Ballots that surpass borders: how will the US election shape emerging markets?

In the latest episode of the Emerging Market Equities podcast, Nick Robinson sits down with Michael Langham to discuss the US election and what it means for emerging markets.

Transcript

Nick: Hello, everybody. This is Nick Robinson from abrdn and you're listening to the Emerging Markets Equity Podcast, the show that explores the factors that underpin our thinking on emerging markets. We ask our expert guests the big questions, from key individuals to evolving trends, all with the goal to identify and profit from opportunities in the region. 2024 has been a big year for elections, and on November 5th we have the key one when US citizens take to the polls to select their president. Given how polarisation in the US politics has evolved over the last several years, the outcome of this election is going to have wide ranging implications on emerging markets. Today, we're going to dig deeper into what the US election means for emerging markets and how we should see the impact of another Trump term, or indeed, the reelection of the Democrat Party for another four years. Joining me today to tackle this subject is my colleague Michael Langham. Michael is an Emerging Markets Economist based in London on abrdn’s Global Macro Research team. He's been with the company about three years and joined from Fitch Group, where he was based for some time in Asia as a Senior Country Risk Analyst doing economic and political research. So, Michael is extremely well placed to talk about the risks of the US election. Michael, welcome to the podcast. 

Michael: Hi, Nick, and thanks for having me. 

Nick: Oh, it's great to have you on. So, let's get stuck into it. So we, we go into this election in the US I think, you know, where uncertainty is unusually high. You know, on one hand, we have Trump, who is obviously very well known to everyone. But at the same time, he has the capacity to always surprise in terms of rhetoric and policy. And then on the other hand, you know, we have Harris, who's been rather mute on policy as Vice President. But at some stage, presumably she'll give an indication of where she's going to land on a number of key issues. So I think to start, you know, how do you see the campaign shaping up at the moment? And what's the abrdn view on who's likely to win? 

Michael: Yeah. So, we actually, you know, see the race is essentially tied not to sit on the fence, but it is very hard to call. Harris is probably marginally ahead in polling averages both nationally and in the majority of swing states. But I think given recent polling errora, particularly when it comes to swing states, you can't really guarantee that Harris has that lead in all cases. And in the past, that's tended to favour Republicans. This, margin of polling error. And then you have the Electoral College bias, which tends to favour Republicans as well. So Harris doesn't just have to win, she has to win by quite a large margin. And currently she doesn't have the same lead that Biden had at this stage in terms of polling. And then, you know, ultimately, Trump polled better on the two big issues facing voters at the moment. And that's the economy and migration policy. Harris has given some indication on domestic economic policy, maybe a bit more progressive than the Biden administration. But ultimately, in that debate, we didn't really see concrete, assurances of what she would do in terms of immigration policy and tackling some of the inequalities in the American economy more broadly. And similarly, you could say that with Trump. So I think there's still some uncertainties around economic policy from both candidates. And this election is, very, very close to call. Harris has quite a lot of ground to make up. She's made the race more competitive than it was under Biden. But, certainly, you know, this is going to be a close call.

Nick: Yeah, and I suppose for the benefit of listeners to timestamp when we're recording this podcast, we're recording, you know, shortly after the first presidential debate, which I think was, notable in some respects for, you know, some of the bating that Harris managed to achieve a Trump and getting him to kind of almost shoot himself in the foot a bit by going on rants about talking about immigrants eating dogs and, and the like, which was, which was very Trumpian. But perhaps, you know, when we think about, you know, what's likely to happen in terms of the future, perhaps we should just kind of refresh what happened during the first Trump presidency. You know, perhaps, Michael, you could remind us of the main features of that presidency in terms of the specific steps that he took that impacted emerging markets during that four years. 

