The return of Trumponomics excites markets but frightens the world

THE TRUMP TRADE is already in full swing. As it became clear that Donald Trump would win the presidential election, American stock futures soared, the dollar strengthened and Treasury yields jumped higher. The price movements contain two messages about the direction and impact of Mr Trump’s economic policies. The near certainty of big tax cuts, combined with his zeal for deregulation, will boost growth, especially in the short term. But the spectre of tariffs and a crackdown on immigration may drive up inflation and, eventually, undercut America’s economic strengths.

Gauging the potential impact of Mr Trump’s policies is, however, no easy task. As ever with him, there is uncertainty about whether he means all that he says. He is, for instance, obviously fond of tariffs but he may also, sometimes, treat them as leverage with other countries rather than as end goals. There is also uncertainty about how much he will be able to achieve. Mr Trump’s team has evolved from the chaos of his first term into what appears to be a more finely oiled operation. And Republicans are on track for a trifecta, as Mr Trump’s resounding victory is likely to come alongside a solid majority in the Senate and a narrower one in the House of Representatives. Still, moderates in the party will have the clout to whittle down some of his agenda.

Mr Trump’s economic programme can be divided into three main categories: lower taxes, sweeping deregulation and higher tariffs. He also has some broader policies—in particular, a looming crackdown on immigration—that could have a profound effect on the economy.

Start with the biggest source of immediate excitement for investors and corporate executives: the sugar rush of tax cuts. Republicans are on track for a trifecta, as Mr Trump’s resounding victory is likely to come alongside a solid majority for the party in the Senate and a narrower one in the House of Representatives. That would open up a path for Mr Trump to slash taxes. His priority will be to extend the cuts in personal income tax he made in 2017, which are due to expire at the end of next year. And he has vowed to reduce the tax rate on companies, perhaps to 15% from 21%. On the campaign trail he also trotted out a dizzying array of other possible cuts, including ending taxes on tips.

The prospect of higher after-tax earnings for companies helps explain why stocks climbed when Mr Trump sealed his victory. The worry, though, is that lower taxes will strain America’s finances. As it stands, the Congressional Budget Office, an independent scorekeeper, estimates that America will run a budget deficit of about 6% of GDP over the next decade—exceptionally high for a normal peacetime economy. Mr Trump’s various tax cuts could swell the deficit to as much as 12% of GDP by 2035, according to the Committee for a Responsible Federal Budget, a non-partisan group. The danger of an exploding deficit may end up limiting how far Republicans in Congress are willing to go on tax cuts as negotiations get under way early next year. Much will also depend on how markets react: a rise in Treasury yields in response to Mr Trump’s triumph is already a warning about America’s fiscal frailty.

The danger of an exploding deficit may end up limiting how far Republicans in Congress go on tax cuts as negotiations start early next year. Much will also depend on how markets react: a rise in Treasury yields in response to Mr Trump’s triumph is already a warning about America’s fiscal frailty. With their post-election surge, yields on ten-year Treasuries have now risen by four-fifths of a percentage point since mid-September, a big move for bond markets, reversing the decline seen after the Federal Reserve started cutting interest rates. That could spell trouble for the stockmarket rally since it suggests that borrowing costs will be higher for longer.

Whereas tax negotiations will stretch though much of 2025, Mr Trump will get to work right away on deregulation when he returns to the White House. In his rallies he promised the “most aggressive regulatory reduction” in American history. He may tap Elon Musk, the Tesla boss who became his chief campaigning sidekick, to lead a “government efficiency commission” that eliminates ten existing rules for every new one But businesses are excited less by the razzle-dazzle of such a commission than by the coming U-turn on rules drawn up by Democrats.

Ms Harris had been expected to continue efforts started by Joe Biden to impose stricter oversight on artificial intelligence (AI), including a requirement for companies to share information about their AI models. Mr Trump is expected to drop that. Similarly, the Biden administration had made itself the nemesis of crypto companies with a barrage of disclosure and transparency rules (which it, reasonably, said were necessary to root out illegality). Mr Trump will take a lighter touch; he has pledged to make America “the crypto capital of the planet”.

