The Developing Scenario

Lawrence Zammit's article on The Times of Malta

When Donald Trump was elected to become the next president of the United States of America, I had commented that the emerging political sentiment we saw this year (Trump’s own election and the UK referendum result in favour of Brexit) goes against the economic policy that has been pursued globally to promote free trade over the last three decades.

When one also notes that Marie le Pen is the most popular politician in France and Beppe Grillo’s party is the most popular party in Italy, one cannot help but remember a song sung by Shirley Bassey and a front page headline of the newspaper The Economist with reference to Silvio Berlusconi of Italy, “Send in the Clowns”.

Donald Trump is now showing his hand (again one cannot but help associate the next President’s name with a game of cards) and is setting out his programme for his first 100 days in office. There are things, which he said during the election campaign and which he is now just skirting round, such as locking up his adversary, Hillary Clinton, or a total abrogation of Obamacare (the US legislation on healthcare).

On the other hand it appears from statements he has made in the last days that certain things which he said, he seems intent on implementing.

The developing political scenario is not a topic that I feel comfortable commenting about. I am referring to the special relationship that Trump seems intent on developing with the Russian president, Vladimir Putin; to the possible stronger ties with Turkey; to relations with the EU and the defence organisation, NATO; to relations with the Arab world.

However this developing political scenario is bound to have an impact on economic relations and as such, even in this area one needs to watch how the scenario will develop.

An axis between the USA and Russia would essentially be a political one since the Russian economy is not a strong one, once one discounts its energy resources such as natural gas. On the other hand if this political axis were to exclude the European Union and China, a new economic axis could be created. Both the EU economy and the Chinese economy depend heavily on exports and foreign investment. Neither of them have any aspirations to command the world’s political stage, but they both focus on growing their economy.

The EU can easily provide China with the technology it needs, while the EU consumer market is actually larger than that of the United States. So a China – EU economic axis is a very plausible scenario if Trump continues to privilege relations with Russia.

Another consideration to make is the impact on the US inflation rate if Trump imposes some form of protective tariffs on Chinese and Japanese exports to safeguard American jobs. One may understand Trump’s objectives, but one also needs to recognise the low inflation experienced in the last years is also due to cheaper exports from the Far East.

Trump has already indicated that he would exit from the TTP (Trans-Pacific Partnership), a trade agreement among a number of countries that birder on the Pacific Ocean. He has also indicated that the TTIP (the Transatlantic Trade and Investment Partnership) with the EU will not be signed. His policy is more likely to favour bilateral agreements.

If trump also lives up to his promise of increased public sector spending on infrastructure, what is the likely impact on the US inflation rate? If the US inflation rate does go up what will happen to interest rates? If interest rates do increase in the USA, how will that affect the exchange between the US dollar and the Euro and how will US consumption expenditure be affected?

A further development in both the US and the UK (following Brexit) could be a reduction in corporate tax. Will that attract the investment that such a decision would hope to achieve? If it does, what would be the response of the EU and China? Will it get them closer at an economic level?

How will Malta be affected with all this? I believe that the impact of these possible new scenarios on Malta could be very significant. As expected, in some respects some of the impact would be positive while in other respects, it would be negative. While recognising our small size, we need to be vigilant to make sure we manage the downside risks of the developing scenario effectively and exploit fully the opportunities it presents.

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