After four years, Trump is about to return to the White House. What does it mean for the global economy? Is the world ready?
According to Xinhua News Agency, in the early morning of the 6th local time, Republican presidential candidate Trump announced his victory in the 2024 presidential election. The market was moved by the news, and the US dollar soared. The yield of 10-year US treasury bond bonds once rose to 4.471% within the day, and Bitcoin soared 6.29% to $73748, a record high. The market is betting on the economic, trade, and industrial policies that the Trump administration may introduce. Mathieu Savary, Chief Strategist for European Investment Strategy at BCA Research, a global economic analysis firm, told First Financial reporters that investors expect corporate taxes to decrease and deficits to increase if Trump takes office. More importantly, trade frictions will intensify and tariffs may increase, which will increase economic uncertainty and drag down global economic growth.
Hu Jie, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and former senior economist at the Federal Reserve, told First Financial Journalist that for the US economy, the President can directly touch the economy through fiscal policy and influence the economy through industrial policy. With the Republican Trump taking office, the United States will experience certain policy fluctuations. For the global economy, Trump's inauguration will make the situation even more unpredictable.
How to Impact the US Economy
During the campaign, Trump proposed three major policy objectives: tax cuts, restrictions on immigration, and increased tariffs.
To stimulate the domestic economy of the United States, Trump stated that he will adopt a tax policy based on his commitment to comprehensive tax cuts, extend and amend the Tax Cuts and Jobs Act he signed in 2017, cancel the consumption tax and social security welfare tax, and further reduce the corporate tax rate from 21% to 15%. Trump said, "This is an important means of creating job opportunities... everyone will flock to the United States because our tax rates are highly competitive
However, the tax cut plan is believed to exacerbate wealth inequality and fiscal deficit issues in the United States. According to data from the US Tax Policy Center, by 2025, Trump's tax cut bill will result in an average tax reduction of over $60000 for the top 1% of US households and less than $500 for the bottom 60% of households. In addition, the reduction of corporate tax did not benefit workers, but instead led to a significant increase in executive compensation.
In addition, according to data from the Congressional Budget Office, the tax cut bill will result in a loss of $1.9 trillion over ten years. If the temporary personal income tax and inheritance tax cuts in the law are made permanent according to Trump's plan, starting from 2027, the US tax base will lose an additional $40 billion annually.
ING stated in a research report released this month that in the short term, the prospects of tax cuts and a pro business environment will keep market sentiment relatively strong and risk appetite active. But the uncertainty of the medium - to long-term growth prospects in the United States will increase. The US fiscal deficit this year has approached 7% of Gross Domestic Product (GDP), with a debt to GDP ratio of 100%. Concerns about fiscal sustainability will lead investors to demand that the US government pay higher term premiums on long-term borrowing, thereby pushing up the borrowing costs of the entire economy.
In terms of immigration policy, Trump has promised to crack down on illegal immigration, mass deport illegal immigrants already in the United States, and impose some restrictions on legal immigrants entering the United States.
ING's analysis suggests that as the birth rate in the United States declines, a decrease in immigration and forced repatriation will become the main constraints on the US economy. If the foreign born labor force decreases, it may cause serious supply side challenges, pushing up wages and inflation. The decrease in domestic active population will also mean a decrease in economic demand.
From the perspective of industrial policy, Trump promised to cut the energy costs of Americans in half within one year of taking office. He stated that he will rapidly strengthen oil and gas drilling capabilities and reduce obstacles from the US government to the construction of power plants. Trump also referred to the Inflation Reduction Act (IRA) passed by the Biden administration as a "green new scam," stating that unused funds under the bill would be cancelled. According to the US Department of Energy, the IRA is the largest investment bill in the climate and energy sectors in US history.
For tech giants, Trump's election could be good news. Trump is skeptical of the proposal to split Google and has stated that he will repeal the Biden administration's executive order on regulating artificial intelligence.
Hu Jie believes that the free market ideology and business background of the Republican Party and Trump have led them to adopt a more relaxed attitude towards regulation. For example, when it comes to cutting-edge technologies such as artificial intelligence, Trump is more inclined to relax regulations and encourage innovation.
The Countereffect of Imposing Additional Tariffs
What shocked the world was that Trump announced in his campaign policy that he plans to impose a universal tariff of 10% to 20% on all imported goods. He believes that these tariffs will protect American jobs and industries, and reduce dependence on foreign goods.
