As the likelihood of a Trump victory in next week’s US election rises, the news has slowly started spreading to European stock markets. In particular, shares in companies that depend on exports are getting knocked back by “Trump trade”. No surprise there — Mr. Trump proposes steep tariffs on imports should he be elected once more, and export-dependent economies, most notably Germany, will take their impact on the chin.
To be sure, this may be a case in which it’s best to take Trump both seriously and literally. In a game of trade-negotiation chicken with most of its partners, the US will enjoy the upper hand. Given the comparative strength of the US economy, it can absorb a lot more of the pain of tariffs than those countries from which the former president will try to extract better trade terms.
While across-the-board tariffs of the sort he proposes would raise the US inflation rate and possibly reduce the economy’s long-term growth, the fact that the country’s running a large trade deficit with the rest of the world allows a lot of scope to substitute local production for imports. Politically, such action would go down well with his supporters, as it would create local manufacturing jobs — at least in the short term. Europe, in contrast, already suffering from the weak demand of a sluggish Chinese economy, can ill-afford such a fight.
However, the recent falls in European share prices may be an instance of that old market adage “sell the rumour, buy the news.” Already trading at a steep discount to their American counterparts, Europe’s major stock markets may be pricing in a worst-case scenario, and thereby setting themselves up for a rally after the result comes in. Besides, the outcome of the American election will not be the only bit of news which moves European markets next week. Events taking place on the other side of the world may matter just as much, and possibly even more.
On Monday, the Standing Committee of the National People’s Congress — China’s top law-making body — will gather in Beijing for its weeklong meeting. Economists are watching keenly to see if the government uses the occasion to announce any sort of fiscal stimulus to raise household consumption, something which has been hinted at but whose details have been left to the meeting. If the government delivers a surprise boost to demand, that will somewhat counter-balance the bad news of a Trump victory by providing some relief to European exporters.
In fact, were China to take such bold action at a time its manufacturers are outsourcing some production to countries in southeast Asia, Europe and South America, it could end up drawing its trading partners further into its orbit. A protectionist America could, in these circumstances, end up overplaying its hand.
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