Michael: Yeah, it's easy to forget all that happened during that period. I guess we had pandemics since then and, you know, five years is a long time in politics. But, a lot did happen during that first Trump presidency. And I think the major thing was this shift away from what was the Republican's traditional free trade stance and towards this more protectionist, I mean, America First policy that Trump, embodies. And, you know, he's always argued that that's pro-worker and, addresses these long-term structural asymmetries within the global trade system and the primary measures he took to sort of address these issues were the, you know, negotiation of the USMCA with Mexico and Canada. That was a big trade policy. And then the withdrawal from the Trans-Pacific partnership. Again, you know, Trump saw this as unfavourable to American workers. It was a lot more, you know, favoring these kind of bilateral agreements rather than large multilateral, agreements. And generally move the US away from international organisations favouring more. Yeah, these, these sort of, specific, more tailored, trade agreements. You know, the obvious, country that faced did so trade with China. But, you know, there were other EMs that got hit by tariffs. And more broadly, when you think of policies that impacted emerging markets, you have to remember that there was this reduction in foreign aid, the withdrawal from the Iran nuclear deal as well. But also tied to migration policies and the criticisms of NATO and other international organisations as well. So, yeah, I think what we got from his first term was this sense of, the injustice of the global trade system, against US and trying to address that in his, in his way. And that was a lot through, you know, using tariffs or the threat of tariffs to try and reduce US trade deficits with countries, primarily China. But, you know, going forward that could expand to more countries, particularly those in, East Asia, those with large trade surpluses with the US, but also, Mexico is especially is not clear that Mexico will be exempt under USMCA from tariff threats under a second Trump, term. So, I think what we can gauge from his first term, is this kind of, trade focus, foreign policy. And I don't think we can expect much, much change on that front. So essentially, more of the same. 

Nick: Yeah, thanks for that. I mean, it's interesting when you when you lay it out like that, it was just a bit of a flashback in terms of the amounts of things that happened during that period. And, quite interesting. I think, you know, all those tariffs, or the initial phase of tariffs really preceded the kind of inflation that we had post-Covid. And you know, I wonder to what extent, you know, those tariffs were partly responsible for some of that inflation. You know, when you think about looking forward one of the things that Trump has been quite clear on is ramping up tariffs, particularly on China If he were to be elected again. Could you talk us through what the impact of the previous set of China tariffs has been? And perhaps the potential impact of the tariffs that he's been articulating for his second term.

Michael: Yeah. So, I think it's worth remembering that, Trump introduced tariffs on around 300 billion of, Chinese goods, that were exported to the US and that raised tariff rates to broadly around 15% in the course of, 18 months. Essentially, that pushed up a little bit on US prices, but most of the costs were born by US imports for China. And more broadly, the rest of EM. There was an impact, but I think that was partially offset by changes in the exchange rate, which I don't think was a coincidence. You know, you saw currencies depreciated roughly by the same rate as the bilateral tariff rate increase. So, essentially trying to maintain that export competitiveness, ensure up growth. And while China's direct, trade with the US or the share of US imports coming from China has fallen around 7% points since then, China's actually, you know, grown its share of, global exports, it’s continued to find new areas to expand its export market. So, I don't think those tariffs really, curtail China's export prowess or, directly stymied the potential for China to still export via this kind of China plus one strategy. Going forward, certainly, the threat of 60% or, tariffs on Chinese goods would be a bigger shock. And, I think it depends on whether you get sort of unilateral tariffs. Trump’s talked about a 10% tariff on all sorts of imports. How that will play out is still unclear, but certainly you'd expect that you'd get more of this, China plus one or friendshoring, nearshoring kind of, strategy going on in supply chains. I think the risk from introducing tariffs now in the US is that we have had this inflationary shock. And, you know, there is this potential for further supply side shocks to keep inflation higher or more volatile to the upside. So, it's not clear whether, Trump really wants to risk, pushing inflation higher. That's obviously hurt the Biden administration in terms of polling. So, the tariff threat could just be that a threat. But I think particularly for emerging markets, the same opportunity is going to be there, this kind of, fragmentation of global trade into two camps, but ultimately US can't completely decouple from China. And there’s going to be a lot of these emerging markets, which can benefit from being part of that supply chain or that supply chain shift. You know, and we can discuss that later on. 

