TRUMPONOMICS AND INDO-US TRADE

Donald Trump will soon become the most powerful man on earth. The rhetoric of the campaign is over, and while it is hard to say exactly which one of his many promises will eventually become a reality, one thing is for sure: Trump represents a radical change from the past both in persona and stated policies. He is the first US President who has spent his entire life in business. A risk taker, a consummate deal maker, and someone who knows how to create wealth, he has picked people very similar to himself to guide his economic policies. His nominees for Treasury Secretary, White House Economic Advisor, and Secretary of Commerce are all Finance professionals who understand risk, and, decision making under uncertainty.

One thing is for certain: expect much to get done, right or wrong. Trump and his team are action-oriented doers and not bureaucrats who will get mired in endless deliberation.

What are the salient features of Trumponomics and how will his economic policies impact Indo-US trade?

Two competing philosophies have dominated mainstream economic thinking for the past three centuries. The ‘productionist’ viewpoint, first expounded by 18^th-century political economists like Ricardo, Adam Smith, and John Stuart Mill advocates that the primary goal of an economy is to maximize production, and, that the best way to increase GDP is to remove all impediments to production. Proponents of this supply-side doctrine, advocate, that the primary goal of economic policy should be to increase employment and productivity.

The competing philosophy, the ‘consumptionist’ viewpoint, named after the 20^th-century economist John Keynes, argues that the focus of economic policy should be on increasing consumption through increased government spending and monetary stimulus. This demand-side view of things claims that output increase, and hence GDP growth, can only come from increases in aggregate demand.

The prevailing economic philosophy in the US is the consumptionist approach. Over the last thirty years, economic policy has focused on reviving economic growth through a combination of increased government spending and monetary stimulus in the form of lower interest rates and Quantitative Easing. Government debt, which was about $ 2 trillion when Reagan left office in 1988, is now $ 24 trillion. In an attempt to revive economic growth, the Federal Reserve Bank has lowered interest rates to almost zero and pumped in over $ 2 trillion into the money supply since 2008. And yet, despite this massive fiscal and monetary stimulus, GDP growth has been less than 3% for the last 11 years in a row. The consumptionist doctrine has resulted in the lowest GDP growth in the US since 1940.

Trumponomics is a radical shift from the consumption-based economic philosophy to a productionist model. Trump has promised that the emphasis of his government’s policy will be on removing impediments to production. The salient features of his proposed policies towards this goal are as follows:

Massive investment in infrastructure: Trump has proposed spending over $1 trillion on infrastructure projects, financed not by public funds, but through tax incentives to lure private investment. Infrastructure spending has a huge multiplier effect. Studies show that $ 1 spent on infrastructure projects increases GDP by $2 and has a positive effect on both employment and production for a broad range of ancillary manufacturing businesses.

Reduction in corporate tax: At 35%, the corporate tax rate in the US is the highest of any developed country. Trump has promised to reduce this to 15% to encourage American companies to stay and produce in the US. A study by the OECD finds that Corporate tax is the most harmful of all taxes and significantly retards productivity and growth because it is effectively a tax on the investors, consumers, and employees of the corporation. Every 5% reduction in corporate tax adds 1 percentage point to GDP and has the potential to increase employment by 2 million people. Trump is hoping that a massive reduction in corporate taxes will prevent ‘tax inversion,’ the phenomenon in which American companies renounce their US citizenship and move overseas.

Trump has also proposed a low one-time tax of 10% to repatriate the $ 2.6 trillion of corporate dollars now parked overseas to legally avoid the high corporate tax. Under current tax laws, U.S.-based multinationals do not have to pay U.S. corporate tax on their foreign profits until the profits are “repatriated” to the United States. To avoid paying the 35% tax, many firms use clever accounting to report as much of their profits offshore as possible to avoid U.S. taxes. Trump wants these companies to bring this money home and spur additional investment on domestic soil.

Reduced regulations: Nothing kills business like regulations. Trump understands this better than anyone else because he has spent a lifetime fighting onerous building regulations around the world. He has promised a reduction in regulations that stifle business and domestic production. It appears he is serious because he has hired a no-nonsense businessman and hedge fund titan, Carl Icahn, as special advisor for regulatory reform.

The US has become a huge regulatory state, and its World Bank Regulation ranking has dropped from 4^th to 13^th in the last twenty years. In a recent Business Roundtable survey, 75% of CEO’s stated that regulations were the biggest reason for increasing costs, reduction in employment and decrease in productivity. The National Association of Manufacturers (NAM) estimates that regulations cost the US about $ 2 trillion, or 10 % of its GDP, annually.

The manufacturing sector, more than any other group, often bears the highest cost of regulatory compliance. It is also the dominant driver of both economic growth and income gains. According to NAM “for every $1.00 spent in manufacturing, another $1.81 is added to the economy, and this is the highest multiplier effect of any economic sector.” The Trump regulatory reform plan is designed, intentionally, to most help the manufacturing sector.

