A View From INSEAD
Navigating Uncertainty: Assessing Trump’s Impact on Global Growth
Donald Trump’s recent election as President of the United States has been discussed at length, yet relatively little is known about what he’s got in store for the banking and financial sectors. How do you see him making an impact in the next few months?
Trump has only been president for a short time, so it’s too early to make predictions. Many of his decisions still have to go through Congress, so it’s not clear whether they will actually happen. What is clear is that he’s creating a lot of uncertainty around him, and financial markets don’t like uncertainty.
A big unknown for me is how the people he’s put in charge will handle things. I’m ambivalent about the fact that so many former executives of Goldman Sachs have been given key government roles. On the one hand, they know the financial sector and can thus direct efforts and resources to fix what they know needs to be fixed. But at the same time, the conditions are there for them to serve their own interests and change things in the wrong direction.
Are there any priority areas you’d like to see addressed?
One area that Trump has mentioned and that I hope he will soon tackle is simplifying bank regulations. After the crisis in 2008, the Obama administration put in place regulations such as the Dodd–Frank Act, which contains thousands of pages of rules. Compared to the 37 page Glass–Steagall Act of 1933, which was created in the aftermath of the 1929 crisis, it’s very complicated and would benefit from being reduced to its core principles.
Wouldn’t that create loopholes and opportunities for banks to do as they please – to go back to taking risks without consequences?
I’m personally all for reducing burdensome regulations, but I also strongly feel that if a bank gets into difficulties, it shouldn’t receive any government support. It should be like any other private corporation, where shareholders and investors accept the consequences of the risks taken, as opposed to counting on the government – and taxpayers – to save them when things go wrong.
For me, this would be the only way that having fewer regulations could work, but it’s unclear at this point how the issue will be tackled, or whether it will be touched on any time soon.
Is there any indication that Trump’s administration wants to put an end to bailouts?
Bailins have been on the table even before Trump. In 2014, the G20 summit decided to put an end to bailouts and reduce state intervention. It was decided that the burden should go back to financial institutions. Despite this, the Italian government agreed to bail out Banca Monte dei Paschi di Siena with a €20 billion rescue fund last December, which shows that the rules in place are already being followed selectively.
Could the Trump administration somehow ensure these decisions are followed? Perhaps that could be a way for it to show its determination to “drain the swamp”?
At the moment, it’s hard to say whether the Trump administration has a position on the matter. As far as I know, it hasn’t declared anything on this topic, for better or for worse. The only clue we have is the fact that the administration is not too fond of binding international agreements, as we’ve seen with Trump’s position on NATO and the Trans-Pacific Partnership. So, at this point, there’s no guarantee he’ll follow G20 and Basel Committee decisions either.
In my view, if these rules were to be thoroughly applied and respected, it would be one of the most game-changing developments for the global financial sector in the last 50 years. It would mean that the risks financial institutions take would be accurately priced by the market, pushing them to be much more transparent. This transparency would change the way global banks operate.
Speaking of transparency, Trump has been at pains to make his protectionist views clear. How do you think such policies will impact global financial markets?
The administration is likely to favour US firms, particularly large investment banks, as opposed to foreign institutions. This will put foreign banks doing business in the US at a competitive disadvantage, raising questions about how the rest of the world will respond.
The way each country regulates its national economy could be impacted profoundly. Will we see a Balkanisation of markets, where global and international markets are dismantled and replaced by more national and local mechanisms? What about global banks such as HSBC? How will they create value if the global financial sector is weakened or rendered irrelevant?
So, for the most part, his protectionist approach will hinder global growth?
I don’t think it’s that simple. There are claims that protectionism can only have a negative impact on growth. Based on past experiences, it can have a negative impact. But in my view, it’s not always the case. I find the idea that protectionism is automatically bad for growth to be severely overstated.
Of course, extreme protectionism generally has adverse effects on consumers and the economy. But to claim that moderate forms of protectionism are necessarily bad for the economy is a bit simplistic. They may very well be bad, but I think at this stage we don’t know what they could look like or what they could accomplish.
What does all this mean for us here in Asia?
Protectionist measures raise questions for South-East Asia. We know the importance of China for the economy of the region. Protectionist measures from the US against China would have spill-over effects for the entire region, including Singapore.
The main question is whether China can counter-balance any reduction in exports to the US by raising domestic consumption. Can its middle class make up for it? The reality right now is that it’s too immature to do so. The Chinese middle class is growing, but can’t yet replace the amount of goods and capital traded with the US.
So how are people preparing for the unpredictable times ahead?
It’s true that things are quite confusing. Trump’s win and the Brexit debacle have created an environment in which no-one wants to make the first move or take unnecessary risks. Most people are just waiting to see whether common sense will prevail. We hope that it will!