Nick: Yeah, thanks. Okay. So that's interesting. And the, kind of changing direction slightly. I mean, how did when we think about kind of tariffs. How did policy evolve during the last four years under Biden? And would we expect the same under Harris? So would there be a, do you think there would be a very significant divergence in outcomes, related to tariffs depending on who was elected president? 

Michael: Yeah. So, Biden didn't roll back the tariffs imposed by Trump on China. In fact, he actually expanded them in a few areas on this basis of national security. Biden's strategy was a more targeted small yard, high fence approach. While Trump's were maybe more broad in nature and affected US allies like the EU and Mexico. Biden was a lot more targeted in terms of tariff usage. And you had this Biden flagship industrial policy as well with Inflation Reduction Act, essentially, you know, continuing that theme of bringing manufacturing jobs back to the US. But I think under a Harris administration, you wouldn't see too much divergence from that. I think Harris represents broad continuity on at least the foreign policy and trade side of things. She's maybe a bit more progressive on domestic economic policies, but, you know, again, you'd have to wonder how much of her policies on that front can push through if she doesn't have control of Congress. But, yeah, we'd expect some continued incremental increase in China tariffs in targeted areas, under a Harris administration, particularly focusing on these kind of, national security areas, whether that be critical minerals, pharma, or AI. But unlike the Trump presidency, I think there would be less concern about unilateral tariffs and, tariffs, hitting, the likes of Mexico or the rest of the Asia region. So that would provide more assurances around the China plus one strategy that we've seen developed, over the past four years. 

Nick: Yeah, it’s funny. I mean, you say nearshoring and I always hear Mexico in these conversations. Yeah. I mean, on Mexico, I guess there's a lot going on at the moment, isn't there, you think the Mexico would be, a beneficiary of this trade fragmentation, which, you know, today has been. But yeah, there's obviously been a change in government there. With Claudia Sheinbaum being elected to president, who, you know, on first glance, appears to be the sort of character that's a bit more intellectual, that Trump may not find such common ground with. And then, you know, additionally, they're also, you know, looking to renegotiate the USMCA at some stage. So, I'm wondering if that is likely to create some kind of logjam as we move forward. Yeah, and perhaps damage the nearshoring theme for Mexico at least. 

Michael: Yeah. So, I mean USMCA is Trump's deal. So I'm not sure, you know, we've heard anything yet on the campaign trail at least that he wants to rip it up and start again. But certainly it's up for review in 2026. And that could be an area, in a point where we see tensions rise between, the Trump administration were to come in and Mexico, I think there's some clear sticking points. As I mentioned, Mexico is one of the countries with a large trade surplus with the US. But also the issue of Chinese investment into Mexico is one which I think both the Harris and Trump administration would take issue with under the review. Certainly, if there's a sense that China is investing in Mexico to simply circumvent US tariffs, that, as you mentioned, you know, Mexican policy as well is potentially threatening some of these negotiations and the review itself, the judicial reform in particular, which looks to, I guess, essentially impose elections on all the country's judges by 2027. So that would essentially mean that all candidates have to be approved by the legislature, which is controlled by the governing party, Morena. And, you know, it means that the judiciary now is at risk of politicisation. It creates a whole lot of bureaucracy. You think running elections with the country's judges and then the judicial system as well, it changes how judges would necessarily rule on certain cases, particularly if they know that an election is coming up. So that's something I can see both the US and Canada wanting assurances around, judicial and independence and, you know, the protection of sort of business rights in Mexico. So certainly that could be a sticking point. And look, this review process can become an annual process. And that in itself would create some uncertainty around how the USMCA works, going forward. So, certainly I think that review period is going to be highly contentious, whether it means, complete, renegotiation. I don't think so. But, it does maybe dampen some of the optimism around Mexico as a beneficiary of, this shift in supply chains. 

