Light and Shadow of Trumponomics and Us

In a few days, the new Trump administration will take office in the U.S. On the campaign trail, President-elect Donald Trump advocated “America First” – a slogan that runs counter to both the international liberal economic order, which was established and has been led by Washington since World War II, and the international security strategy that supports the order – and set forth protectionist policies as campaign pledges. Trump’s inauguration will signal a transition in the United States: It will wave goodbye to globalism, which the country has maintained for the last 70 years. It is a stark contrast to John F. Kennedy’s 1961 speech, “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty.”

Trump has announced the establishment of a National Trade Council and appointed an advocate of protectionism as head of the council. In fact, he has already taken protectionist actions to challenge established international norms. For example, to prevent automakers from investing in Mexico, he threatened to impose tariffs on cars made in Mexico by not only major U.S. companies, including Ford and General Motors, but also Toyota, a Japanese company that produces vehicles for export to the U.S.

It is also only a matter of time before the new U.S. administration applies sanctions against Korean companies exporting their products to the U.S. and proposes to renegotiate the U.S.-Korea Free Trade Agreement. Therefore, the Korean government should urgently realign and enhance its ailing trade apparatus – which develops, modifies and negotiates trade policies – and hire more corresponding experts.

Meanwhile, during his presidential campaign, Trump also promised expansive fiscal policies for economic growth, including aggressive tax cuts and increased spending on infrastructure. The problem with this is that his pledges are highly likely to serve as a link to a vicious cycle of protectionism.

The U.S. economy has already reached full employment, and expansive fiscal policies may encourage the Federal Reserve to raise short-term interest rates earlier than expected. This would support a strong dollar, which might give U.S. exports a lesser competitive edge and deteriorate the U.S. current accounts. Consequently, protectionist measures would be implemented more frequently, and they would trigger retaliation from China and other U.S. trading partners, worsening trading conditions across the globe.

Fortunately, since the U.S. economy is relatively less dependent on global trade, the macroeconomic impact of Trumponomics is expected to be positive for the next one or two years, despite the trade-offs of protectionism. However, the increasing budget deficits and the balance of payments deficits of the U.S., along with its macro-prudential deregulation, could inflame a future financial crisis, casting a shadow on the American economy’s medium and long-term outlook and increasing the uncertainty of the world economy.

For this reason, we should urgently restructure our economy and actively use economic diplomacy to establish a solid international financial cooperation system capable of bolstering confidence in the international financial market. The U.S.-Korea alliance, which is the basis for the stabilization of the geopolitical risks on the Korean peninsula, should undoubtedly be maintained without a hitch.

In addition, we particularly need to focus on the paradoxical effects of Trumponomics ahead of the 2017 Korean presidential election. The economic policies of the Trump administration, including a regressive tax cut and investment in infrastructure, would lead to inflation and eventually increase the burden on low-income, under-educated white workers and other working-class Americans, who played a crucial role in Trump’s victory in the recent presidential election, rather than benefits. It is the irony of a democracy prone to populism.

A number of instances where populist policies aimed at benefiting the working class turned out to have a negative impact on them can be easily seen in the past of foreign countries. These examples have great implications for our society, which can be easily swayed by the post-truth phenomenon spread through social media and an irresponsible press – think of the protests and jitters about mad cow disease in the early 2000s. This is a critical time for the media to make sound arguments based on facts.

The advent of Trump, following Brexit, indicates the necessity of a new policy paradigm that shocks the so-called “economic policy elites” into self-reflection. Their tunnel vision focus on the macroeconomic advantages of globalization and free trade means they neglected to consider the microeconomic sphere – the difficulties of the companies forced to restructure; the distress of the unemployed; the polarization accelerated by the increasing gaps in productivity, wages and income as a byproduct of fast technological innovation; and the dissatisfaction of the falling American middle class suffering from income stagnation. The situation is no different in South Korea.

The importance of strengthening the social safety net to protect workers rather than jobs that are destined to be eliminated, to soften the labor market, and to reform general education to include the training and retraining of workers and continued education cannot be stressed enough. In particular, laws, institutions and other social norms must immediately be updated to be ready for the upcoming fourth industrial revolution. In light of this, it becomes clear that amending laws pertaining to the election of members of the National Assembly for the advancement of the legislature is more urgent than reforming the current political structure. The door must be opened for a number of experts and outstanding professionals with relevant experience and knowledge in each sector. This is why we should consider introducing a political realignment and proportional representation to our political landscape.

Translator’s note: The author, Il Sagong, is an advisor at Joongang Ilbo and former minister of finance.