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US election result: impact on developing economies

Written by Dirk Willem te Velde, Maximiliano Mendez-Parra, Phyllis Papadavid, Judith Tyson


As news emerged that Donald Trump had won the US presidential election, our economics and finance experts look at what this means for economic transformation, trade policy, global markets and private finance – with a particular focus on how developing and emerging economies will be affected.

Add your views in the comments below.

Frequently asked questions

Governments need to ensure growth means jobs for the poorest

Dirk Willem te Velde, Head of Programme

Donald Trump’s election is a symptom of a longer-term trend taking place in several countries around the world. Voters who believe that governments are not helping them enough are rejecting ‘business as usual’ economic policies and trade agreements. They want to take back control over how the benefits of general economic progress are distributed.

In the US, both presidential candidates had problems with current trade agreements. This might appear difficult to understand given that the US benefited so much from free trade. But it is easier to understand when you consider that voters up and down the East Coast and West Coast enjoyed the lion’s share of those benefits (with clear parallels to the divide that Brexit revealed in the UK between voters in the north of England and the capital, London).

The short term effects are heightened uncertainty and volatility, as Phyllis Papadavid explains below. This has the potential to negatively affect developing countries in the short and long term. Fortunately the open order institutions that the US has put in place bind the policies and actions of individuals, which will limit the ability to make extreme policy reversals.

The more worrying trend is the gradual increase in protectionist feelings (against trade and migration), as Max Mendez-Parra explains, and an increasing lack of a sense of urgency to tackle global problems (such as climate change). Both will hit aggregate global growth and welfare hard in the longer term.

Governments need to do a better job of stimulating economic transformation that can, directly and indirectly, provide jobs for the poorest regions and communities. They should not stop being open to trade, investment or migration, but implement visible complementary policies.

Developed countries should understand that failure to provide global public goods – such as climate action, or open trade rules – will ultimately not be in their own interests. And this failure is a much longer process to reverse.

Frequently asked questions

Global trade and trade policy

Maximiliano Mendez-ParraResearch Fellow

With so much of Donald Trump’s rhetoric focused on trade, you might expect major changes in the United States’ trade policy. But there is a big gap between rhetoric and policy. As President, Trump may find difficult or inconvenient to carry out his campaign promises.

When it comes to existing agreements, we’re not likely to see much change. Although Trump talked about revising the North American Free Trade Agreement, it’s still too soon to anticipate an effective movement towards its reform. And while he proposed hitting China with higher tariffs and trade restrictions, World Trade Organization (WTO) commitments may actually prevent the US implementing these measures. Instead we could see – and in fact are already seeing – a rise in so- called ‘murky protectionism’, or the use of barriers that can be disguised as WTO-compatible measures.

Nevertheless, Trump’s victory will dent the United States’ commitment and the willingness to work in multilateral fora such as the WTO, particularly when multilateral commitment is necessary to address global issues like the rise of protectionism.

It also affects US willingness to engage in regional or bilateral negotiations. For example, it is almost impossible that the Trans-Pacific Partnership will be ratified – good news for many African countries that might have faced competition in the US market with countries like Vietnam.

And with US-EU negotiations over the Trans-Atlantic Trade and Investment Partnership already looking unlikely to reach a deal, don’t expect the Trump administration to revive it.

New free trade agreements, such as the replacement of the African Growth Opportunity Act, will probably be more balanced in terms of commitments between partners. This means that African countries, for example, will be expected to offer significant market access to the US in order to secure access to the US market. Although these negotiations won’t start soon, they would occur during a possible second term for Trump.

In general, the US will be less interested in engaging in trade negotiations unless they perceive that benefits and costs are shared equally among partners. This means that the US will use trade as a development tool, as long as it does not clash with any domestic interest.

Frequently asked questions

What the market impacts could mean for developing economies

Phyllis Papadavid, Team Leader, International Macroeconomics

Donald Trump’s unexpected win has prompted an initial weakness in global markets, driven by risk aversion (though this was mitigated, in part, by the conciliatory tone of Trump’s acceptance speech).

In the months ahead, it is likely that continued risk aversion will drive investment outflows from developing economies that are deemed riskier, particularly those with large external financing needs, in an environment of heightened economic and political uncertainty.

The economic variables most responsive to US elections, particularly US Treasury bond yields and the US dollar, have reacted and could affect developing and emerging economies if sustained. Short-term US interest rates have declined, triggered by the reduced market probability of the US Federal Reserve raising rates due to the more uncertain US outlook.

However, a larger risk is that Federal Reserve Chair Yellen could be replaced with someone who raises interest rates more aggressively, given Trump’s comments that rates are being kept ‘artificially low’. Both this, and the rise in longer-dated US interest rates, could have a spillover effect on borrowing costs for emerging and developing economies.

The election outcome could continue to support the dollar, given that it strengthens during times of risk aversion. This would be coupled with declines in emerging and developing country currencies, due to investment redirected to assets that are perceived as safer.

Economies with exposed financial systems, or larger external financing needs such as South Africa, Nigeria and Kenya, could see an investment downturn, as could Mexico due to economic links with the US. Longer-term, emerging and developing country currencies will be subject to downside risk if Trump’s isolationist policies are implemented.

Frequently asked questions

For private development finance, it’s what Trump is not saying that matters

Judith Tyson, Research Fellow

The message from the Trump victory for developing countries seems bleak. International trade, key to their economic growth in the last three decades, is going to get a lot tougher. Migration and related remittances will be curtailed. Aid funding will suffer sharp reductions as domestic spending takes precedence.

But what about finance, the other key pillar of globalisation alongside trade and migration?

Here it’s what Trump has not said that matters. No mention of reversals of unfettered cross-border capital flows, one of the drivers of globalisation. Nor of greater regulation.

Indeed, the day after the election, Trump pledged to repeal the Dodd-Frank Act, the key US regulatory package enacted after the financial crisis of 2007.

Reflecting this, in the 24 hours since the world woke up to President Trump, global stock markets are up and the dollar firm.

Some of this is good news for developing countries. They have huge investments needs for their economies which need the high levels of post-2007 capital flows into their economies to continue.

However, it’s also critical that those flows are stable – and from investors, not speculators – if damaging financial instability is not to recur. That’s where lower US regulation could be damaging as the Dodd-Frank Act curtails speculation.

How should developing countries respond? Their best interests will be served by remaining open to international flows. There is no realistic alternative in the medium-term to sourcing the capital needed for development.

But it also means they need to reject international standards that threaten stability in their financial systems or growth in their economies. That might include using capital controls to stabilise cross-border flows, banning excessive speculation in their financial markets and selectively implementing Basel III standards.

These policies have already been discussed behind closed doors. Trump’s new world means it’s time for them to be implemented.