Now that newly-sworn-in US President Donald Trump has made his first formal policy pronouncements, it is possible to make more clear-eyed judgements about the probable impact on the world economy and on Australia’s economy in particular. So far, there have been few surprises, although some seem shocked the President is delivering pretty much what he promised during his campaign.
The President’s announcement on restricted immigration (since suspended) attracted most attention, and does have implications for Australians. Travel to the US for affected citizens has become more difficult, at least for now, a reality that affects mainly multi-national firms, particularly those in financial services and technology. Australia looks poised to get special treatment, but the details remain sketchy.
The policy announcement with more profound implications for Australia, though, was one of the first made by the new President – the withdrawal of US support for the nascent Trans-Pacific Partnership (the TPP), of which Australia and eleven other countries were signatories. Most analysts agree the promised TPP deal is dead without US participation, although Australia’s government continues to attempt its resuscitation.
Australia was to be a significant beneficiary from ratification of the TPP but instead will now have to pursue bilateral agreements with our major trading partners, including China, India and eventually, the UK, which now is well on the way to exiting trade agreements in Europe.
Trade was always likely to be the channel through which US policy would most affect Australia. We are a small, export-oriented economy dependent to a large extent on trade flows for our prosperity. But growth in global trade has been dwindling since the global financial crisis, owing to weaker economic growth, waning benefits from previous free-trade policies, China’s maturing economic cycle and, more recently, some crab-walking back towards protectionism.
A lurch inwards by the US on trade, including imposition of the punitive tariffs promised by the Trump administration, will probably make this situation even worse. It is difficult to estimate the retaliatory reaction of affected countries, but some analysts warn about the imminent outbreak of a new trade war. There will be few winners from such hostilities. With a large domestic market, the US economy may be able to sustain inward-looking policies, at least in the short term. Australia cannot.
There may be resistance in Congress, but President Trump pledged to lower corporate and personal taxes in his election campaign, strengthen the US economy, boost jobs growth and embark on a new wave of infrastructure spending. Much of this is positive for Australia.
On taxes, President Trump has promised a 15 per cent corporate tax rate, half the prevailing rate in Australia. While a cut of this magnitude will intensify tax competition for Australia, it should work towards lifting growth in the US, which has struggled to stay above 2 per cent since the crisis. A stronger US economy is good for world economic growth, so should benefit export-focused countries like Australia.
The infrastructure spend should also help Australia. The world’s largest economy substantially lifting spending on roads, rail, ports and other public assets should boost demand for iron ore and energy commodities like coal and liquefied natural gas. Australia is a major exporter of all three. Moreover, economies in Asia, which receive two thirds of Australia’s exports, may also boost infrastructure spending if they fear a trade war with the US.
Most economists agree that the US economy is already fully employed. That is, there is little spare capacity in product and labour markets, a point repeatedly made by the chair of the Federal Reserve. Pouring stimulus into a fully employed economy probably means inflation and earlier and more assertive interest rate hikes.
More aggressive monetary tightening in the US would eventually spoil the global economic cycle, leading to weaker growth, a negative for Australia. It probably also means a stronger US dollar and, by extension, a weaker Australian dollar, something our central bank has been trying to encourage for some years now. A weaker currency should aid Australia’s delayed rotation to more non-mining sources of economic growth.