Beyond the freer hand for big tech companies, Mr Trump will also preside over a reordering of the regulatory landscape. He has vowed to give energy companies more freedom to drill for oil on federal land and will probably lift a moratorium on the export of liquid natural gas. His second administration could also herald an easing of the onerous reporting requirements placed on banks after the global financial crisis of 2007-09. At the same time, Mr Trump may claw back some of the rules and subsidies drawn up by the Biden administration to encourage Americans to use renewable energy. Winners and losers in the stockmarket reflected this reshuffling (see chart 2). First Solar, America’s biggest manufacturer of solar panels, plunged by 10% the day after the election, while big banks such as Bank of America were the mirror image of that, climbing by 8%.

Tariffs will be Mr Trump’s most controversial set of policies, especially in foreign capital cities. Central to his programme for nearly a decade has been a belief that protectionism is essential to American prosperity. His first term in the White House, which featured tariffs on steel from around the world and on a range of Chinese products, is probably just a prelude to what he will attempt now (see chart 3). He has talked about slapping levies of 10-20% on everything that America imports, of 60% on all goods from China and even higher duties—perhaps 500%—on cars from Mexico.

Almost universally, economists say such hefty tariffs would lead to higher consumer prices and act as drags on investment and growth. That is a potentially cruel irony for American voters given that anger about inflation under Mr Biden helped fuel support for Mr Trump’s re-election. Many Republicans in Congress are also less enthusiastic about tariffs; a traditional free-trade strain remains alive, if hardly thriving, in the party.

But any opposition from them may not amount to much. Mr Trump’s advisers, notably Robert Lighthizer, America’s trade representative in his first term, have been drawing up plans to use executive orders and hitherto untested emergency powers to impose across-the-board tariffs. Whether those powers will actually function as they hope is unclear. Companies are sure to challenge the tariffs in court and may succeed in overturning them. So Mr Trump may start with smaller and more targeted tariffs before shooting for universal levies. The White House will have an easier time slapping new punitive tariffs on China as byproducts of previous investigations into its trade practices.

Tariffs are also sure to invite retaliation. In Europe officials have already drawn up lists of levies that they may impose on American goods. China will probably go after farm products, from soyabeans to corn. Other countries will be tempted to follow suit but will also try to carve out exemptions from Mr Trump’s tariffs. That will be especially true for Canada and Mexico, whose fortunes are closely yoked to trade with America; the peso fell to a two-year low the day after the election, before regaining some lost ground, amid fears that Mr Trump’s tariffs could spell trouble for the Mexican economy.

Given the size and diversity of its economy, America may be better insulated than most from a global trade war—that, along with the higher Treasury yields, helps to account for the dollar’s rise after Mr Trump’s victory. The very real danger for the world is weaker growth, higher prices and more brittle supply chains.

The fix is in

Mr Trump’s plan to “fix” America’s borders—a constant theme of his campaign—is another source of uncertainty. If he keeps his promise of mass deportations, these would take a huge toll on the economy by shrinking the workforce. Booting out 8m migrants would reduce America’s GDP by 7% versus baseline expectations by 2028, according to estimates by the Peterson Institute for International Economics, a think-tank. But the actual number is unlikely to come close to that. Any attempt to deport millions will run into stiff resistance, with local officials in some of America’s biggest states, from California to New York, refusing to co-operate.

A more realistic outcome may thus be much stricter enforcement of border controls, which would stem the inflows of illegal migrants seen under Mr Biden. That in itself may translate into labour shortages for restaurants, construction companies and more, imparting yet another inflationary force. How Mr Trump approaches legal immigration could make things worse—or better. In his first term he pared back green-card issuance, but in campaigning he has suggested that he might consider easing immigration rules for foreign students. Given that America’s native-born workforce will shrink as the population ages, Mr Trump will face real economic pressure on this front. “We do need immigration to hold up for potential economic growth to stay healthy,” says Satyam Panday of S&P Global, a credit-rating agency.

There are other threats, too. Worries about inflation are likely to weigh heavily in the Federal Reserve’s calculations. The rise in Treasury yields shows that many investors believe the central bank will end up leaving interest rates higher next year than previously assumed—though they still expect a quarter-point cut at its meeting on November 7th, after we published this.

A more hawkish Fed may, in turn, invite the wrath of Mr Trump, who has insisted that, as president, he should have a say over interest rates. He will surely want to see steeper rate cuts now that he is in charge. Legally, he can do little to control the Fed, but his advisers have talked of creating a “shadow Fed” to try to steer its decisions. The spectacle of the president attacking the central bank may spook markets but the Fed’s statutory independence should keep it well protected.

