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Trump and EM

The Emerging View

12 January 2017

The threat of protectionism is on the rise, nowhere more so than in the United States, the erstwhile bastion of free markets. US protectionism is no idle threat. President-elect Donald Trump’s proposed policy mix includes protectionist measures to ameliorate the negative side-effects of his main policy thrust – greater fiscal deficits due to lower corporate tax rates. However, it is not an ideal time to engage in fiscal stimulus and trade protection. The US real effective exchange rate is already overvalued and Trump’s policies look set to worsen imbalances. Inflation will rise and the Fed may be forced to hike rates. The economy will get hurt. Many domestic interest groups will get upset. Foreigners will retaliate. If you don’t fancy living with that particular Sword of Damocles hanging over your head then reduce your exposure to the US.

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