Domestic policies adopted by world leaders in their home countries can have rippling effects on the global economy. And not just policies, but their opinions on world matters also shape the way investors think. This holds particularly true for the President of the United States, the biggest global economy, the domestic currency of which is also the global reserve currency.
Even before he was elected to power in 2016, Donald Trump showed a general tendency towards prioritising the needs of the United States before those of other countries. And, his current policies reflect just that, in what has come to be known as a MAGA (Make America Great Again) attitude. While a focus on the home country is expected from every world leader, an excessively isolationist view has cost the world economy.
The 2017 World Economic Survey (WES) by the German IFO Institute Centre, which surveyed around 929 economic experts across 120 countries, concluded that President Trump’s politics has significantly damaged international trade, global cooperation, peace and security. It has negatively influenced the world economy.
So, where does the United Kingdom stand in all of this? Let’s take a look.
Republican nominee and businessman Donald J. Trump was pitted against Democratic nominee and former US Secretary of State, Hillary Clinton in the 2016 US elections. While initial polling data in the run-up to the election was in favour of Ms. Clinton, the results were very different.
Upon the confirmation of Trump’s presidency, volatility ensued in the global currency markets. Currency traders were already reeling under the uncertainty caused by the Brexit vote. For the intermediate term, they sought safe haven investments. As a result, the GBP gained against major currencies on November 9, 2016.
From the day the US election results were announced through the first 100 days of Trump’s presidency, the GBP showed strength. In fact, after a period of decline, the GBP rose to a 6-week high of 1.2598 against the USD, when British Prime Minister, Theresa May, met President Trump for the first time in February 2017. Many experts credited the price rise to the election of a pro-business US President.
Amidst Britain’s plan to leave the EU, came President Trump’s decision of steep tariffs against China and re-working trade agreements with some of America’s biggest and longest-standing trading partners, Canada, the EU and Mexico. The 25% steel tariff and 10% aluminium tariff placed on the EU affected the UK directly, worth approximately £389 million per year.
But far greater consequences came from the US-China trade war. Goods exported from the UK to the United States account for approximately £3 billion worth of Chinese exports. Over half of these goods were subjected to the three rounds of tariffs that the US imposed on Chinese goods. This created reduced international demand for British goods directly, as well as through the global value chains. The UK stock market was affected. On March 22, 2018, the FTSE 100 fell 1.2%, as President Trump announced tariffs on Chinese goods.
In particular, the UK car manufacturers felt the impact hugely. In the car manufacturing industry, components have to cross several borders before finally reaching the assembly units. If each unit faces increased tariffs on the borders, then costs accumulate in the supply chain. This singlehandedly caused the UK economy great trouble, since the motor industry accounts of 12% of all UK exports.
Daimler reported profits shrinking from €2.5 billion in Q2 2017 to €1.8 billion in Q2 2018, on account of tariffs that had affected its pricing power on Mercedes-Benz cars. Other car companies like Ford, Nissan, Fiat Chrysler and General Motors also performed poorly due to increasing raw material costs and lower demand.
The termination of US participation in the Transatlantic Trade and Investment Partnership (TTIP), along with Brexit, will cost the UK economy a great deal in the coming years. A lot of things will depend on the Brexit negotiations and the US elections of 2020.
In 2017, US President Trump decided to leave the Paris climate change agreement. Now, this had two major effects, environmental and political. Environmentally, this meant an increase in public health costs due to an expansion in fossil-fuel industries. The WHO estimated that unless the issue of climate change is addressed, starting 2030, over 250,000 additional deaths worldwide will be reported each year.
Withdrawal from this agreement also effectively deters US industries from being subjected to carbon emission caps. On the other hand, the UK has decided to potentially exit the EU Emissions Trading System (EU ETS), on account of Brexit. Surprisingly, in the aftermath of the US departure from the climate change agreement, other countries, including the UK, showed a unified approach to stay in the agreement.
In fact, the UK launched a global alliance of 20 countries, dedicated to phasing out coal as a source of energy production. But, the Brexit impact looms large here. While the US pull-out has led to its isolation and sidelining in the UN negotiation process, even the UK is in the process of being pushed away from other European nations. The combined effect provides leverage to countries like China, where emissions have been reported at their peak in the last 7 years.
President Trump is wary of a soft Brexit agreement, and has time and again shown his displeasure about it. In July 2018, he issued a statement saying that the current Brexit deal would kill all chances of a UK-US trade deal in the future. The next day, the GBP fell 0.61% against the USD, while also declining against the EUR.
President Trump’s intervention and commentaries have also had an impact on Prime Minister May’s dealings with the British parliament. As she continues to struggle with conservative leaders, who say that the current deal doesn’t secure any freedom of action for the UK, Trump’s vague statements can weaken her hand and delay the Brexit process. This also applies to investors, who will have less confidence in the UK economy, if the US says that UK won’t be allowed to sign trade deals around the world.
In 2018, we saw an example of this, when the pound sterling emerged as the worst-performing G10 currency on November 27, 2018, following Trump’s tweets.
As of March 14, 2019, Trump has shown a positive stance on future US-UK trade relations post-Brexit, citing the stability of the GBP, amidst reports of deadline extension. This has led to an appreciation of the GBP against the EUR. President Trump has also been very keen on a fast and hard Brexit, why?
Without a doubt, President Trump is an important figure globally. His tendencies to go against his own words and his love for incessant tweets to express his opinions, has put the UK economy into uncertainty before. The future of the UK economy will depend on the culmination of several factors now, including the stance of the US President. After all, both countries have a “special relationship,” based on shared cultural, economic, diplomatic and military bonds.
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