Brazil

ALEXANDRA STROMMER GODOI, Economics Professor, FGV Escola de Administração de Empresas de São Paulo

As Brazil struggles to fix the costly inheritance of its populist binge, which led to deep recession, high inflation, fiscal disarray and, ultimately, to the impeachment of a president, it must now face the consequences of the world embarking on its own populist cycle, led by Trumpism.

Changes in policy that might result from the US election catch Brazil at a sensitive moment. After a long and deep recession, with GDP declining by -3.8% in 2015 and another -3%+ in 2016E, and inflation peaking at 10.7% in 2015, Brazil was, as of November 2016, ready for a recovery.  Monetary policy started to be eased, as prices showed signs of stabilization and fiscal measures were taken to reign in government’s deficit. Confidence began a timid recovery, and the country was counting on foreign investment in infrastructure projects to propel growth. This scenario is now upset by the uncertainty of a Trump presidency, combined with amplified concerns on the European political calendar.

Even though details on Trumponomics are unavailable, the immediate effect on markets is the pricing in of higher uncertainty, with a sharp rise in bond yields and a spike in volatility, which are negative for emerging markets’ risk premiums. More exposed sectors in Brazil in the short term are the ones most sensitive to interest rates and economic growth, cyclical sectors like financials, retail, energy and concessions – exactly the ones previously well-positioned to benefit from the embryonic domestic recovery.

However, despite the negative short-term outlook, Brazil’s medium-term fundamentals are more defensive than most when it comes to the effects of Trump’s policies, in particular his promises to renegotiate trade agreements and implement higher import tariffs. Despite its status as a respectable exporter of commodities, Brazil’s economy is very inward-looking and has a remarkable low dependency on exports, which represent only 11% of GDP (compared to 26% in Chile and 33% in Mexico, for example). In addition, only around 13% of Brazilian exports are destined for the United States. Brazil is not part of any trade agreement, apart from flimsy Mercosur, and is mostly marginal to the main supply chains. Finally, the products sold by Brazil are typically not in the core of the discussions by defenders of protectionism, as are China’s.       

In fact, a scenario of growth-enhancing fiscal policies and higher inflation in the US should be positive for commodity prices, which could significantly benefit Brazil’s terms of trade going forward. 45.6% of Brazil’s exports consist of raw material and another 13.8% of semi-manufactured goods, and commodities might again provide some relief for the economy.

Even though we expect a relatively benign scenario when it comes to foreign trade, we are concerned with the impact of retreating globalization when it comes to foreign direct investment (FDI), which remained so far strong despite Brazil’s recent economic instability. Being a country with low savings’ rates (18% of GDP), Brazil depends on foreign capital to finance investments. Future economic growth was expected to rely heavily on investments in infra-structure, which could be jeopardized if the global scenario for risk-appetite sours and interest rates rise significantly. 

Finally, on the geopolitical front, the impacts of Trump’s election for Brazil are marginal, with no apparent benefit as is expected by other BRICs like Russia, nor potential harm, as might be the case for Mexico or China.

All things considered, Brazil seems to be a defensive play when it comes to the revised post-Trump world economic and political scenario, despite the expected short-term market correction that follows the pricing of higher risk premiums. As has been historically the case, Brazil’s economic cycle is relatively decoupled from the world’s, and its successes and failures are locally cropped and harvested. 

Germany

Jörg Rocholl, President, ESMT Berlin

How do you see the election impacting the global business environment more broadly?

Donald Trump’s victory in the U.S. Presidential Election has created significant uncertainty about the future U.S. economic policy and its implications for growth and employment. This holds in particular for the prospects of global free trade. Germany as an open and export-oriented economy is mostly worried about the impact on its major export industries such as automobile or manufacturing. Companies in these industries hope that the practical implementation of potential new rules will be substantially more benign than the rather volatile demands during the election campaign. At the same time, major German companies have created natural hedges by opening production sites in the United States, thereby to some extent lowering the implications of potential trade restrictions.

More broadly, the most substantial concern for the global business environment at this point of time is uncertainty, regarding both policies and key personnel. This makes it even more important for President Trump to reassure global partners of the steadiness and continuity of U.S. foreign and economic policies.

