Trump's economic policies could destabilize the global economy
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In promoting an "America First" economic policy, President-elect Donald TrumpDonald John TrumpTrump calls for Republicans to be 'united' on abortion Tlaib calls on Amash to join impeachment resolution Facebook temporarily suspended conservative commentator Candace Owens MORE appears to be blinding himself to the currently very fragile state of the global economy. He also seems to be ignoring how very integrated the U.S. economic and financial system is with the rest of the world.

This raises the very real risk that Trump's economic policies could destabilize the global economy with untoward consequences for the U.S. economic recovery.

Of further concern is Trump's disdain for the multilateral lending institutions and his strong skepticism about the need for continued U.S. international economic leadership. This could be highly problematical for the world economy should for any reason there be a bursting of the global credit bubble created by years of highly unorthodox monetary policies.

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Among the more immediate global economic challenges likely to confront Trump will be China, the world's second largest economy and until recently the major source of global economic growth.

There are the clearest of signs that China's investment-led economic growth model is close to having run its course and that its credit bubble is now beginning to burst. There are also clear indications that China's capital outflow problem is again gaining momentum and that the Chinese authorities do not have good exchange rate policy choices at their disposal to stem this outflow.

Seemingly in total disregard of China's fragile economic position and of its importance to the global economy, Trump keeps branding China as a currency manipulator intent on cheapening its currency. He does so despite the fact that over the past year, China has burnt through over $1 trillion in its international reserves in an effort to prevent an excessive weakening in its currency.

Worse yet, Trump keeps sending signals, not least by his appointment of Chinese hawks to key economic positions, that he is serious about the need for high tariffs on Chinese imports.

Yet another way in which Trump seems to be undermining China's economic growth prospects is by the very expansionary U.S. fiscal policy that he is proposing. Despite the fact that the U.S. economy is at or very close to full employment, Trump is pushing for deep tax cuts and for increased public expenditure on infrastructure and defense.

Those policies will almost certainly force the Federal Reserve to raise interest rates several times in 2017 to contain inflation. That will in turn attract capital back to the United States from the emerging markets in general, and China in particular, and it will also propel the dollar to ever-higher levels.

Sadly, China is far from the only emerging market economy that is vulnerable to a combination of higher U.S. interest rates and a stronger dollar.

As the Bank of International Settlements keeps warning us, the emerging market economies constitute a major risk to the global economic recovery because they have allowed their corporate sectors to have increased their dollar denominated debt by more than $3.5 trillion over the last eight years.

Rising interest rates and a strong dollar could prove to be very challenging for major emerging economies like Brazil, Russia and South Africa, particularly at a time when international commodity prices remain at low levels.

Yet another reason why Trump should be more concerned about the global economy than he seems to be is the parlous state of the European economy. Despite years of budget austerity, public debt levels have continued to rise in Southern Europe, banking systems have weakened especially in Italy and Germany, and economic performance between Europe's south and its north has continued to diverge.

Meanwhile, as underlined by Brexit and Italian referendums, populism appears to be on the march across the continent and support for the European project is waning.

Hopefully, it has not escaped Trump's notice that Europe has a crowded political calendar in 2017.

In April/May, France is to hold its presidential elections in which the National Front's Marine le Pen could do well; by the third quarter of the year, Italy is likely to have early elections that could see further gains for the populist and anti-euro Five Star Movement; and in September, German Chancellor Angela Merkel's political authority could be further undermined by parliamentary elections.

These series of elections could prove to be particularly destabilizing for Italy, the world's third largest sovereign bond market, which is already facing an accelerating pace of capital outflows and which is suffering from severe strains in its banking system.

There is of course always the chance that Trump gets lucky and that none of the global economic vulnerabilities mentioned above will get triggered during his presidential term.

However, given the unusual confluence of fault lines in key parts of the global economy and their potential to undermine the U.S. economic recovery, it would seem irresponsible to frame domestic economic policy in total disregard of what might be occurring in the rest of the world economy.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.


The views expressed by contributors are their own and not the views of The Hill.