Commentary: Implications of Trump’s policies for Singapore’s economy

ANN ARBOR, Michigan: On Nov 10, a headline in the Wall Street Journal read “Rest of World’s Growth is at Trump’s Mercy”.

This is especially true of Singapore, given many of its characteristics: An extremely open economy, massive current account surpluses, heavy reliance on the United States as a source of foreign direct investment (FDI) and as an export destination, a strategic intermediary role in both China-centred manufacturing supply chains and the regional operations of US technology companies, and a much-touted reputation as a paragon, champion and beneficiary of globalisation.

All these features run headlong into the antipathy to globalisation expressed by President-elect Donald Trump and his advisers. They speak of “unequal” and “unfair” trade contributing to the chronic global trade deficit of the US, and suggest that US companies are complicit with other countries, particularly China, in “stealing” American technology and market share.

Uncertainty is expected with any new administration. But the era of Trump 2.0 may be less volatile and inconsistent, and more disciplined and focused, than his first term as president.

He now has much greater control of the Republican Party, Congress and the judiciary, and is appointing to Cabinet and staff positions loyalists with whom he has close ideological affinity, rather than the experienced mainstream professionals with whom he often sparred in his first term. He will also not be running for re-election, so is more likely to do what he says he will.

IMPACT ON THE US ECONOMY

The US is the world’s largest economy, accounting for a quarter of global gross domestic product, and most of current growth.

Despite decades of declinist predictions and rising-China boosterism, the US share has actually increased in recent years, as its growth has outpaced that of Europe, Japan and other high-income countries, while China’s has slowed. This has entrenched the US’ position as the largest source of external final demand for its trade partners.

Much therefore depends on the US domestic growth impacts of the Trump administration’s policies. These are difficult to predict.

Trump’s signature policy proposal of a 10 to 20 per cent tariff on all imports, and 60 per cent on imports from China, would increase investment in import-competing US-based industries, adding to growth. But by raising costs, tariffs would hurt import-consuming sectors, and by inviting retaliation, hurt competitive export sectors.

Facing higher prices, consumers may cut back on spending, reducing growth. With an economy already operating at capacity, close to full employment, the promised mass deportation of illegal immigrants – another signature policy – would worsen labour shortages and add supply constraints to growth.

Trump has promised tax cuts for corporations and individuals. This will result in revenue losses that would not be made up for by tariff revenues, especially if the tariffs work as intended in reducing imports.

Significant cuts in government spending are unlikely, since only a quarter of the Federal budget is “discretionary” (the rest are “entitlements” like Social Security and Medicare), and half of that is defence spending, which could increase. Thus the nonpartisan Congressional Budget Office estimates that the budget deficit under Trump will amount to US$9 trillion over 10 years, resulting in a huge stimulus to growth.

Tax cuts and proposed deregulation will increase corporate earnings and investment – the current expectation of this explains the recent boom in stocks. A positive “wealth effect” from rising asset prices could also increase consumption. So overall growth could increase in the short run, though with US GDP already growing at 2.8 percent in 2024 – high for a large, mature economy late in the business cycle – a substantial increase is unlikely.

Much higher growth may even be undesirable, because these policies will be inflationary.

To attract borrowers to fund the federal deficit, the US Treasury department will raise the interest rate it pays on T-bills and bonds (debt instruments that companies and governments issue in order to borrow). New bonds offering higher interest rates reduce the attractiveness and hence price of existing bonds bearing lower rates, whose value is eaten away by inflation. Financial markets have already recognised this by sending bond prices down and Treasury yields up.

To curb inflation, the US Federal Reserve Bank will raise the federal funds rate at which banks lend to each other overnight – this cascades into other interest rates in the economy, like those for mortgages, car loans and credit card debt.

The Fed is meant to be politically independent, but Trump has complained about it raising interest rates during the last bout of inflation. As the current terms of Board members come to an end, he could appoint new members who share his philosophy. If this happens, interest rates will be lower, inflation higher, and the US dollar weaker, than otherwise.

It is possible that technological innovation could increase productivity sufficiently to dampen down these inflationary effects. Some potential drivers for such innovation include deregulation – for instance, through ending the Biden administration’s vigorous anti-trust actions, removing or relaxing environmental rules, and pulling back on regulatory initiatives on AI and cryptocurrency. Innovation might also be spurred by a labour and skills shortages (for example, if immigration also tightens for skilled legal immigrants) and the availability of ample capital for investment (from higher corporate profits and stock prices).