That Mr Trump may not be able to realise his most extreme ambitions should offer some solace to an anxious world. But he will probably be able to push further in his second term than he did in his first. He is better prepared for governing this time, with a larger team of loyalists and a more detailed plan of action. It is going to be a turbulent economic ride, for America and the world. Buckle up. ■

Can big be beautiful?

More generally, the antitrust crusade launched under Mr Biden, where bigness by itself seemed to paint a target on companies’ backs, is almost certain to be wound down. “I think we’ve now seen peak techlash, and those waters are going to recede,” says Robert Atkinson of the Information Technology and Innovation Foundation, a think-tank. “There’s simply no way that that’s going to happen under the Trump administration.”

Next in focus for Mr Trump will be tariffs. Central to his programme for nearly a decade has been a belief that protectionism is essential to American prosperity. His first term in the White House, which featured tariffs on steel from around the world and on a range of Chinese products, is probably just a prelude to what he will attempt now. He has talked about slapping levies of 10-20% on everything that America imports, and of 60% on all goods from China and even higher imposts—perhaps 500%—on cars from Mexico.

Almost universally, economists say these tariffs will lead to higher consumer prices and act as drags on investment and growth. That is a potentially cruel irony for American voters given that anger about inflation under Joe Biden helped fuel support for Mr Trump’s re-election. Republicans in Congress are also, generally speaking, less keen on tariffs; a traditional free-trade strain is still alive, if hardly thriving, in the party.

But any opposition from them may be immaterial. Mr Trump’s advisers, notably Robert Lighthizer, America’s trade representative in his first term, have been drawing up plans to use executive orders and hitherto untested emergency powers to impose across-the-board tariffs. And they may have an even easier time slapping punitive tariffs on China as byproducts of their previous investigations into its trade practices—hence the sell-off in Chinese stocks in the wake of Mr Trump’s victory.

Tariffs are sure to invite retaliation. In Europe officials have already drawn up lists of levies that they may impose on American goods. China will probably go after farm products, from soyabeans to corn. Other countries will be tempted to follow suit but will also try to carve out exemptions from Mr Trump’s tariffs. That will be especially true for Canada and Mexico, whose fortunes are so closely yoked to trade with America; the peso fell to a two-year low the day after the election amid fears that Mr Trump’s tariffs could spell trouble for the Mexican economy. Given the size and diversity of its economy, America may be better insulated than most from a global trade war—that, along with the higher Treasury yields, helps to account for the dollar’s rise after Mr Trump’s victory. The very real danger for the world is weaker growth, higher prices and more brittle supply chains.

Mr Trump’s plan to “fix” America’s borders—a constant theme of his campaign—is another source of uncertainty. If he keeps his promises of mass deportations, these would take a huge toll on the economy by shrinking the labour force. Booting out 8m migrants would reduce America’s GDP by about 7% versus baseline expectations by 2028, according to estimates by the Peterson Institute for International Economics, a think-tank. But the actual number is unlikely to come close to that. Any attempt at mass deportations will run into stiff resistance, with local officials in some of America’s biggest states, from California to New York, refusing to co-operate. A more realistic outcome may thus be much stricter enforcement of border controls, which would stem the inflows of migrants seen under Mr Biden. That in itself may translate into labour shortages for restaurants, construction companies and more, imparting yet another inflationary force.

There are other threats, too. Mr Trump’s pledge to make America “the crypto capital of the planet” may make his victory a boon for cryptocurrencies. The price of bitcoin soared to a new record as the election results came in. But lighter regulation for an industry already rife with money-laundering and other criminal activity is hardly a welcome development. Meanwhile, worries about inflation are likely to weigh heavily in the Federal Reserve’s calculations. The rise in Treasury yields shows that many investors believe the central bank will end up leaving interest rates higher next year than previously assumed—though they still expect a quarter-point cut at its meeting on November 7th.

A more hawkish Fed may, in turn, invite the wrath of Mr Trump, who has said that, as president, he should have a say over interest rates. He will surely want to see steeper rate cuts now that he is in charge. Legally, he can do little to control the Fed, but his advisers have talked of creating a “shadow Fed” to try to steer its decisions. The spectacle of the president attacking the central bank may spook markets but the Fed’s statutory independence should keep it well protected.

That Mr Trump may not be able to see through his most extreme ambitions should offer some solace to an anxious world. But he will probably be able to push further in his second term than he did in his first. He is better prepared for governing this time, with a larger team of loyalists and a more detailed plan of action. It is going to be a turbulent economic ride, for America and the world. Buckle up.■