Nick: Yeah. I think, you know, one would hope that pragmatism prevails in Mexico, and the USMCA acts as a decent guardrail against anything too significant going on with, judicial reform. Perhaps, you know, staying in Latam. I mean, I suppose in Trump's first term, you know, is very well aligned with Bolsonaro and those two, you know, seem to get old like a house on fire. I'm not sure how much that benefited Brazil materially, but, you know, do you see any impact now that, you know, we've got Lula in charge of Brazil, and I'm not sure if those two are going to be quite so aligned.

Michael: It's an interesting point. I think Brazil falls into that camp of nonaligned middle power countries. Sort of relations with the US, but also with China and the EU. Clearly Lula's a prominent politician or a leader within Latam as well. And, you know, Brazil is part of the BRICs alliance. So, it's certainly it will be flexing his foreign policy muscles. And that could bring him into contention, with the Trump, administration. But I don't think Trump particularly has his eyes set on, Brazil or Lula really. I think it would take a particular issue for those two to clash. And one example of that could be over Venezuela. Although Lula’s been quite critical of their election process there. But if you think back, Trump took quite a hard stance on Maduro in his first term, imposing quite tough sanctions. So that could be one area in which Lula and Trump don't see eye to eye. I think ultimately for Lula and Brazil more broadly, it's how the US economy performs post-election. I think that's the that's the key. And, you know, Brazil itself, the economy is growing around 3%. And there's concerns overheating there, you know, the central bank's becoming more hawkish. So I think when you look at Brazil, you'd say, well 3% growth isn't particularly strong for a middle income economy. So it's much more important that policymakers focus on supply side reforms, boosting productivity, than getting into spats with Donald Trump.

Nick: Yeah. Okay. Thanks. I guess perhaps if we head back over the other side of the world and think about Taiwan a little bit. So, in Taiwan is and risks associated with China and Taiwan are probably the, you know, the biggest risk for emerging markets I’d say today, and I remember, you know, the beginning of Trump's first term, he caused some controversy by, phoning the president of Taiwan fairly early on in his kind of round robin, global president, presidential phone call series. What, do you think there's much difference in the approach to Taiwan between the two candidates? And, you know, would you be concerned that Trump seems to be very reluctant to, kind of expand military presence overseas and get into any wars where he doesn't really feel there's an urgent need from a US domestic security perspective.

Michael: Yeah. I think that's a good point. Trump's, aversion to kind of foreign military intervention is certainly something that would put, his approach to Taiwan, as potentially a change in strategy from the current administration. I think, at least from a Harris point of view, you get broad continuity there, keeping in the same guardrails that the Biden administration has put in and worked with Beijing on. And I think that has helped to cool some of the tensions you've seen around Taiwan. We have the elections as well. And those went broadly quite smoothly in terms of political tensions in the region. So I think at least under a Harris administration, we get more of the same. But it is true that Trump's, approach to Taiwan has been a bit muddled. You know, you've seen him, criticise the US trade deficit with Taiwan, and, the prowess in the semiconductor sector, saying  that it undermined the US production. But at the same time, during his first term, he did expand military support to Taiwan. And with TSMC building this plant in Arizona, maybe the trade deficit becomes less of an issue. I think with strong bipartisan support for Taiwan, I don't think you're going to see Trump diverge too much from, the current US support for Taiwan. I think, if anything, you're going to see potential risk of Taiwan becoming front and centre of US-China tensions more. So certainly an area of risk. You know, some of Trump's appointees have made remarks questioning the US’s one China and strategic ambiguity policies in the past. But, I think broadly consensus in Washington is that of, support for Taiwan. And, I don't think Trump would try to diverge too much from the current, messaging, on that front. 

