The startling changes brought in by the Donald Trump administration have unnerved one and all. Financial markets, businesses, consumers and policymakers simply don’t know what these moves mean for growth and inflation, nor do they have a good fix on how bad the downsides in geopolitics might be. In fact, uncertainty alone is proving corrosive for the world economy as firms defer capital spending and hiring until they can make sense of what is happening around them.
Unpredictability is all around us but some things are actually crystal clear. The US is no longer a stabilising anchor for the world. Rather, it will be a disruptor. Europe has realised this and is undertaking transformational changes.
China is also making some course corrections. In the near term, emerging economies in Asia will have to endure higher risk aversion, which will make their currencies and asset values susceptible to big swings. They will also have to deal with a number of major structural shifts. In a rougher world, emerging economies will have less room for error.
In America, the disruption is just beginning
Enough is now known about what President Trump’s team is doing to get a sense of their overall objective: it is to pull off a wholesale re-making of the American political and economic system. This involves reversing the decades-long trend of the government as a protector of the people against such ills as economic insecurity and the mistreatment of minorities.
They want to shift the balance of power away from the Federal government to state governments and more in favour of big businesses. Some of the methods being used to achieve this are radical: undermining or even eviscerating liberal-leaning institutions such as consumer protection agencies, universities, mass media organisations, law firms that serve liberal causes and even cultural agencies such as the John F. Kennedy Centre for the Performing Arts.
It is also likely that there will be shifts in fiscal policies. The House of Representatives has passed a budget bill that will allow for US$4.5 trillion ($5.9 trillion) of tax cuts, which will only be partially offset by US$2 trillion of spending cuts, many of which do not seem practicable. Trump’s allies likely believe that the best way to reduce the role of the US federal government is to ‘starve the beast’ — significantly reducing revenue so that reluctant lawmakers will have no choice but to cut spending decisively.
See also: Greece raised to investment grade by Moody’s on resilience
Trump has been able to carry out such a comprehensive overhaul of the American system with little opposition, given his party’s control of both houses of Congress and the disarray among his Democratic opponents.
However, this will not last. It may take a few months more but the sweeping changes are bound to instigate a strong backlash in the US, given the large number of people who will be the losers from Trump’s extreme moves. Opposition will grow, and there will almost certainly be great social, political and legal dissension within the country.
The new administration is also keen to reset America’s relations with the rest of the world. The immediate change has been the highly aggressive use of tariff hikes. Many observers had assumed that Trump would simply use the threat of such tariffs as a lever to secure trade deals for the US and that he would back away from those threats if financial markets rebelled or if an economic downturn or higher inflation became more likely.
See also: No doubt that Trump is trying to reset US economic structure: JP Morgan’s chief economist
Well, this has not quite worked out as the optimists had hoped. Trump and his officials now say that Americans will have to tolerate some pain for the longer-term good. Trump is a true believer in tariffs and will pursue them zealously. Trade frictions will only worsen as other countries retaliate.
Trump’s team is also making it brutally clear to its allies and trading partners that they are expected to make concessions as demanded by the US. Trump’s treatment of Panama and Ukraine has shocked American allies. Military alliances such as Nato, which were the bedrock of America’s foreign policy, have been shorn of their effectiveness by the administration’s diminished commitments to these partnerships.
At the same time, the US is willing to be more sympathetic to previous rivals such as Russia. Moreover, the US is getting out of the aid-giving business with the effective shutdown of the US Agency for International Development (USAid). Neither is the US under Trump keen on projecting soft power through media organisations such as the Voice of America and Radio Free Asia.
There is little doubt that this is a sea change, a fundamental rewiring of the world system that will bring great dislocations in its wake. Not surprisingly, the rest of the world is reacting.
The biggest change is in Europe
Within hours of winning the German election last month, the likely new Chancellor Friedrich Merz aligned himself with French President Emmanuel Macron’s longstanding call for Europe to develop strategic autonomy from the US.
Within weeks, Merz effected a groundbreaking constitutional change in Germany that eliminated the country’s limit on public debt. This will pave the way for a massive trillion-euro increase in defence spending and a huge infrastructure programme. France, Germany, Poland and other European Union countries are putting aside years of awkwardness with the UK to work on joint defence programmes and provide more assistance to Ukraine.
