The Trump Effect

How might Donald Trump’s economic plans affect the world if he becomes U.S. president? By Mei Xinyu

The Trump Effect

How might Donald Trump’s economic plans affect the world if he becomes U.S. president? By Mei Xinyu

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

As the world’s second largest economy and largest trading nation, China is particularly interested in potential policy changes in the United States if Donald Trump, the Republican presidential nominee, wins the 2016 U.S. presidential election.

As for Hilary Clinton, the Democrat presidential nominee, most of her economic and political policies may be a continuation of the Obama administration. In comparison, Trump is likely to pursue a different policy orientation.

Deficit cuts

For years, there have been voices in the United States advocating a reduction in trade and budget deficits, which are in line with Trump’s proposals in his election campaign. He advocates cuts to public finance expenditure and the budget deficit, including a decrease in spending on military and international affairs, as well as a reduction on welfare expenditure, while increasing investment in strategic emerging industries and advanced manufacturing. Since a trade deficit contributes toward a negative national saving rate, Trump’s position may be conducive to both reducing the U.S. trade deficit and increasing the national savings rate.

First, decreasing military and international affairs spending is likely to curb the U.S. budget deficit or even reduce it, since it will be a reduction in public expenditure. A significant factor in the U.S. Government deficit is the scale of its overseas operations. Enormous military spending has become a heavy burden on the nation’s budget and a major source of its budget risks, while the business sector has been misled to invest excessively in national defense, but inadequately in civil industries, further weakening its international competitiveness and worsening the country’s balance of payments.

The budget risks caused by excessive overseas interventions for many years by the United States have been a long-standing problem in the country. Despite Obama’s initial pledge to cut military spending, the reality is that it has expanded under his watch. The Obama administration has opened up more battlefields under the pretext of “democracy” and a “rebalancing toward the Asia-Pacific.”

The Libyan and Syrian civil wars are examples of American intervention in the internal affairs of foreign countries. The U.S. National Defense Authorization Act for the Fiscal Year of 2013, requiring the president to sell F16-C/D fighter aircraft to Taiwan and suggesting that the Diaoyu Islands dispute falls under a U.S.-Japan bilateral security treaty, has irritated China.

However, confrontation with China, the largest lender to the United States, is never the right way to cut expenditure. If Trump’s objectives to reduce the U.S. military presence worldwide and demand “protection money” from allies can be realized, the United States may be able to significantly reduce its military and international affairs expenditure.

Second, reducing welfare expenditure in the United States will help to not only cut budget costs, but also increase private savings. Social security has the potential negative impact of reducing private savings: In Social Security, Induced Retirement and Aggregate Capital Formation published in 1974, U.S. economist Martin Feldstein estimated that before 1972, the U.S. socialsecurity system had reduced about 44 percent of individual savings in the nation.

Donald Trump speaks to his supporters in Washington, D.C. on May 29

The current U.S. welfare system allocates more resources to the poorest 20 percent of the country, while the middle-income group, accounting for 60 percent of the population, has to assume greater tax burdens. However, most of the welfare received by the bottom 20 percent will go to consumption rather than savings, while the middle class has less to save. Consequently, the current U.S. welfare system reduces private savings in the country.

The U.S. economic recovery in recent years has resulted in a greater increase in imports than exports, causing the current account deficit to expand. Statistics from the U.S. Department of Commerce show that in 2014, U.S. imports grew by 3.5 percent compared to 2.7 percent for exports, reversing the tendency that exports had outgrown imports following the 2008 sub-prime mortgage crisis. In 2015 imports declined 4.5 percent compared to a 7.2-percent drop for exports, further widening the trade deficit.

Trump’s economic plans will contribute to a sustainable economic recovery. On the contrary, if Clinton becomes president, budget and trade deficits are likely to expand further, as she advocates an interventionist international policy and desires to maintain welfare benefits as much as possible. Trump’s position on monetary policy is not yet clear. Though he endorses low interest rates, as president he said he would replace current Federal Reserve Chair Janet Yellen with a Republican, in spite of their mutual support for low interest rates—the Federal Reserve is the independent central bank of the United States.

Impact on China

In the field of trade, Obama prefers regional free trade agreements to multilateral World Trade Organization (WTO) negotiations. The Trans-Pacific Partnership (TPP) is vigorously advocated by Obama, which may end up excluding China from the rulemaking process and squeezing out its share of the international market to ensure U.S. influence on world trade rules. The TPP will give Viet Nam and other countries that compete with China in traditional manufacturing industries easier access to the U.S. market. Such a strategy will inevitably increase the trade deficit of the United States.

The TPP currently faces huge uncertainty in the United States and both presidential nominees, Trump and Clinton, have implied they will oppose the TPP. If Trump wins the election, the progress of regional free trade will slow down or may even grind to a halt.

Since Trump vows to cut down trade and budget deficits, there are worries that a Trump-led U.S. economy will depend less on foreign trade, damaging China as the world’s largest exporting nation. However, even if such changes take place, the growth of U.S. foreign trade will be affected most, and China’s exports to the United States will not be significantly reduced. Moreover, once the United States depends less on foreign trade, it will be increasingly difficult for China’s rivals to copy the success of China’s exportoriented economic growth.

Additionally, a Trump presidency would place greater emphasis on domestic economic growth and infrastructure construction in particular, presenting more opportunities for China to make direct investments and participate in U.S. infrastructure projects.

However, if the United States embarks on these changes, the growth of China’s surplus of international payments will slow, and the percentage of funds outstanding for foreign exchange against the total base currency will decline more rapidly. To ensure the appropriate growth of the money supply and to avoid deflation, China must further innovate its monetary base creation regime. Such innovations can be combined with the expansion of China’s bond market and the internationalization of the yuan.

Brad Owen, Lieutenant Governor of Washington State, delivers a speech at the Chinese Provinces-US States Economic and Trade Cooperation Seminar held in Seattle on September 22, 2015