The 2016 United States General Election: A Period Of Transition
The victory by Republican presidential candidate Donald Trump in the 2016 general election marked the beginning of a transitional period for the United States. Hot button issues such as civil rights, economics, foreign affairs and judicial appointments took center stage during the fiercely contested election. Although Trump's stances on each of these topics played a role in persuading citizens to either vote for or against him, his stated commitment to domestic economic improvement garnered vast support among the electorate.
Trump's commitment to improving the U.S. economy is largely based on fundamentally changing the manner in which the government conducts business. His stated ideals—ranging from the restructuring of U.S. debt abroad to the renegotiation of trade agreements—sent shock waves throughout the financial community.
As a rule of thumb, financial markets are not big fans of uncertainty. The changes proposed by Trump throughout the election cycle of 2016 created an abundance of such uncertainty, and the markets reacted accordingly. Listed below are a few of the more dramatic global market reactions from Election Day, November 8, 2016:
- DJIA Futures experienced a massive decline of 900 points before posting a loss of 300 points or 1.5% on the session's close.
- Japan's Nikkei 225 index plunged 5.4%
- Hong Kong's main index the Hang Seng fell 2.2%.
- Russia's primary equities index rose 2.2%
The Election Day trading of DJIA futures gave a dismal impression of a pending Trump presidency. However, in the days following his win, U.S. equities experienced heavy buying. For the week of November 7-11, 2016, the DJIA posted a gain of 5.4%—the largest one week rally since 2011. For the same period, markets in Asia, Europe and Australia posted substantial gains that served to mitigate losses sustained on November 8.
Much of the chaos and tumult in global markets surrounding the U.S. general election was based on either fear or optimism towards the pending shift in the nation's policy. The dramatic sell off of global equities and subsequent recovery is a prime illustration of the impact an unexpected change in U.S. economic policy can have on the entire world.
Trump's Policy: Declaring American Economic Independence
While on the campaign trail, Donald Trump outlined several key areas of the economy that will be targeted for improvement. Throughout his run for the presidency, he cited high unemployment rates, out-of-control government spending and the negative US trade balance as unacceptable realities.
In response to these challenges, Trump promotes a policy of "American economic independence." Extensive reform of US business practices both domestically and abroad have been key elements of hos plans to achieve economic independence.
As of public record, Trump outlines seven steps that he will immediately take upon election in order to foster prosperity and economic growth within the United States:
- U.S. withdrawal from the Trans-Pacific Partnership (TPP)
- Appoint tough trade negotiators
- Direct the Secretary of Commerce to identify violations of trade agreements, and use American and international law to end any abuses
- Renegotiate, and possibly withdraw from, the North American Free Trade Agreement (NAFTA)
- Impose tariffs and taxes on countries actively manipulating their currencies to take advantage of the U.S., and label China a currency manipulator
- Instruct the U.S. Trade Representative to bring trade cases against China addressing violations of the World Trade Organisation (WTO) rules and restrictions
- Employ aggressive tariffs against countries promoting illegal activities, such as the theft of U.S. trade secrets
The overriding theme of these stated policies is to limit the impact of globalisation on the nation's economy. Through taking an aggressive stance towards rolling back previous trade deals such as NAFTA, KORUS (South Korea/US) and avoiding entry into TPP, President Trump aims to achieve U.S. economic independence through reducing the trade deficit.
Trump's Policy: Trade And Economic Impact
As observed by the world's financial markets in the election's immediate aftermath, the potential impact of Trump's policies towards global commerce are largely debatable. Depending on one's perspective, proposals to restructure international trade deals, impose aggressive tariff structures and enforce WTO regulation can be seen as either positive or negative.
While Trump's proposed actions can be perceived to add value to the American manufacturing sector, the trading regions of Asia and Latin America may equate them to economic decline. If imposed, strict tariff structures could bring into question the viability of exporting goods to the U.S. from developing countries. In the event that tariffs are placed on imports from countries actively devaluing their currency, the value created by producing goods in these countries is mitigated. As a result, many multinational corporations may choose to relocate production facilities.
China is poised to experience substantial economic change if Trump's policies come to fruition. The U.S. is the largest destination of goods made in China, accounting for 18% of all Chinese exports. To maintain trade relations with the U.S., the Chinese government will likely have to make concessions. Although the final compromise may be elementary, even a short-term contraction in China's GDP could result in widespread corrections in global markets.
From the perspective of the U.S., reforms of NAFTA and KORUS in addition to non-entry into the TPP can be seen as positive developments related to improving the trade balance. Often being seen as a result of NAFTA, the U.S. has experienced a trade deficit with Mexico for 22 straight years. As of the year-end 2015, it measured US$60.7 billion.
Since the inception of KORUS, the U.S. trade deficit with South Korea has increased 114.6% and, as of the year-end 2015, has measured US$28.3 billion. The renegotiation of trade deals with Mexico and South Korea under the Trump administration will serve as templates by which future agreements are crafted.
Attempts to reduce the US trade deficit under Trump's policies will likely benefit U.S. workers and bolster GDP growth, at least in the short term. The long term ramifications resulting from a dramatic policy shift to economic independence from one of globalisation are debatable.
Time will tell if Trump's policies are implemented, successful, and contribute to U.S. economic growth and prosperity. While a large portion of his supporters cite the need for fundamental economic change as their primary reason for backing him, it remains to be seen if the policies outlined in his seven-point plan will have the desired impact upon the U.S. trade balance.
The process of renegotiating existing trade agreements, in addition to the enforcement of international law upon economic superpowers such as China, will present many unique challenges. Although the application of Trump's policies may improve the U.S. economy, the ability to physically enact its tenants upon trade partners may prove to be a monumental task.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…