Trade doctrine: Trump is determined to reduce America’s burgeoning trade deficit by renegotiating bad deals and cracking down on unfair practices that he believes have caused the US to lose a large part of its manufacturing base to other countries like Mexico and China. Since the signing of NAFTA in 1992, the US has gone from a $ 1.8 billion trade surplus with Mexico to a $ 60 billion deficit in 2015. The total US trade deficit for goods is around $ 800 billion a year and is estimated to cost about 6 million American jobs. Since 2000, for example, 30% of US manufacturing jobs have been lost while import of manufactured goods has doubled to $ 1.6 trillion. So from a ‘consumptionist’ standpoint while consumption has increased it has been accompanied by lower GDP and higher unemployment largely because it was not supported by higher domestic production.

Trump hopes to reduce the trade deficit and the drag it has on domestic growth by reversing this pull of US manufacturing jobs overseas.  Tumponomics will replace the doctrine of “free trade” with “ free and fair trade” in the hope of bringing a revival of domestic manufacturing, jobs, and economic growth.

5) Removing restrictions on all sources of energy: Trump wants to lift restrictions that are keeping companies from exploiting America’s enormous energy resources. These include environmental and exploration restrictions, as well as revision of laws to allow export of energy. Trump is hoping that energy becomes a huge export sector for the US. Estimates by the energy industry show that a 20% increase in domestic energy production will raise GDP by 1 percent point, and add roughly 1.2 million jobs.

How will Trumponomics affect Indo-US trade? A Trump presidency will be good for business in general. An improvement in the US economy, the largest in the world, will have a positive ripple effect for business worldwide. Trump is also a huge supporter of India, and there is every reason to believe that unless his and Modi’s inflated egos clash, his business-friendly approach will provide substantial opportunities for increased Indo-US trade.

The US imports more from China than any other country in the world. Almost 22% of its imports come from China resulting in an overall trade deficit of around $ 350 billion. China is far more dependent on the US than the US is on China. The Chinese economy is heavily reliant on the US consumer market and Trump, the deal-maker, understands the leverage that represents. He will use US-China trade as a bargaining chip for getting Chinese compliance on geopolitical issues including concessions in the South China Sea region. China will not likely cave in that easily, so the possibility of a US-China trade war is a reality.

A potential US-Chinese trade war will leave a void that Indian companies could exploit. There would be opportunities in toys & games manufacturing, leather goods, footwear, furniture & bedding, tools, cutlery, ceramics, glass & glassware, small engineering and machine goods, plastic products, lighting, auto parts, clothing, textile, and other low-value products. The chart below, of Chinese imports into the US for some of these group, shows the value of this potential opportunity for Indian business.

Trump has also promised to invest more than $ 1 trillion to improve America’s infrastructure. This could open up opportunities for Indian steel manufacturers especially if Trump carries through with his proposed tariff on cheap Chinese steel, much like the EU did recently.

Another industry that stands to benefit from a Trump presidency is the Indian Pharmaceutical industry. Currently, due to stifling Food and Drug Administration (FDA) regulations, it costs over $1 billion and almost 12 years, on average, to introduce a new drug in the market. Removing these regulations, as Trump has promised, could be a huge plus for the Indian pharmaceutical and biotechnology industries. If the notion of “progressive approval” of drugs is implemented by the FDA, then several small Indian companies, who currently do not have the resources for phase 2 or 3 trials, would have increased opportunities to market their drugs in the US.

Other Indian industries that could get a push from Trumponomics would be the defense and small armaments sector. It is likely that Trump’s disdain for China and Pakistan would lead to close defense ties with India and add impetus for joint production of defense equipment and spare parts in India and create opportunities for ancillary industries that provide components to the defense industry.

On the downside, reduction in US corporate taxes could result in a reduction in US investment in India. FDI to India has already been severely hurt by the risk and uncertainty created by the demonetization policy and is likely to get worse if US investments stay home under a new business-friendly Trump presidency. Also, Foreign Institutional Investment( FII) into India will likely drop if the carry trade becomes unprofitable. In the carry trade, an investor borrows in the US at low rates to invest in India at higher rates, and then repatriates the funds and pays off the US loan at the end of the investment period for a profit. A stronger dollar and higher interest rates in the US, both expected consequences of higher US economic growth, will make the carry trade unprofitable and reduce FII investment.

Trump’s presidency will present a unique opportunity for Indian business. It is one that they should grab with both hands. But it will require introspection and change in behavior. US companies are very wary of dealing with Indian companies largely because of ethical issues. Let’s face it; many of our business people have a very short-term horizon. The intent is to make a quick buck instead of attempting to develop long-term relationships based on trust and honesty. Our companies will have to focus on quality, design, price, service, but most importantly a higher level of transparency that US businesses value. And, the government of India must help by eliminating unnecessary and redundant rules and regulations that not only stifle Indian companies but also make US companies chary of doing business with us. The government would be well advised to follow a laissez-faire policy and let Indian entrepreneurs create wealth without government guidance and interference.

Trump’s election is also a historic experiment in politics. If he succeeds, it will dispel the notion that only career politicians have the wisdom, administrative acumen, and experience to manage the affairs of a country. If this experiment to run the country like a business is successful, it will send shudders down the spines of the political elite all over the world, and open up politics and government to non-career politicians. As Plato said, ” One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.”

America and the rest of the world are about to find out if that is indeed true.