Donald Trump’s economic program is neither inconsistent nor unpredictable.
It is actually a very rigorous form of neo-mercantilism. We Europeans have learnt in history books what mercantilism was during the XVII and XVIII centuries: the effort by strong States to accumulate wealth by protecting their industries behind high tariff barriers, and forcing weaker trading partners (colonies at the time) to accept unfavorable terms of trade. What Trumponomics is about is exactly along the same lines. And this form of economic nationalism is by no means a school of thought that has grown in America only. The economic idea behind Brexit, or the economic programs promoted by far-right parties in France or The Netherlands endorse similar ambitions. There is no question that economic liberalism and globalization have had their own flaws, which partly explain this current trend. But the more pressing question for markets is: what will be the consequence of this drift towards mercantilist policies?
One can think of at least two. The first one is inflation. Donald Trump’s policy is being implemented at a time when inflation is already picking up almost everywhere, to various degrees. And whereas liberalism, globalization and innovation had been deflationary, it is likely that the support to old uncompetitive industrial sectors through tariff barriers will be inflationary. Therefore, rising cyclical inflation might be reinforced by the anticipation of higher structural inflation. Bond markets are clearly not pricing this risk today.
The second consequence will be trade tensions, which might hurt global economic activity, if not rise the political risk premiums in certain regions. Let’s remember that mercantilism had initially come to an end for two reasons: first the growing resentment of trading partners had in several cases turned trade wars into outright wars. Second, economists had finally converged to David Ricardo’s point that global trade is not a zero sum game. Rather than try to steal trade volumes from each other, countries should see that it is to everyone’s advantage to promote free trade.
In other words, mercantilism generates winners and losers, and therefore instability. Equity investors are right to consider that winners are worth investing in, and are likely to be found primarily in the cyclical sectors and the US market. But they would be well advised to prepare for instability also.
Didier Saint-George – Managing Director – Carmignac