It's only the first week of Donald Trump’s presidency, but the contrast between Trump’s “America First” protectionist rhetoric and other world leaders’ hopes of globalisation working for the many could not be starker.
The Trump rally had already stalled before the 45th President began his inauguration speech, as investors sought more detail on his plans. Despite Trump’s tax cuts and infrastructure spending pledges, the Federal Reserve may have to scale back its growth and inflation expectations for next year. Not just that, but it may have to think about cutting rates, instead of hiking twice like the vast majority of analysts expect. It seems the consensus is to wait and see.
Nevertheless, Trump’s populism and his belief that the EU is a vehicle for Germany already has an appeal across the pond. Emboldened by his victory, Europe’s far-right parties met over the weekend in Germany. France’s Marine Le Pen hoped more nations would follow Britain’s example in leaving the EU. “2016 was the year the Anglo-Saxon world woke up. I am certain 2017 will be the year when the people of continental Europe wake up,” Le Pen said.
Anti-establishment parties could test the euro, but the biggest threat could be to Central European currencies. “I don’t understand why people aren’t trading the Central and Eastern European currencies lower. They are our pesos”, Valentin Marinov of Credit Agricole told me.
He argues that the Dutch, German, and French elections could weigh on the Central European currencies, for the same protectionist reasons that the Mexican peso sold off in the wake of the Trump victory. Marinov points out that, even if the anti-EU parties don’t directly win elections, they most likely will expand their presence in parliament. This could fan fears about growing protectionism in Europe.
Despite an inward-looking America, Chinese President Xi Jinping and Prime Minister Theresa May went to Davos with an altogether different message. Both were calling on business leaders to understand that globalisation has not been inclusive and that some people have been left behind.
“Many people feel bewildered and wonder: what has gone wrong with the world?” Xi said. “As a line in an old Chinese poem goes, ‘Honey melons hang on bitter vines; sweet dates grow on thistles and thorns’.” Suggesting that nothing is ever perfect, he added that “many of the problems troubling the world are not caused by economic globalisation”.
“Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible. Indeed, it runs counter to the historical trend.”
These are interesting thoughts from Xi, for the Middle Kingdom is one of the most protectionist countries in the world.
May, while echoing Xi on the benefits of global trade, and reiterating that Britain will still be part of Europe post-Brexit, also spoke of how the UK should be focusing on “developing a new Modern Industrial Strategy”. The Prime Minister said this new Industrial Strategy was about “creating the conditions where winners can emerge and grow. It is about backing those winners all the way to encourage them to invest in the long-term future of Britain.” A more interventionist Britain does not sound too dissimilar to Trump’s America.
It’s possible both Xi and Trump have fired the first salvoes in a trade war. We stand to learn a great deal when May heads to Washington this week. She needs a strong bargaining chip for negotiations with the EU to show that there is a world beyond the Single Market. But what kind of deal can a post-Brexit Britain expect, if all the UK has to offer the President is a stay at Buckingham Palace and if Trump insists on putting America First?