Ghana

Kobby Mensah, Lecturer, University of Ghana Business School

With the election of Trump, there is every reason to fear that the initiatives by Presidents Clinton, Bush, and Obama may not be repeated, as tradition demands. During the US election campaign, Trump vowed to disregard World Trade Organization agreements. For example, he promised to cancel trade agreements such as NAFTA, TPP, and many others that, according to him, are not in the interest of America. Here, the narrative, especially on Africa, is a world apart from his predecessors and there surely seems to be no love at first sight in the Trump camp. Of course, Ghanaians also, as Dr. Agyekum Addo, Chair of the Ghana Investment Promotion Council (GIPC), puts it, do not in their wildest dream expect Trump to set foot in Africa, let alone Ghana, as has been the tradition. Crucially, also, it is highly expected that trade agreements such as AGOA could suffer the fate that Trump prescribes for NAFTA and TPP. If such is the case, according to Dr. Agyekum Addo, the casualties would be the agriculture and non-traditional export sectors.

The predictions from the Chair of the GIPC is not all doom and gloom though. He also observes that Trump could prove us wrong, as he always did during the US primaries and the general elections going forward. Dr. Addo notes that as a seasoned business man, Trump, more than any politician, understands better how the movement of capital within the global space can contribute to America’s success, and bring to reality his mantra of “making America great again” if there is any such thing. 

Singapore

Alex Capri, Visiting Senior Fellow, Department of Decision Sciences, NUS Business School

What industries or areas of the economy in your country are most likely to be affected by possible Trump policies?

Trump has called for 45% customs duties on a swath of products from China, 35% duties on products from Mexico, and 15% to 35% duties on products from other countries deemed “currency manipulators.” If such protectionist tariffs were imposed, they would inflict real damage on the US retail sector – especially stores such as Wal-Mart that import the majority of their consumer products from China. Ultimately, US middle and working class consumers would have to pay more for everyday goods as well as having fewer choices.

In addition, manufacturers in the US that are utilizing Maquiladora strategies—rationalized production both in Mexico and the United States—could be hard hit. These industries include automotive, electronics, industrial machinery, medical devices, pharmaceuticals, apparel, footwear, and others.

If Trump pushes through on his threat to “tear up” the North American Free Trade Agreement, new costs will be added to supply chains, which would disrupt (in many cases, permanently) existing production networks. This could lead to plant closures, which would further deprive other sectors such as services, logistics, and real estate from trickle down income. The Peterson Institute of International Economics, a non-partisan think tank, estimates that Trump’s trade policies would cost the US 4 million jobs and send it into a recession.

Trump has also stated he will kill the Trans-Pacific Partnership (TPP) free trade agreement.  This will effectively create a competitive disadvantage for US export sectors in lucrative overseas markets. Key industries affected: agriculture, aviation, high tech, medical equipment, services (such as entertainment), and pharma.

How do you see the election impacting the global business environment more broadly?

Trump’s election has ushered in an era of heightened uncertainty and anxiety in global business. Companies are questioning to what extent value chains will be affected by protectionist tariffs and by a Western backlash against globalization. It’s not clear to how far Trump will go to carry out his campaign pledges. Imposing high tariffs against goods originating from Mexico, China, and (potentially) the EU, Japan, and Korea could have devastating effects on production networks and business ecosystems.

A worst case scenario would include a trade war between the US and China—the world’s two largest economies—whereby the Chinese impose retaliatory tariffs on US goods and services. Even if no trade war occurs, protectionist tariffs will severely disrupt global value chains of not only US and Chinese firms, but thousands of foreign subsidiaries that have embedded themselves in cross-border production networks. If Trumpian policies disrupt these value chains, it’s likely that many US firms and US-based foreign subsidiaries will relocate their activities elsewhere, creating the exact opposite outcome intended.

Global cities like Singapore, which function as trade and financial entrepôts, could likely experience, first, a slow-down from the effects of the Trump-induced trade fallout, followed by heightened activity, as US Firms and other MNEs move their operations out of the US to Asia.

Isolationist or erratic rhetoric from a Trump White House could also affect flows of foreign direct investment into the US This includes not only monetary assets, but also human capital as a perceived anti-immigrant, nativist ethos puts off potential graduate students and professionals.

Nitin Pangarkar, Associate Professor, Department of Strategy & Policy, NUS Business School

What industries or areas of the economy in your country are most likely to be affected by possible Trump policies?

It remains to be seen whether Trump’s policies will be as protectionist as he said while campaigning. If he does go that way, industries such as electronics that export to the US may be affected. Singapore is not a big exporter to the US in terms of rankings and a good proportion of what it does export to the US is in niche areas which are not in the public eye, such as optics and medical instruments, organic chemicals, electrical machinery, etc.

How do you see the election impacting the global business environment more broadly?