But it is unlikely that higher growth itself would be sufficient to generate the added revenues necessary to significantly narrow the budget deficit (and thus reduce inflation), as this has never happened.

The US dollar strengthened upon Trump’s victory due to a few factors. These include the market expectations of tariffs, which reduce the supply of dollars overseas as the US buys less foreign goods, and attract FDI inflows to supply the protected US market. The market is also expecting higher interest rates (due to inflation), higher corporate profits (from tax cuts and deregulation), and possibly higher growth.

All of these make investing in the US more attractive than in other countries, thus increasing demand for the dollar. A stronger dollar could take some of the bite out of tariffs’ effect of increasing import prices – since a given foreign currency price would translate into a lower dollar price. Trump advisers are also betting that foreign exporters will bear most of the tariff burden, by lowering their export prices and margins.

IMPACT ON THE WORLD ECONOMY

How does this put the “rest of the world’s growth at Trump’s mercy”?

If the policies result in greater US growth than would have occurred otherwise, everything else being equal, the rest of the world would benefit from stronger US demand for imports. A stronger US dollar would also make imports more competitive in the US market.

From the perspective of other countries, these two effects – higher growth and a stronger dollar – could partly outweigh the impact of tariff barriers, though a stronger dollar also increases the foreign debt burden of developing countries.

But if tariffs and mass deportations reduce growth (due to higher costs and prices weighing on domestic demand), and/or inflation and higher interest rates curb demand, Americans will buy less from foreign countries, both because of their lower real income, and the direct price increases on imports imposed by tariffs themselves.

The US is already the largest recipient of global FDI inflows; if there is more FDI into the US to avoid tariffs and to take advantage of growth, this would be diverted from other countries. Likewise, there could be a diversion of short-term portfolio capital flows, attracted by higher US interest rates and a booming stock market. So investment and growth would be reduced in the rest of the world, while their weakening currencies (as capital leaves for the US) cause inflationary pressures that could push up domestic interest rates and slow growth.

Facing decreased demand for their exports in the US (whether due to tariffs or a growth slowdown, or both), countries will turn to other world markets. This will be particularly true of China, which will face the highest tariffs and is already accused of hurting other countries’ industries by exporting overcapacity and domestic deflation resulting from its own weak domestic demand.

Ironically, this fall in export prices worldwide will achieve the Trumpian goal of reducing import costs to Americans, helping to “pay” for part or all of the tariffs.

Other countries could retaliate against the US tariffs by imposing tariffs of their own on US exports, and on the exports of countries suspected of “dumping” (selling below cost or below the domestic price) excess production in third countries. This will make everyone worse off as growth slows everywhere, which happened during the trade wars of the 1930s Great Depression. Heavily indebted developing countries could encounter a “nightmare scenario” of falling export earnings, falling inward investment, higher inflation and interest rates, and an increased external debt burden.

A better outcome for everyone would be for China, the world’s second largest economy, to restructure its economy away from export orientation toward domestic consumption, as its “dual circulation” (now “internal circulation”) proposal originally promised, including by liberalising imports.

As a still developing economy, China can benefit from “catch-up” growth momentum. Growth can also be propelled by lifting the currently low (below 50 per cent) share of wages and consumption in GDP. Higher domestic demand in China would absorb more of its currently excess industrial capacity, and some of other countries’ exports that will be shut out of the US market by tariffs.

It would help to limit the US’ centrality to the world economy, and increase China’s influence around the world. But there is no sign that China is willing to do this.

Trump and his advisers have long been sceptical of the multilateral “rules-based international order” governing international trade and investment. They see it as benefitting other countries more than the US, which disproportionately finances institutions like the United Nations, World Trade Organization (WTO), World Bank and International Monetary Fund (IMF), while others “free-ride” on this institutional infrastructure.

The new US administration could ignore, reduce funding for, or at the extreme, withdraw from such organisations. This provides an opportunity for China or Europe to replace US funding and leadership in these institutions, but their much weaker economies, and China’s apparent preference for unilateral action, make this unlikely. Trump has also announced his wish to restructure many US institutions such as the Fed and the Securities and Exchange Commission (SEC), whose actions have international repercussions.

HOW LIKELY IS ALL THIS?

Trump’s win of the White House, and his Republican Party’s sweep of the Senate and House of Representatives, mean that he is likely to succeed in passing most of the legislation he wants. Most likely to materialise will be the tariff and immigration policies which headlined his campaign, and in which the president has broad discretion based on existing laws.