China is also re-calibrating
Trump’s aggressive trade policies against China will create headwinds to its growth. But unlike other countries that have rushed to make concessions to the US, China is playing it cool. President Xi Jinping has been slow to respond to Trump’s desire for direct talks and has yet to agree to visit the US as Trump wants. China has also retaliated immediately against American tariffs and indicated that it will expand its arsenal of responses over time.
Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends
Talk about a “grand bargain” between the US and China will probably remain just that: talk. Eventually, some kind of deal could be reached, as we saw in the January 2020 trade deal that settled the first US-China trade war during Trump’s first term. But the clash of interests between the two big powers is probably too fundamental to allow for a game-changing deal.
China has also ramped up measures to boost consumer spending and so make the country less reliant on exports to the US. Although some observers feel that these policy moves do not go far enough, the changes come after many years when the leadership resisted requests to do so and will be enough to move the needle on making consumer spending a bigger driver of Chinese growth.
In the long term, China’s leaders probably see recent developments as favouring it. America’s alienation of its major security allies, its diminished soft power efforts and the likely deterioration in its fiscal condition will all play to China’s advantage in what it sees as a long period of contestation with the US for global power and influence. Xi will also take advantage of Trump’s less-than-enthusiastic support for Taiwan — probably by stepping up grey zone tactics such as air and naval intrusions, cybersecurity attacks and influence operations to destabilise the country rather than by overt military aggression. It is also entirely possible that China might assert itself even more forcefully in the South China Sea.
Uncertainty hurts confidence and delays spending decisions
Major institutions have been updating their forecasts in recent days — and they are all to the downside. For example, the OECD has downgraded its expectations for global growth due to the trade frictions caused by Trump’s aggressive tariff hikes. It also believes that global inflation may prove to be stickier, not falling as much as had been expected a few months ago. That means that the Federal Reserve Bank will not be cutting rates in a hurry and that large rate cuts are likely only if recession risks intensify.
This growing unease about the future is affecting consumers and businesses. In the US, consumer confidence, as measured by the University of Michigan, fell in March to levels not seen since the last stages of the pandemic in 2022.
Moreover, expectations for inflation over the next five years spiked to 3.9%, the highest level they have reached since 1998. The Global Economic Policy Uncertainty Index is at its highest level since the index began surveys in 1996. The rise in trade policy uncertainty is even sharper. Businesses are not immune to this uncertainty. Surveys of purchasing managers worldwide show that companies are issuing fewer new orders, raising the chances of a slowdown in the coming months.
This despondent mood will also hurt emerging Asian economies. First, financial investors are becoming much more risk-averse and will not hesitate to withdraw money from risky asset classes. With plenty of things that can go wrong, they are not in the mood to excuse policy errors or other weaknesses in emerging market bonds or equities. The recent plunge in Indonesian stock prices is a warning of what could happen.
Second, such financial pressures could worsen over time. With the US, Europe, and other countries stepping up defence spending, fiscal deficits are set to increase. More debt issuance and competition for savings will result in higher borrowing costs for emerging economies.
Third, global businesses will react to uncertainty the way they always do — by postponing or downsizing investment. The foreign investment that is so crucial to developing Asian economies is likely to slow appreciably — or perhaps even fall — if a full-scale trade war materialises.
This will undercut one powerful driver of economic development in Southeast Asia that we had been banking on: supply chain reconfiguration, which involves relocating production from China to other countries.
Fourth, it is not only Europe that needs to raise defence spending. With the US no longer willing to play its role as a security guarantor in Asia, Asian countries will have to strengthen their own defence efforts, given the rising risks in hotspots there. Hard choices will have to be made about what other spending may have to be sacrificed to allow this rise in defence commitments.
Asean needs to be as galvanised as Europe
In short, Asean countries will face growing insecurity in their region, and the globalisation and free trade that have enriched them in the past will be less helpful. No one should be complacent about the risks — they are all very much to the downside.
Individual countries will have to adapt to this through measures to ensure resilience. Reforms must address vulnerabilities in defence, economic competitiveness, financial sectors and the lack of diversity in economic drivers. The government will have to spend more to boost domestic demand and military preparedness, and money will have to be found for these spending increases.
However, the likely dislocations will require not just individual actions but also collective action at the Asean level. The old “Asean Way” of polite but ineffective initiatives, such as the Asean Economic Community, must give way to a more energetic and meaningful response. If doing things in an all-Asean way turns out to be difficult, then smaller subgroups should form coalitions of the willing so that there is at least some strength in numbers.
Manu Bhaskaran is CEO of Centennial Asia Advisors