Trump could have a positive impact in one way. The Obama administration’s solution to everything was passing a lot of bills and regulations. Business in general, and banks in particular, were blamed for many problems.

If Trump can roll back regulation and view business as a partner of government and a facilitator of growth and employment, it might have a positive effect on business sentiment and growth. He may also reduce taxes which could have a positive effect on the economy (though not on government finances). If he implements protectionist policies, that might counter some of the positive effects identified above. The key appointments he makes will be important signals about what he will actually do.

Andrew Delios, Professor and Head of Department, Strategy & Policy, NUS Business School

What industries or areas of the economy in your country are most likely to be affected by possible Trump policies?

Trump is not Suharto. Trump is not Xi Jinping. The office of the US President has defined powers, most of which are in the political sphere. But for any real and long-lasting policies to be designed and implemented, they need the support of all parties in the policy making process.

Congress and the presidency are in Republican control. But Trump is a maverick Republican and some of his most extreme ideas do not have the support of your traditional Republican. With a Republican majority in the House of Representatives and a razor-thin Republican majority in the Senate, there are many opportunities for effective opposition to Trump’s more extreme policies.

So what does this mean? It should mean more or less business as usual for countries in the ASEAN region. This does not mean there will be no uncertainty or no policy change, but it does mean radical policy change that redefines the business environment, that redefines terms of trade, is unlikely. It also means the passage of the TPP is less likely, because it needs the support of all involved in the policy-making process in the US to pass it. 

How do you see the election impacting the global business environment more broadly?

In terms of the global business environment, there will be much stronger rhetoric coming from the US. To an extent, it is true that the expansion of economies in East and Southeast Asia came at the heavy expense of a subset of the populace in the United States. It is also true that US manufacturing is recovering, becoming more productive and leaving less reason for US firms to outsource or seek manufacturing partnerships outside their domestic market.

As much as ever, East and Southeast Asian economies need a cooperative US, more than the US needs the cooperation of these economies. Increasingly, US policy makers as a whole understand these positions, which means terms of trade, trade negotiations, trade treaties, and perhaps even the action of individual US firms, will leverage this strength in their bargaining position more so than they have in the past, extracting terms that are more favourable to US firms. Indeed if one is completely agnostic to the matter, the resulting trade agreements will be fundamentally more balanced in benefits to the US and its trading partners than has been the case in the past.

South Africa

Sean Gossel, Senior Lecturer of Applied Financial Econometrics, UCT Graduate School of Business

Trump’s election will impact South Africa via the global financial and trade channels rather than directly. Short-term trade negotiations are likely to be difficult but the long-term trade agreements (e.g. AGOA) are unlikely to be affected. Aid programs though—including  USAID, anti-HIV/AIDS programs, etc.—may be scaled back, which will have social implications. The Johannesburg Stock Exchange will be impacted by the companies with international listings (e.g. BAT, Anglo, Steinhoff, etc.) rather than by the locally domiciled listings and the bond market will be affected by the US’s interest rate and deficit spending. The effect on SA’s impending ratings downgrade is impossible to predict but SA is facing a ‘strike-three you’re out’ blow—Brexit was strike one, Trump is strike two, and a downgrade would be strike three.

As for global implications, Trump’s election shows that Brexit wasn’t an outlier and will embolden left- and right-wing nationalists and populists in the short-term. Some commentators are saying that this is an outcome of inequality arising from globalization, but this is only partially correct. Brexit and Trump are a result of wage stagnation in industrialised countries arising from globalization. The implication is that although Trump will try to use trade agreements to return American large-scale manufacturing back to the USA, this is unlikely to have much impact and the specialised manufacturing that does return to the USA is largely mechanised and high-skill, low labour intense to affect the USA wage gap.

Trump’s isolationist and populist platform will heighten tensions globally, but will also expose the political fault-lines in the USA between a deeply divided Democratic Party, as well as a fractured Republican Party. This means that despite all the fear and hype, Trump may face the policy stagnation that comes from fractured party politics (similar to SA under Zuma).

Trump plans to boost the US economy through an expanded infrastructure programme but the budgetary reallocation to do so is problematic because if government spending increases then this will lead to inflationary pressure necessitating interest rate increases. If the government borrows instead then it will have to fund the associated costs. Of greater concern would be if the government used both expansionary monetary policy coupled with deficit spending because this would then fuel global inflation. This in turn would have detrimental effects on many emerging countries which tend to have procyclical capital flows and synchronous business cycles.