But this policy agenda may change according to the influence of advisers, lobbying by business, responses in Congress, and the outcome of likely legal challenges.

For example, Elon Musk could persuade Trump to waive his objection to electronic vehicles (EVs) and continue Biden’s subsidies for them, so long as they are domestically manufactured. He could also persuade him to be less tough on China, an important market for Tesla.

Musk and other Silicon Valley tech moguls could forestall greater restraints on legal skilled immigration, which dropped during Trump’s first term, and encourage him to instead follow up on his campaign suggestion to give green cards “automatically” to foreign nationals who graduate from US colleges.

With unpredictability as his favoured modus operandi and negotiation tactic, exemptions to any policy are possible, and deals can be made. But these will be unilateral or bilateral one-off transactions that could be reversible, and thus will not provide any new set of national rules to replace the dissolving multilateral system.

Such extreme uncertainty means high risk and volatility. This in turn will lead to lower and slower business investment not just by US businesses in sectors targeted by Trump’s policies – manufacturing, technology, environment, health – but also by businesses in other countries engaged in trade and investment with the globalised US economy.

This means that global investment, and hence economic growth, will be lower than otherwise in the longer term.

Trump’s vice-president JD Vance, a leading contender to succeed him in four years, is more wedded to nationalist populism than is Trump himself. Under Vance, trade protectionism and immigration restrictions would continue.

But he may also channel the anti-corporate, anti-elite sentiments of Trump’s dominant working class supporters into more government intervention to curb the power of big business, including through anti-trust enforcement, and restrictions on both outward investment by American and inward investment by foreign multinationals, especially where leading-edge and sensitive technologies are involved. The Biden administration already restricts some US outbound investment to China, Hong Kong and Macao, for this reason.

IMPLICATIONS FOR THE SINGAPORE ECONOMY

Singapore’s economic development model of the past half century has been state-directed, export-driven, manufacturing-focused, and led by FDI. As such it thrived in the neoliberal era of multilateral trade and investment liberalisation which underpinned globalisation and has been unravelling since the first Trump presidency.

Foreign investors have been attracted to Singapore by a policy regime of free trade and capital flows, liberal employment of foreign labour and skills, and various government subsidies, including generous tax breaks, state infrastructure provision, equity participation and R&D grants for technology development.

This runs counter to the economic philosophy of the incoming Trump-Vance administration, which sees many of these policies, whether practiced by allies or adversaries, as contributors to “unfair trade”, which they measure by the persistent bilateral and global trade surpluses run by countries like Germany and China – and Singapore.

They have criticised American multinationals for creating jobs overseas rather than at home, and are committed to “reshoring” manufacturing to the US. They have also voiced opposition to Biden-era industrial policies – including the Inflation Reduction Act and the Chips and Science Act, which passed with bipartisan support and provide subsidies to US and foreign companies making semiconductor and green technology investments in the US, though these may not be completely dismantled.

The incoming administration’s fundamental objection is to corporate subsidies of any kind, with China’s state investment incentives, including for technology development, frequently castigated for constituting “unfair competition”.

Trump is no fan of trade agreements, having pulled out of the Trans-Pacific Partnership, and the US-Singapore Free Trade Area could invite closer scrutiny.

He renegotiated the United States-Mexico-Canada-Agreement (USMCA) during his first term, yet Canada and Mexico are on the firing line for new trade restrictions. He has threatened to impose 500 per cent tariffs on automobile imports from Mexico, where US auto companies have part of their supply chains, and which has become a favoured host location for Chinese and other countries’ manufacturers seeking tariff-free access to the US market.

While Singapore runs a bilateral trade deficit with the US, it is understood that manufacturing supply chains are distributed over many countries. Singapore could be importing parts and equipment from the US to export to China or Chinese-owned companies in other Southeast Asian countries, which could then run trade surpluses with the US, as China, Vietnam, Thailand and Malaysia do.

It is well-known that many Chinese companies evaded the tariffs Trump imposed on Chinese exports in his first term by routing exports through, or relocating production to, third countries, particularly Southeast Asia and Mexico. This has even been called “Singapore-washing”.

Singapore’s role as a regional hub for multinationals and an intermediary in global supply chains could turn out to be a liability. Hosting so much foreign investment by, and regional headquarters of, US companies, makes Singapore a prime exemplar of American multinationals shipping jobs overseas, including to other Southeast Asian countries, routed through Singapore.

