<b>A V Rajwade:</b> Law of unintended consequences

This law coupled with Trump's trade protectionist policy may see China emerge as new economic leader

Since the election of President Donald Trump, the dollar has remained strong; he has reiterated his pre-election policy threats/promises on several issues, and announced his team. Neither bodes well for the future of global trade and international cooperation on other issues. Two particular targets have been Mexico, the US’ second-largest export market, and China, the global manufacturing/trading superpower. In a way, one admires the boldness of the man elected by a minority of Americans (his opponent got three million more votes — but was defeated by the “electoral college” system of choosing the winner!); only 37 per cent consider him qualified for presidency while just 31 per cent think that he is moral — and 65 per cent consider him reckless (Pew Research polls)! Millions demonstrated on the streets against Trump on his swearing-in day.  

Turning first to his cabinet and other senior appointments, they all seem to be from the “1 per cent”; the combined net worth of the cabinet is something around $12 billion, by far the largest of any US cabinet in history. And, in terms of their views and beliefs, too, many seem like atheists acting as priests! To quote some specific cases: 

* The secretary of state, in effect the foreign minister, has close business ties with Russia, US’ geopolitical rival; he was conferred Russia’s Order of Friendship Award in 2013;

* The member of Congress, now appointed health secretary, had introduced a bill to abolish the Affordable Care Act, which provided for health insurance to the poor. President Trump’s first executive order after swearing-in was to suspend some provisions of the Act;  

* The head of the Environment Protection Agency does not believe in global warming, or the need for the Paris Accord on the issue; 

* The treasury secretary “forgot” to mention his investments in tax havens in the list of assets he is required to submit; 

* The labour secretary opposes minimum wage and other business regulation.

On the economic policy team, too, many of the top appointees are Goldman Sachs veterans. (In a scathingly critical article in Rolling Stone, Matt Taibbi had described Goldman Sachs as “a great vampire squid wrapped around the face of humanity”.) Goldman Sachs has paid billions of dollars in fines for malpractices, which, inter alia, led to the 2008 financial crisis. Chances are that the banking regulatory regime introduced after the 2008 crisis will be watered down significantly leading to one more dispute with the European Union (EU) — it will be interesting to see whether Britain goes with the US in a bid to retain London’s importance as the global financial centre, or sides with the EU even after Brexit. Back in the 1950s, Republican president Dwight Eisenhower had accused the “military industrial complex” of influencing US policies; over the last 30 or 40 years that power is now being exercised by Wall Street.

With regard to trade issues and the “America First” policy, in his inaugural speech, Trump said, “The wealth of our middle class has been ripped from their homes and redistributed across the world.” He seems to ignore that these were payments for goods and services supplied by other countries and a significant part of the proceeds remain invested in US Treasuries: China and Japan alone hold more than $2 trillion of US Treasury securities, which have financed US fiscal deficits. Trump’s premise that “(Trade) protection will lead to great prosperity” is belied by empirical evidence: the world’s largest democracy, India, followed protectionist policies for 40 years and the result was the “Hindu rate of growth”, and no increase in per capita incomes. “Buy American, hire American” and high import duty policies may only lead to high domestic prices and inflation. 

To be sure, the US has been incurring high trade deficits, and the consequent loss in domestic output and employment for many years (even today, India is not very different in this respect). And the persistent trade deficit suggests that the dollar is overvalued. It is difficult to imagine that the needed correction on the external account would take place without a correction of the currency’s exchange rate. Before his inauguration, the president-elect had indicated his preference for a lower dollar, but post-inauguration, his treasury secretary reiterated the policy of a “strong dollar”.

Will the law of unintended consequences come into operation and the “America First” trade protectionist stance of the US lead to the global economic leadership passing to China, whose president was lionised last week at the Davos Economic Summit by the “1 per cent”?

The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com