Donald Trump and Sen. J.D. Vance, Grand Rapids, Michigan, July 20, 2024. REUTERS/Tom Brenner
WITH Donald Trump’s odds of winning the US presidential election in November 2024 soaring, global markets and investors are anxious about what the Trump 2.0 would mean for the US and global economy.
The US economy is in good shape. The economic growth rate is decent (2021-2023 at 3.4% per annum, estimated at 2.7% in 2024 and 1.9% in 2025), June unemployment of 4.1% is near historic lows, wages are rising and household net wealth has risen by around US$40 trillion since the pandemic.
The US Federal Reserves (Fed) is more confident that inflation (3.3% in June) slowing to its 2% target, allowing interest rate cut in the near term.
The global economy remains in a sticky spot. In July, the International Monetary Fund (IMF) maintained global growth estimates at 3.2% for 2024 and 3.3% for 2025, underpinned by a firming up of global activity and world trade, which is spurred by strong technology exports from Asia.
Meanwhile, the IMF sees “bumps” in path to lower inflation, given a slowing pace of global disinflation. Upside risks to inflation remained amid escalating trade tensions and increased policy uncertainty, raising the prospects of higher even-longer interest rates.
Geopolitical rivalries
The geopolitical rivalries and conflicts have greatly complicated the challenges facing the global economy, and left unmanaged, it can compromise global growth, economic and financial stability.
On the US economy and inflation, Trump said that “When I take the oath of office as the 47th President of the United States, I will rapidly rebuild the greatest economy in the history of the world”. He reiterated his promises to lower taxes, stop inflation and bring down interest rates.
The Trump’s pro-growth policies will likely be accompanied by more bumps along the inflation path, raising the prospects of a shallower interest-rate easing.
Trump’s team is eyeing two bills to kick off a second term: a border-security and immigration package, and an extension of his 2017 tax cuts, which will expire in early 2025.
These are the corporate tax rate 20%, tax cuts on individual income brackets, 100% business expensing, and the doubling of the estate-tax deduction.
Trump is considering a plan to impose import tariffs of 60% or higher on Chinese goods as well as a blanket 10% tariff on all US imports. It is not only to help raise tax revenue but also to protect US manufacturing companies.
While the planned extension of the 2017 Tax Cuts and Jobs Act would be positive for corporates and consumer spending, trade tariffs would mean higher prices for consumers and push up business costs.
Pressures on labour market
The proposed mass deportation of 15 million to 20 million undocumented migrants and also the restriction inflows of visa-holding migrant workers, together with an estimated 10,000 Baby Boomers exiting the workforce every day, would put pressure on the already tight labour market condition and wages.
With the wage pressure keeping stubborn inflation at bay, the Fed would take longer time to cut rates, or may push interest rates higher. The possible consequence is a stagflation in the US economy.
The US budget deficit (6.3% of gross domestic product or GDP) and U$34.9 trillion debt are highly unsustainable.
The proposed extension of tax cuts could add an estimated US$4.6 trillion to the budget deficit over the next decade, leading to bigger debt problems, push up long-term interest rates and ratchet up protectionism.
Trump has always been a strong critic of the Fed chair Jerome Powell’s interest rate policy and had threatened to fire Powell. However, on 16 July, Trump made an about-face remark that he would allow Powell to finish his term if he wins in November.
That said, we believe the Fed will retain its monetary independence without interference by Trump.
On China, the prospect of trade and technology tensions between the United States and China under Trump 2.0 administration will likely intensify, heightening the risk of triggering a full-blown trade war with China if Trump scales up the trade tariffs and barriers, followed by China’s retaliation.
The Trump administration in 2018-2019 had imposed several rounds of tariffs on steel, aluminium, washing machines, solar panels and other goods from China, affecting more than US$380bil worth of trade, amounting to tax increase of nearly US$80bil.
A September 2019 study by Moody’s Analytics found that the trade war had already cost the US economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other studies put the cost to US GDP at about 0.7%.
Protective stance
On the technology front, the US administration in recent years has adopted a more protective stance for the US semiconductor and technology companies to compete with China.
It was reported that the United States is considering applying tighter export curbs of advanced semiconductor technology to China.
Trump’s recent remarks that key production hub Taiwan should pay the United States for its defence, and also repeated accusations that Taiwan had taken “almost 100%” of the US’ semiconductor industry, has heightened investor concerns over global semiconductor supply chain.
This may compel the chipsmakers to diversify their operations outside Taiwan under the Taiwan-plus-one strategy.
The likely impact on Malaysia
The United States has been one of Malaysia’s top trading partners (the third-largest with a total share of 9.5% in 2023; 11.3% exports share and 7.3% imports share), investing partners (the third-largest foreign investor, 10.9% share of foreign direct investment or FDI stock outstanding at end-2023; approved US investments in the manufacturing sector totalled RM18.1bil or 14.1% share of total foreign investment approvals in 2023).
Currently, Malaysia is the sixth-largest semiconductor exporter globally and holds 13% of the global market for chip packaging, assembly and testing services.
Malaysia plays a pivotal role in the global tech industry, supplying 25% of the semiconductor components that power the US technology demands.
Giants like Intel, Infineon and Amazon Web Services are investing billions more to expand cutting-edge production capacity in Malaysia.
Malaysia also participates actively in the US-led Indo-Pacific Economic Framework for Prosperity, showcasing its commitment to regional economic integration and collaboration in trade, supply chains, sustainable practices, and support in anti-corruption measures.
The US-China trade and tech rivalry will benefit Malaysia not only via continued trade diversion. During the Trump administration’s slapping of trade tariffs with China in 2018-2019, imports from Malaysia to the United States grew by 7.7% per annum in 2018-2022.
Malaysia remains a hotspot for the reconfiguration of sourcing and supply chain under China+1 and Taiwan+1 strategy.
Malaysia’s National Semiconductor Strategy to court at least RM500bil investments, inclusive of domestic direct investments (DDIs) for integrated circuit design, advanced packaging and manufacturing equipment as well as FDI for wafer fabs and manufacturing equipment, would spur intense interest from foreign multinationals looking to start new plants or expand their existing manufacturing activities.
Blanket import tariff
That said, on the trade front, Trump has pledged a blanket 10% tariff on all imports to incentivise US domestic production if he becomes president again. South-East Asian countries with big trade surpluses with the United States could become a target for Trump.
Malaysia has enjoyed a sustained trade surplus averaging RM46.2bil per year in 2017-2023 after the US-China trade war, with the trade surplus widening from RM23.4bil in 2017 to RM72.3bil in 2023.
These enlarge surpluses raise the risk of Trump slapping import tariffs on the Malaysian products.
On the capital flows and ringgit, the potential inflationary aspects of Trumponomics would compel the Fed to either cut interest rates slowly or at least keeping the rate higher for longer.
This could cap the ringgit’s rise against the US dollar amid a narrower interest-rate differential. The capital reversal back to the emerging markets including Malaysia would remain volatile.
Overall, Malaysia must act fast to seize the moment, focusing on strengthening the economic fundamentals, undertaking the necessary structural reforms, sustaining favourable investment climate as well as strengthening the industrial and business ecosystem to drive both FDI and DDI.
This include in the areas of high and clean technology such as semiconductor, artificial intelligence, digitalisation, data centre, renewable energy, aerospace, smart agriculture and food security.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