During his first term, Trump imposed 25% and 10% steel and aluminum tariffs on traditional allies such as the European Union and Canada, citing national security concerns, which sparked retaliatory tariffs from these economies. In 2019-2020, Europe and the United States were constantly fighting over issues such as digital service tax, subsidy disputes between Airbus and Boeing, and threats of automobile tariffs.
A study by the think tank Center for European Reform (CER) predicts that "Trump may not be as restrained (as he was in his first term). During his first term, due to his unfamiliarity with power games and his team, few officials fully aligned with Trump's views, forcing him to rely on moderate Republicans. Now, Trump and his team will be more organized and therefore more capable of managing the government's leverage
A research report by Goldman Sachs this year stated that the high tariffs imposed by the Trump administration are highly likely to lead to a sharp increase in trade policy uncertainty. During 2018-2019, trade policy uncertainty reduced industrial production in the eurozone by about 2%. Due to the high dependence of EU member states such as Germany on industrial production, it is expected that these countries will be more affected.
Goldman Sachs Chief Economist Jan Hatzius predicts that if the United States imposes tariffs, the EU will suffer more damage than the United States. The EU will lose 1% of its Gross Domestic Product (GDP) as a result, while the United States will only lose 0.5%. However, this will also increase the inflation rate in the United States by 1.1%, while the inflation rate in the European Union will only increase by 0.1%.
According to UBS's model, if the United States fully implements Trump's tariff plan, the S&P 500 index will fall to 5200 points by the end of next year, a decrease of 11%.
A report recently released by the Peterson Institute for International Economics (PIIE) shows that under Trump's policy combination, inflation in the United States will intensify and employment rates will significantly decline. By the end of Trump's four-year term in 2028, the actual GDP of the United States will be 2.8% to 9.7% lower than the benchmark level. Afterwards, GDP slightly rebounded, but it will still be below the benchmark level by 2040. By 2026, the inflation rate in the United States will be 4.1% to 7.4 percentage points higher than the benchmark level. By 2028, consumer prices in the United States will generally increase by 20% to 28%. From 2034 to 2040, the inflation rate will remain stable at a level 2 percentage points above the benchmark, approaching 4%.
Is the world ready
Savari told First Financial reporters that European investors expect Trump's inauguration to bring about trade disputes, and raising tariffs will directly damage European profits and increase global economic uncertainty. Europe deeply abhors this uncertainty because it is extremely sensitive to fluctuations in global economic activity, "he said.
Cui Hongjian, a professor at the Institute of Advanced Studies in Regional and Global Governance at Beijing Foreign Studies University and director of the European Union and Regional Development Research Center, previously stated in an interview with First Financial News that from Trump's first term to the Biden administration, Europe has gained a clearer understanding of political changes in the United States and has to some extent completed "desensitization". Therefore, even if Trump takes office again, "Europe will not be as emotional or anxious in terms of psychological and policy responses as it was in 2016".
Four years ago, the EU had already fully experienced the ineffectiveness of its emotional response to the Trump administration. Therefore, if Trump came to power again and announced the imposition of tariffs, the EU may pay more attention to details and specific issues, seeking to exchange interests with the United States. Cui Hongjian said that Europe may send a signal to the United States through political and security cooperation, indicating the importance of Europe to the United States in exchange for cautious consideration in the economic and trade fields.
Robert Lawrence, a professor of trade and investment at the Kennedy School of Government at Harvard University, believes that Trump's new proposal will also violate the United States' commitments to the World Trade Organization (WTO). Lawrence said: "Based on past experience, there is no doubt that foreigners will retaliate when we raise tariffs, especially when they feel that we have not complied with the rules."
Tu Xinquan, Dean of the China WTO Research Institute at the University of International Business and Economics, also told reporters that Trump's return to the White House is undoubtedly a serious challenge to the WTO. There is widespread concern within the WTO about the possibility of Trump returning to the White House. Based on historical experience, during Trump's first term, multiple member states, including Europe, attempted to communicate and coordinate with the US, but with little success. Therefore, the WTO currently has to prepare for the worst-case scenario He said.
Tu Xinquan believes that at present, the WTO can only adopt a strategy of "cracking down on tactics". He said, "In this situation, members including China can only develop response strategies based on specific circumstances, such as finding alternative operational solutions under budget constraints or exploring acceptable solutions for leadership changes