Trump and the TPP

The beginning of this week has seen a significant announcement in the US that adds to the present policy debate, with investment implications. This is the comment made on Monday by President Elect Trump that on the first day in office he would sign an executive order withdrawing the USA from the Trans Pacific Partnership (TPP) between the US and eleven Pacific Rim economies. It should be said that the US already has a trade relationship with Canada and Mexico as part of NAFTA and is likely to have a new relationship with Japan. After the US, these are the three biggest economies in the TPP.

The impact on the US economy of withdrawing from the TPP is likely to be limited. But this will have a number of wider implications. One is that despite all the current positive sentiment regarding Trump's domestic economic policies, it will reinforce the negative sentiment that exists about his future trade policies. There are fears in some quarters that his stance on trade will undermine US growth. While these concerns should not be ignored, our view is that his planned reflationary policies will be positive for growth, the dollar and domestic markets.

US markets seem to have taken this, and the rest of President Elect Trump's comments on Monday well, indicative of strong leadership and clear decision making. The rest of his comments were on specific aspects of his future domestic agenda. It fits in with the news I am hearing from Washington that Trump plans to introduce "Megabills" early in the new year. This would include a whole host of measures, such as tax cuts and help to the corporate sector. Although his inauguration is not until late January, the House reconvenes very early in the New Year, so things could start very quickly, setting a positive market tone at the start of 2017.

The main benefit of TPP was likely to have been increased investment flows into and out of the US and to the rest of the Asia Pacific region. Thus, the negative impact is likely to be seen across the Pacific Rim. It should be stressed that TPP was widely seen in recent weeks to have been dead and so the market impact was limited. Despite this, news that TPP will fail is disappointing news for Japan. I was in Japan last week, taking part in a closed door policy session with invited participants from around the world. I also met policymakers and financial leaders. Japan had no Plan B if Trump won. Hence Prime Minister Abe met Trump last Thursday in New York. Despite no TPP, it is likely that Japan and the US will have a good future trading relationship. Regional security is, naturally, a key issue too. In this environment, one of the future issues is the likely regional role that China will assume across Asia, in economic, trade as well as security terms.

For the moment, though, the issue for investors should be the currency developments there. The Japanese yen is weak, and is displaying the characteristics of a funding currency, where some international institutions and hedge funds, may borrow in the yen as they expect it to weaken, and then use this money to invest in the US. At the same time, the Chinese renminbi is weakening against the dollar. When this has happened previously it has had an impact on global markets. For now, financial markets may be overlooking the weaker renminbi, but if it continues it will add to competitive pressures across emerging markets. And, if sustained, then in the future, it would be a source of deflationary pressures and this would offset some, but not all, of the inflation worries currently creeping into economies in the West. The important thing, for now, is to take note and see how this develops. Overall, the latest news from the US fits in with the future administration's focus on boosting the domestic US economy, which has been positive for equities and the dollar.

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