax cuts. A trillion dollars is a lot: 5.6% of 2015 GDP. This would mean, compared to current baseline projections, the fiscal deficit ends up at maybe 5.5% of GDP by 2020 rather than 2.5%, and federal debt could be 25% higher ten years hence than it would have been (so says the Brookings think-tank). US GDP growth accelerates, at least in the early years of this program. We can expect that US interest rate rises are greater than they would otherwise have been, that US inflation is higher, that the US trade deficit is bigger, and that the dollar is stronger.

This is reminiscent of Ronald Reagan’s first term. Unfortunately the emerging market asset class wasn’t quite invented at that stage, but the Hong Kong market, for example, halved between 1980-84. It seems clear that capital gets absorbed by the US to a greater extent under this scenario, and that life is harder for emerging and frontier markets, on account of higher interest rates and lower inward investment flows.

Vietnam as a stock market is much less owned by global non-Vietnam-dedicated investors, and its currency is not freely traded, so it will not suffer as much from this “giant sucking sound” as many other markets. But it cannot escape an interest rate effect: higher rates mean fewer profitable investments in the real economy, and a lower justified P/E ratio for the stock market.

Longer term, there is of course the question of whether this US debt splurge is sustainable, indeed whether it ultimately leads to dollar decline, asset price crash, and recession (see USA 1987-91). Trump’s goal is 4% annual GDP growth; the last time the US grew at this rate for five years was just before the 2000 crash. Any US crash is also, of course, bad news for emerging markets, including Vietnam.

For the record, it is worth recalling the high long term volatility of the US dollar (measured by the dollar index). Notable moves are as follows: in the 1970s it fell 30%, under Reagan (1981-89) it doubled and then halved, between 1995-2001 it rose 50%, under George W Bush (2001-09) it fell 40%, under Obama it rose 33%.

Conclusion: the coming US fiscal loosening is bad for the rest of the world in terms of the likelihood of rising US interest rates and diminished investment fund flows towards the emerging world. It is also, of course, bad for everybody if an irresponsible US splurge ends in a crash and recession. Faster US growth might be good for exporters to the US, but then again, that leads us to the next subject.

US protectionism raises its ugly head

Unfortunately, good old Ricardian trade economics is taking a bad rap, despite being so central to the dramatic rises in global wealth since 1945. Trump’s mirage of mass rejuvenation of US factory jobs has been swallowed by the naive masses. If he really were to slap promised, massive tariffs (35-45%) on Mexico and China, surely retaliation would ensue and the world could easily tip into recession or worse. Dropping TPP and TTIP is the least of it. Although Trump mentioned China hundreds of times during the campaign, he also mentioned Vietnam a few times. If he puts tariffs up on China, we have to expect similar for Vietnam. Vietnam is somewhat vulnerable here: 22% of its exports go the US, its number one market. The comparative figures for notable others are Mexico 82%, Colombia 29%, Japan 20%, China 18%, and India 15%.

If MM were Xi Jinping, he’d get on the phone to all the TPP signatories right now and say to them: “Let’s go ahead with this, we’ll take America’s place.” They might well say yes. The US would be the big loser.

Probably the most likely course for US protectionism is that it will amount to high-profile moves in a few sectors, but not massive, generalised tariff increases. To do the latter would be foolish for the US. The American Trump-voting masses would not be helped by rising prices on all manner of Chinese consumer imports.

Security in the South China Sea

The best bet for Asian security is that nothing much changes. As long as Asian allies are putting enough money into their defence budgets, Washington’s commitment to East Asian security probably continues. Wise heads at the Pentagon prevail. Whether or not multinational convoy sailings within 12 miles of the Chinese militarised shoals proceed is uncertain, though MM recommends it, as a robust and relatively low-risk way to enforce the recent international court judgement.

(Interestingly, back in Europe, NATO is probably a little more dramatic. Here MM can easily see Trump publicly saying: “Article 5 is good for all members until January 2018, but after that it is only good for those members who spend 2%+ of GDP on their defence budgets. So start spending folks, unless you just attend NATO summits for the free food.”)

