Op-ed: Trump or Clinton? What the global economy should expect

By Iouri Marounov, international economist based in Paris

Donald Trump from the GOP, Hillary Clinton from the Democrats - the nominations are complete. The whole world is following the US presidential election, as the US economy and its perturbations are affecting the world not just in ripples, but tidal waves (think 2007 subprime mortgage). Hence the question: what would the election of Mr. Trump or Mrs. Clinton mean to our jobs, our income, our future?

The impact of the November election is a matter of political foretelling as much as economic forecasting. Even though the best proxy for the president's policy is candidate promises, the latter may not translate into the former. Moreover, the president is constrained by Congress, especially if the majority is controlled by the other party (for Mr. Trump opponents outnumber supporters even in his own party). Finally, policy choices are conditioned by other factors - oil price hikes, geopolitical emergencies, a new Euro zone crisis, etc. With this in mind, what steps would the new administration follow and what would it mean for the world economy?

Mr. Trump built his program on a tough stance on immigration, protectionism (renegotiation of the trade deals, trade barriers to fight outsourcing), massive tax cuts and strong reduction in public spending. However, the most controversial proposals of the candidate are also the least likely to be enacted should he become president. This is because of the difficulty in securing a majority in Congress and because, once in the Oval office, there is little political benefit from fulfilling yesterday's promises. So the question of deporting 11 million illegal immigrants and building a wall on the Mexican border will not arise beyond the election. The same will happen to his protectionist ideas: US businesses have segmented their production processes worldwide and as such trade wars would hurt them. The new president will also forget about the 45% tariff on Chinese imports through fear of retaliatory measures. Yes, Mr. Trump will take a tougher stance in the TAFTA negotiations, but so would Mrs. Clinton.

Perhaps the only area where Mr. Trump would bring change is in the fiscal policy. He plans to reform income tax, cut taxes of capital gains and dividends, bring down the corporate tax top rate to 15%, and repeal the gift and estate taxes. According to the Tax Policy Center, Mr. Trump's plan would cut fiscal revenue by $9.5 trillion over a decade (assuming supply-side effects occur only in the long run). To ensure long term fiscal sustainability, the tax cuts would have to be matched by public spending cuts. Mr. Trump says he will eliminate most corporate tax breaks. However, in a democracy reducing public spending is hard. The best guess is, therefore, that Mr. Trump would be able to push through some of his tax cuts, but only a few spending cuts would be enacted. This would equate to an important fiscal expansion with a higher fiscal deficit and growing public and external debt-to-GDP ratios. In the short run, it would represent a stimulus to the world economy based on the growth of the US imports. In the longer run, the worsening of the US net external position would be fraught with "black swans". Until recently, the US external deficit was matched by the accumulation of foreign exchange reserves by central banks of emerging and/or oil-exporting countries. The latter sought to prevent their currencies' appreciation against the dollar. Since 2014, the US current account deficit has been increasingly funded by foreign private agents acquiring corporate bonds and by the speculative short-term capital in search of higher return. These investors are more receptive to the exchange rate and solvency risks, and if, beyond an unknown psychological threshold, the US external deficit is deemed unsustainable, the demand for US assets could strongly decline, leading to a strong dollar depreciation and huge portfolio losses for foreign holders of dollar assets. The discussion of 2006 on the probability and the effects of a dollar plunge will resume.

What about the economic consequences of Mrs. Clinton? On the fiscal side, her presidency would mean added fiscal pressure for higher incomes: the "Buffet tax" of 4% on income over $5 million, higher taxes on capital gains, a repatriation tax on profits. Federal government spending and welfare transfers would increase in a number of areas: debt-free tuition in public colleges, expanded childcare assistance, higher infrastructure spending, and the expansion of Obamacare. Moreover, if Mrs. Clinton is elected, the federal minimum wage is likely to be increased. Unit labor cost increases would result in a higher inflation rate, also boosted by a foreseeable recovery of oil prices (which would of course occur no matter who is elected in November). Wage growth and further investment in the energy sector would stimulate GDP growth. The effects for the world economy would stem from a potential reaction of the monetary authorities. If the Fed, in turn, reacted by hiking its key interest rates, it would lead to an upturn in long-term interest rates. Then the risk for the emerging economies is that their interest rates would follow, leading to a serious worsening of their financial position.

The outcome of the campaign remains highly indecisive. According to the latest polls, Mr. Trump is closing the gap with the former Secretary of State. Mrs. Clinton is generally considered a better candidate for the markets. Her program is not more business-friendly, but the populist rhetoric of Mr. Trump generates uncertainty. As we move closer to the election date, this uncertainty will translate into higher market volatility, at least if Mr. Trump is still sufficiently high in the polls. Given the global nature of the markets, this volatility will spread worldwide. The post-election consequences could be even more dramatic. The exorbitant privilege of the US is that the US president is elected by the US citizens only, but the impact from his economic choices is felt all over the world. To paraphrase the former US Treasury Secretary John Connally, "it is our election, but it is your problem".

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