Nick: Yes. Okay. And of course, you know, one of the other sources or kind of regions of conflict is Russia-Ukraine. And again, Trump's been quite clear on his keenness to withdraw military support, from Ukraine. You know, how do you think that's likely to evolve, particularly given his, his close relationship with Putin or at least what seems to be a close relationship and it's although perhaps not reciprocated in that Putin, I think, came out the other day to endorse Harris, which was perhaps a bit of a surprise, but also perhaps not him being entirely straight with everyone. 

Michael: Yeah, I think, I'm not sure how much, credibility I take, from that, show of support, but I think when we look back to Trump's first term, he, you know, it wasn't all positive towards Russia. You know, as part of his, national security strategy Russia was recognised, along with China as a major strategic competitor. And, he did increase sanctions on Russian nationals during the course of his presidency. However, it is hard to disassociate that relationship with Putin. It is quite chummy. And it's, you know, that will affect his kind of foreign policy stance towards Russia ultimately. Trump has been quite critical of US military support for Ukraine, and he's stated that he’d seek a piece deal his first day in office, you know, his VP as well, JD Vance has been quite vocal again in, you know, pushing back against aid to Ukraine. So, that is a potential threat that could be used to get both parties and both sides to the negotiation table. US threatening the withdrawal of support to Ukraine and or ramping up support to Ukraine to try and get Russia to the table as well. I think drawing this, conflict to an end is something that, Trump is quite keen to do. But the extent to which a sustainable peace deal can be achieved, I think it's maybe, you know, lower in probability when Trump is anticipating and even were US support to be withdrawn, you know, Ukraine could get more support from the EU. It's got already some financing secured through the next year and military assistance secured on that front. So, I think this conflict is going to continue to rumble on. But it is worth highlighting in the sense that if Trump does look to pull support from Ukraine to get this peace deal, it's not clear how long Ukraine can continue to fight the war without, US backing. So that could be something that, it's slower to develop, but ultimately leads to some, negotiation down the line. 

Nick: Yeah. Okay. So there's potentially a silver lining there to some extent in terms of reducing or just having one less conflict in the world potentially at some point overt still a huge, huge cost. What about you know, I suppose I feel like we've talked about a lot of the risks of a Trump presidency and certainly that feels like from an emerging market perspective as probably more risk with Trump as president versus Harris. But what about, you know, are there any potential beneficiaries of Trump being elected out there in terms of countries or those countries where perhaps actually the outcome doesn't really matter?

Michael: Yeah, I think, you know, it's worth remembering that, during Trump's first term, it was quite market friendly in terms of economic policies. And that did help US growth. So, were we to see the US economy, you know, performing well over his presidency, that obviously would be a big benefit to emerging markets. But I think when we look at how he's framing his tariff threat, a lot of it is directed towards China. So, I would say that, you know, again, going back to this theme of, China plus one or, friendshoring, nearshoring, as it were, countries like Mexico, but also, you know, within the Asia region still stand to gain, I would say, there's also economies like India, maybe, you know, Indonesia and Brazil to a lesser extent that have less direct economic exposure to the US. So some of those economies could maybe withstand some of the uncertainty around the US election result a bit better than other emerging markets. But I think we have to remember that, you know, the US isn't everything to emerging markets. And there's a lot going on in the domestic economies that's positive. We're seeing reforms in places like India, which is boosting long term potential growth. And, you know, the Asia region in terms of its, centrality to global trade, puts it still at a strong advantage, even if tariffs are imposed. I'm still positive on, these regions and Asia in particular is a fast growing consumer market in itself. So I, I don't think manufacturers are going to necessarily want to, pull out of that region. In fact, more than more want to nearshore to the Asia region to get, you know, get a slice of that growing consumer market. So I think there's still a lot of positives, even under a Trump presidency for emerging markets. 

Nick: Well, that is very good to hear. And I think that's probably a good time to draw the podcast to a close. So, thanks very much, Michael for joining me today. It's been great to have you on. 

Michael: No, it's been a pleasure to be on here. I'm a keen listener to this podcast. 

Nick: I’m pleased to hear it. I'm glad someone does. So, and thanks to everyone else who, took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for our next episode and tune in.