Greenhouse gas emissions

Vietnam is a bit player in the global COP21 efforts, but its littoral topography means it’s likely to be highly affected in the long run by the course of action the world takes. So Trump’s likely disavowal of the Paris treaty is bad news: the US is the second-highest emitter (15% of world total), with China first (22%). Encouragingly, China has swung behind efforts to implement the accord. Hopefully the world presses on, US or no US; this might shame even a Trump administration into cooperation. Please see the article dated 21 September, two below this one.

Overall conclusion: there’s no way to pretend that Trump is good news for Vietnam or for the world in general; the question is how bad is he. Admittedly, he has a chance to be good for America, if he pursues a pragmatic course that includes sweeping tax reform (hopefully progressive, not regressive), a humane resolution of undocumented immigrants’ situation (how about a wall and an amnesty at the same time?), and public infrastructure rejuvenation. There is nothing about vile, lying narcissists that prevents them achieving some success, particularly if they have a bicameral majority. Such is the unfairness of life, Obama may muse on his retirement porch.

Mekong Man

President-Elect HRC’s – uh, make that DJT’s – Asian in-tray

10 November 2016:  This article of three days ago – the day before the election – plumped for the likelihood of a Clinton victory. Our sentiments regarding US policy towards Asia remain as per below, though clearly the likelihood of them being heeded has diminished. TPP now is dead. Whether a vigorous multilateral approach to security in the South China Sea is pursued is less clear. One of the big problems with trying to analyse Trump at this stage is that it is very unclear how much of the extraordinary campaign rhetoric we should believe.

 

President-Elect Clinton will of course have many issues to consider ahead of her taking office, and Asia will not necessarily be foremost on the agenda. But Obama’s “pivot to Asia” needs to remain alive and well as a crucial foreign policy theme. Unfortunately, the nativist revival seen in the US political campaign – and that behind Trump’s shockingly large popularity that nearly achieved the presidency for that appalling individual – makes it politically more difficult to do the needful in Asia. But needs are needs and they are basically twofold: trade and security.

First, having cynically disowned the trade agreement that she herself was a central negotiator of, she needs to summon her best Clintonite skills of political duplicity and dissimulation and get a version of the Trans-Pacific Partnership trade/investment pact ratified. There will clearly have to be a revision process on aspects of the existing draft, in order for this about-turn to be performable. It is such a large treaty on paper that it should be possible to identify certain changes to be made. It is absolutely in the global interest for the international trade and investment regime to reflect liberal values rather than the autocratic, corruption-tolerant ones of Beijing. It is wrong to consider TPP an “anybody but China” club; rather, TPP can provide the lead that other countries including China will one day want to join – to the betterment of the global trading and investment system.

Second, Clinton should employ her hawkish and multilateral instincts in the South China Sea. (This is not the only part of the world where these instincts are needed, the other one being vis-a-vis Putin in Eastern Europe, via continued galvanisation of NATO.) In recent days and weeks we have seen worrying developments, including (a) mad dog Duterte cosying up to China; (b) a Chinese/Malaysian deal for naval cooperation; (c) Cambodia now wholly lost to being a pure puppet state of China; (d) advanced Russian fighter jets and anti-aircraft missiles being sold to China; and (e) the staunchly pro-American Park government in South Korea facing its downfall on account of a Rasputin-esque female witch doctor. There is no point in trying to deny or prevent the rise of China as a world superpower – that’s a given. The point, as with the TPP discussion above, is to shape the rules of engagement to fair, long-established and internationally-agreed ones. Specifically this applies to freedom of navigation in the South China Sea. Obama made a start with such naval exercises, but this now needs further extension. There need to be sailings within the 12-mile zone of the shoals that China has militarised, and the goal for Clinton’s administration should be that these be undertaken by multinational convoys including the US, Japan, South Korea, Indonesia, Vietnam, Singapore, Australia, and any other countries that want to take part. The UN court this past summer ruled definitively that Beijing’s nine-dash map of that sea has no validity; it is now incumbent on concerned nations to enforce the judgement. Much better to stand down thuggish behaviour early than to appease and thereby encourage it.

 

Mekong Man