As the inauguration of President Trump approaches, it is important for investors in Asia to have a view on what his Presidency will mean for the region. We break the issues down into three main categories: trade policy, currency implications and foreign policy.
One tax reform policy currently being considered by Congress is a Border Adjustment Tax (BAT), which would impose a tax on imports while providing a tax exemption for exports. Notably, the BAT is not just aimed at China or Asia, but would apply to all imports and exports regardless of their origin or destination. The tax rate applied to imports could be anywhere between 5% and 20%.
Trump has recently said that a BAT is too complicated and it is possible he will simply impose a 5% tax on all imports. In either case, these policies appear protectionist and will likely evoke some sort of response from impacted countries.
During the campaign Trump pledged to label China a currency manipulator on “day one” of his presidency. Trump’s criticism is that the Chinese yuan (CNY) has been deliberately managed down, thus making Chinese imports artificially cheap. While this may have been true 10 years ago, it is an inaccurate description of what is happening today.
The CNY has actually appreciated versus the USD since China ended the fixed dollar peg in 2005, and China has spent $US 1 trillion of reserves defending the value of the currency since 2014. However, while China doesn’t meet the legal definition of a currency manipulator, the facts may not stand in the way of Trump fulfilling his election promise.
It is also important to highlight that the ultimate response to this situation could be for the Chinese to throw in the towel and let the CNY float. While this is unlikely given the degree of disruption it would cause near term, it is not impossible, and is a viable alternative to continuing to burn through hard won FX reserves.
Another important issue for Asian currencies is whether Trump’s domestic policies prove reflationary and result in an accelerated trajectory for interest rates and a stronger USD. This can be a positive for some sectors and stocks in Asia, such as Singapore banks and Asian insurers, but has historically been a negative for ASEAN economies. We are positioned for this and are overweight interest sensitive financials in Asia and underweight ASEAN as a region.
In early December, President-elect Trump flouted decades of foreign policy protocol and had a phone conversation with Taiwanese President Tsai Ing-wen. It is difficult to ascertain if this was a deliberate provocation of China or a blunder by a President-elect with limited diplomatic experience. In either case, it did not get the administration off to a good start with respect to Asian foreign policy. Subsequent tweets on North Korea’s nuclear ambitions have only exacerbated the situation.
A longer term foreign policy issue is the regional balance of power in Asia in a world where the US is more isolationist. We reject the notion, as put forward by the Eurasia Group, that we now live in a G-Zero world (i.e. one with no superpowers). Our view is that if the US pivots away from Asia, China will step in to fill the void. In fact, this is happening already. President Duterte in the Philippines has shunned America while simultaneously aligning himself more closely with China. Other countries in Asia like Vietnam, Indonesia and Malaysia are deepening ties with China via One Belt One Road infrastructure initiatives and inbound FDI. Over the long term, this could prove to be a positive for intra-Asian trade and investment.
The trade, currency and foreign policy dynamics between America and Asia are complex and cannot be dealt with 140 characters at a time (i.e. via Twitter Diplomacy). Hopefully, more detailed, thoughtful policy will unfold in the early days of the Trump administration. Until then, Ellerston Asian Investments is defensively positioned with a high level of cash and a domestic demand portfolio.