Asia is looking ahead with a little trepidation. As Donald Trump moves into the White House this weekend, observers throughout the region are wondering whether America's new president will deliver exactly what he promised during his election campaign. If so, Asia will feel the pinch -- not merely from his more protectionist trade agenda, but financially as well, with rising geopolitical tensions possibly thrown in for good measure. And yet, if Trump takes a more pragmatic turn, living up to his reputation as a businessman who "cuts deals," Asia and the world might be better off. There is still cause for hope among regional leaders that pragmatism will prevail.
There are plenty of pressure points in Asia. Start with Trump's idea for a substantial U.S. fiscal stimulus. All considered, America's economy is already growing at a respectable speed, with the unemployment rate well below 5% and wage growth ticking up recently.
True, at below 3% annual growth in gross domestic product, the economy has not yet reached the speed of earlier years -- and does not come close to the aspiration of Trump's candidate for Treasury secretary, Steven Mnuchin, for 4% annual growth. This, in part, reflects disappointing productivity growth, which has plagued America for well over a decade. Therefore, cutting taxes and raising spending, such as on infrastructure, is bound to push up inflation. The U.S. Federal Reserve, in turn, might then be forced to raise interest rates faster than expected.
And that is a problem for Asia. Since the 2008 global financial crisis, which knocked out exports as a driver of growth, the region has relied on credit to fuel its economies. Rising U.S. dollar interest rates would thus represent a severe drag on growth, much more so, in fact, than during the last Fed tightening cycle in the mid-2000s, when debt was low and export growth relatively robust. Already, capital outflows over the past three months have tightened financial conditions across Asia, including in China.
One might argue, of course, that faster U.S. growth would benefit Asian exports, thus "compensating" the region for the higher cost of capital it now faces. However, this is where Trump's other campaign promises come in: trade restrictions aimed at reducing overseas purchases and bringing production "back home." The exact measures, to be sure, have not yet been revealed, and it might take time before the new administration takes concrete steps. And yet, rhetoric alone is already weighing on growth in Asia, curbing investment among companies unsure about the degree of market access they will enjoy in the coming years.
Asia's economies have been built on trade, so protectionism in the U.S., and possibly beyond, comes at an especially awkward time. Local demand, after all, has begun to sputter, with leverage-driven growth increasingly exhausted. Balance sheets are stretched and productivity gains have withered. It should be remembered, however, that Asia did the world a service by splurging on debt in years past, helping to sustain global growth at a time when the West had stumbled. Now is not the time, as the region requires a helping hand to wean itself off credit, to shut off trade.
Promises were made, and a U.S. presidential election won. But pragmatism could still prevail. The Trump administration will include many former leaders in business, presumably accustomed to bargaining high but cutting useful deals in the end. If so, the future might look brighter for Asia than otherwise expected.
Take China. As uncomfortable as Trump's recent utterances may have been for Beijing's officials, these may yet prompt useful negotiations. Greater market access by American companies to the vast, and still rapidly growing, Chinese market is one objective for which U.S. negotiators can aim. That might help to "rebalance" the bilateral trade relationship, preserving trade between the two countries while also generating U.S. jobs.
It could also provide a useful nudge to Chinese officials to press on with domestic reforms. In fact, China's negotiations for access to the World Trade Organization in the late 1990s (the country joined the group in 2001), helped to spur far-reaching reforms to state-owned enterprises and much needed deregulation. Today, China faces similar challenges, and a comprehensive deal with the U.S. could ultimately deliver the productivity gains the country so urgently needs.
More widely, the Trans-Pacific Partnership free trade pact may yet see the light of day -- perhaps not exactly in its current form, and presumably under a different name -- but pragmatism suggests that the U.S. could still ratify an agreement that is so evidently in its own interest, not just economically but also geopolitically.
Even on the domestic front, the Trump administration may take a more nuanced approach, carefully calibrating its tax cuts and spending so as not to stretch the U.S. economy and fuel inflation, which would lift rates and boost the dollar -- rendering its goal of sustained prosperity harder to achieve. In that case, Asia may not be entirely spared the effects of financial conditions tightening, but these would prove muted enough for the region to take the Fed's rate increases in stride.
Which Trump will move into the White House over the weekend: The campaigner or the pragmatist? Asia is watching closely, and dearly hoping it will be the latter.
Frederic Neumann is HSBC's co-head of Asia Economics Research.