Spain

Gayle Allard, Professor, IE Business School

Trump’s victory is seen with trepidation from Spain. His anti-globalization rhetoric promises that initiatives like the TTIP, which would boost growth for both sides, will be scrapped; and protectionism will prevail over freer trade. Spain exited its recession thanks to export growth, and a trade slowdown hurts its prospects and those of the world.

On the upside, Spanish companies could win contracts in Trump’s infrastructure program, and the stronger dollar may boost eurozone exports and induce more Americans to vacation in Spain. Rising US interest rates as Trump overstimulates the economy will boost returns for pension funds and others battered by near-zero interest rates. This could bring Spain some benefit. Globally, though, emerging economies with US dollar debt will struggle, as will highly indebted developed countries like Spain if their interest rates follow US yields upward.

Trump’s criticisms of NATO hint that he is less willing to subsidize European defense. Spain’s fiscal debt is high and its looming pension crisis may be the developed world’s worst.  It is unlikely to be able to devote to defense more than the 0.89% of GDP it now spends.

Additionally, Spanish popular opinion supports multilateral efforts to combat climate change. The loss of US leadership will fuel anti-American sentiment, since the US is seen as the main contributor to the problem.

Spaniards have mixed feelings toward the United States. Hollywood, the media and history have led them to view it as an unequal country in the sway of special interests, especially oil, where militarism lies very close to the surface. Trump’s victory hints that these tendencies may be given freer rein. Spain will perceive Trump’s America not only as a less reliable ally, but as a country that does not share its values. It also fears a similar rise of populist sentiment at home.

Switzerland

Jean-Pierre Lehmann, Emeritus Professor of International Political Economy, IMD Business School

We are all in a state of shock. There was no prediction, or warning, that Donald Trump would be the 45th President of the United States, let alone that his victory would be crushingly decisive. Wow! Even the shock of Brexit pales into comparison. As a middle-ranking power, Britain is a minor actor on the global geopolitical stage. We are talking here about the United States of America, the world’s major power by far, dominant on the global stage, albeit facing a rising Chinese power. This victory will clearly have myriad consequences, both intended and unintended! We should have been more attuned as my friend Nik Gowing urged in his landmark report to Thinking the Unthinkable.

The Trump victory undoubtedly corresponds to what author Nassim Nicholas Taleb termed a “black swan”. It was off our radar screens, all polls indicated Clinton would win; it has had and will have a huge impact; yet it becomes logical and clear with the benefit of hindsight.

In one respect, especially the third point applies: trade. The closest thing we can have to a certitude in terms of consequences of Trump’s victory is that protectionism will increase, in the US, but through retaliatory moves everywhere. The threat of an outright trade war between China and the US, present for some time on the horizon, is now getting closer.

A rise in American and global protectionism, however, would not be a “trend breaker,” but the intensification of an existing trend. Since the beginning of this century, the global trade agenda has been moribund. The WTO Doha Development Round launched in 2001 was thwarted at the Cancún ministerial conference in 2003. In 2005, The Evian Group warned that Doha was a dying duck. This was stridently denied by most policy makers, who then and for the ensuing years have engaged not in thinking the unthinkable but in wishful thinking. Doha is dead!

Whereas Trump is an overt protectionist, the trade policy makers in the administration of his two predecessors, George Bush and Barack Obama, were closet protectionists. The main obstacle to pursuing an open rules-based multilateral trade agenda has arisen due to the inability of the erstwhile dominant actors, US, Europe, and Japan, to adjust to the emergence of new actors, especially China, but also other so-called “emerging economies”.

The most recent blatant manifestation of this failure has been the “mega-regionals,” notably the Transatlantic Trade and Investment Partnership (TTIP) and Trans Pacific Partnership (TPP), both of which flagrantly discriminate against the new actors, especially, again, China, but also India, Brazil, South Africa, and all least developed countries. The mega-regionals are also blatantly politicised, using trade as a weapon to achieve geopolitical ends: as Obama’s Secretary for Defence, Ash Carter, shamefully admitted, “TPP is like having an extra aircraft carrier”.

The good news is that with Trump’s election it is reasonably certain they will be buried. The bad news is that there is no solid rules-based multilateral global trade framework. As things currently stand, the global trade institution (the WTO) is cavernous, while the protectionist rhetoric, especially, but not exclusively, against China has become more threatening and strident.

There is an urgent imperative for those who wish to promote a sustainable, inclusive, equitable and dynamic global rules-based multilateral agenda to rally forces. The situation is highly critical and, as things currently stand, could get much worse. The spectre of protectionism and global trade wars is terrifying and must be taken seriously.