The US Senate’s
approval on Saturday, 2nd December 2017, of big corporate tax cuts
(from currently 35 to ca 20%) paves the way for a rehearsal of Reagonomics, in worse:
·
a ballooning US budget deficit
(despite spending cuts for the American poor), according to the Congressional
Budget Office and the Joint Tax Committee;
·
a
further sugar high for stock markets and, possibly, short term growth;
·
a
tighter US monetary policy to limit short-term diabetis (inflation pressures,
bubbles);
·
rising
US interest rates and a stronger US dollar;
·
depressing
raw material prices in dollar-denominated markets.
Unlike Reagan, Trump is unashamedly
protectionist, limiting any beneficial effects of the US tax cuts on US
imports. Trade protectionism and the level of economic activity are important
for developing countries, since they affect their exports and terms of trade. High
real interest rates will dramatically increase the debt service burden of indebted
developing countries; the appreciation of the US dollar will depressed
commodity prices; developing-country terms of trade will mostly drop, implying
an implicit income transfer away from commodity-dependent countries to
commodity importers.
Table: Likely Impact of Trumps Tax Cuts on
Africa
|
Net Foreign
Assets/
Commodity Trade
|
High debt/tax ratio
|
Low debt/ tax ratio
|
Net FX reserves
|
|
Exporter
|
Ghana
|
Nigeria
|
Algeria
|
|
Importer
|
Turkey
|
India
|
China
|
The burden on the world´s poor will not be
uniform. The table, inspired by van Wijnbergen´s (1985) analysis[1]
provides a quick balance-sheet analysis of the impact of rising interest rates,
a rising US dollar, and of falling commodity prices on some emerging countries.
Ghana is an example of a country possibly worst hit by the US Tax cuts as it is
a net oil exporter and carries a high net debt load. India and China should be
much less affected in comparison by the US tax cuts as they are net importers
of fossil energy and minerals, while they are less affected by a rise in
interest rates. Whether they will benefit from any US expansion fueled by the
tax cuts, is quite doubtful. First, it is quite unlikely that the US tax cuts
will lead to a sustained; the Senate tax plan
would merely cause faster economic growth -- about 0.8 percent more over the
next decade, the
Joint Committee on Taxation has found. Second, any important pass-through of
US growth benefits abroad will be inhibited by Trump´s protectionism. With
Trump, “we” can´t beat world poverty.
[1] Sweder van
Wijnbergen (1985), “Interdependence Revisited: A Developing Countries
Perspective on Macroeconomic Management and Trade Policy in the Industrial
World”, Economic Policy, Vol. 1, No.
1 (Nov., 1985), pp. 82-137. http://www.jstor.org/stable/1344613
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