The fact that so much of this investment is by and for US Big Tech and other technology firms, including those from third countries, also raises the risk that Singapore could be targeted as a potential source of “technology leakage” to non-American firms. This includes firms from countries deemed friendly to the US, like the new wafer fabrication joint venture between Taiwan’s TSMC and the Netherlands’ NXP Semiconductor. Despite Taiwan being a close US partner and TSMC investing billions in semiconductor production in the US, Trump has complained that TSMC “stole our chip business” and has threatened tariffs on chip imports from Taiwan.

National security as well as commercial considerations are relevant here. In his first term Trump blocked the proposed acquisition by Singapore-headquartered Broadcom of Qualcomm, on national security grounds, and Broadcom “redomiciled” back to the US.

He has flip-flopped on banning Singapore-headquartered Chinese-owned TikTok, but it is unclear if he will have the inclination or the legal authority to reverse the Biden administration law banning the app unless the company is sold to Americans in 2025. Regardless, these high-profile cases highlight Singapore’s significance as a strategic node in the American-dominated global technology industry, which is bound to come under scrutiny for its China linkages.

Singapore is a popular host location for FDI from China, and it is well-known in Washington that there are over half a million Chinese nationals living and working in Singapore (plus an unknown number of former Chinese nationals, now naturalised as Singaporeans). They include many skilled workers in the tech sector, and the Huang Jing and Dickson Yeo cases of Chinese spying have added to suspicions based purely, if undeservedly, on ethnic affiliation.

The greater favourability of the Singapore population toward China rather than the US, in which it is a striking outlier among high-income countries, adds to these suspicions. So might complementarities between the Singapore and (even more pro-China) Malaysia economies, particularly their intertwined electronics, semiconductor and EV supply chains, and the China-built data centres in Johor supplying tech companies in Singapore.

To the more staunchly anti-China members of Trump’s circle of policy advisers, Singapore’s foreign policy of “not taking sides” in the rivalry between the US and China may be regarded as a sign of inadequate commitment or a lack of the “loyalty” which Trump so prizes among his associates. An intermediary is also well-placed to be a conduit to the enemy.

Singapore’s close military and security ties with the US are a plus, but even if it could negotiate a favoured position as a trusted partner, this cannot be guaranteed for all the economic partners with which it is networked, especially those in Southeast Asia which are closely linked with China. Nor would or could Singapore do anything to win US confidence that would rile China, on which its economic dependence has been growing, though this remains less significant than its dependence on the US.

Geopolitics is inherently uncertain and unstable. It is possible that Trump will not follow through on all of his proposed policies. US military interests and the American business community might succeed in persuading his administration to “go easy” on Singapore with his tariff and other policies, though these may not extend to other economies with which Singapore is networked.

But the overall policy direction is clearly in a nationalist protectionist direction. Singapore, like the rest of the world, will not escape.

FDI will fall, from other countries as well as the US, from uncertainty if nothing else. Higher growth in the US could increase exports to that country, while tariffs will reduce them. Singapore’s global exports will fall with increased competition in third country markets to which US trade partners, particularly China, divert their exports, particularly if the Singapore dollar rises with the US dollar, and if US growth stalls rather than strengthens. Domestic inflation will fall with falling FDI and import prices, unless the Singapore dollar weakens – for example, as capital flows out to the high interest rates and stock prices in the US.

A NEED TO RETHINK SINGAPORE’S ECONOMIC MODEL

Singapore’s particular state-driven, export-oriented, manufacturing-focused, FDI-led economic model cannot survive in a Trump-dominated world of aversion to state industrial policy, free trade and international investment.

Even if Trump, as president, enacts only a fraction of the economic policies he has floated, it will disrupt the US and world economies on which Singapore relies so heavily. The shift away from mutually agreed upon, stable and predictable multilateral rules of the game, toward variable and inconsistent unilateral actions by the US, and other major economies responding to it, leaves lesser economies like Singapore’s little room for discretionary action in advance.

They can only react. Singapore will do better under a system of across-the-board tariffs that affect all imports equally, since they are less distortionary, and Singapore will not have the domestic market access clout to negotiate for exemptions or lower rates.

But as an already high-cost economy, its competitiveness may be hurt more than others’. FDI and job creation by multinationals will fall. This unfavourable external environment adds to the domestic contradictions that reinforce the need for a rethinking of Singapore’s economic model.

Linda Lim is an editor of AcademiaSG and Professor Emerita at the Stephen M Ross School of Business, University of Michigan. This commentary first appeared on AcademiaSG.