Even in the country with the world’s strongest economy, debates about economic can turn into a security discussion. “Make America Great Again” is a promise that appeals to the voters’ emotions as well as their wallets. And here comes “MAGAnomics,” the antidote to a global economy spinning out of control, disrupting the lives of rural and suburban American communities, which form the main voter base of the New York magnate.
Trump’s strategy is thus to insert enticing economic promises for companies and asset holders into a narrative that nostalgically looks back at a more economically reassuring past for heartland America. The goal? To rewind the globalization tape, which has benefited many Americans while leaving others feeling left behind. “We will offer low taxes, low regulations, low energy costs, low interest rates, and low inflation,” Trump promised during a rally in Arizona. “So everyone can afford groceries, buy a car, and own a nice home.”
The return to protectionism
Trump’s economic program appears as an extra-large version of what he presented in 2017. In a speech at the Economic Club of New York, Trump praised the McKinley Tariff Act of 1890, proposed by William McKinley, which drastically raised tariffs on many imported goods. During his presidential term, from 1897 to 1901, McKinley continued to use trade policy to protect national manufacturing by further increasing tariffs. According to Trump, this policy would have made Americans’ lives more prosperous.
In this context fits the main economic policy proposal of his election campaign: Trump wants to change the direction of trade policy. If, during his first term, the declared premise of his action was to limit unfair practices by China and Europe, for his second term there are no half measures. Trump wants to impose generalized tariffs on all imports, a 10% tariff on all imports (which could rise to 20% in some cases) and up to 60% on goods coming from China (with peaks of 100% for sectors such as automotive). The former President also announced that he would introduce a punitive 100% tariff on imports from countries that attempt to abandon the U.S. dollar as a reserve currency.
It wouldn’t be the first time the United States imposed tariffs on its imports. Average tariffs close to 10% were the norm until the 1970s. But such a radical and rapid policy shift would have deep consequences on the global trade map, considering the possible countermeasures by other countries.
Unprecedented tax cuts
In addition to tariffs, Trump’s flagship proposal is a generalized tax cut. During the campaign, Trump progressively raised the stakes, promising to extend all the benefits for businesses, investors, and high earners introduced by the Tax Cuts and Jobs Act of 2017. Among the provisions of that law was a significant reduction in the corporate tax rate, from 35% to 21%. Trump has promised to lower it further to 15% for companies that produce in the United States. This proposal contrasts with the Democratic program, which aims to raise the rate to 28% for businesses and for those earning more than one million dollars, along with other taxes aimed at the wealthy.
In addition to the corporate tax, Trump wants to maintain all the tax cuts he introduced in 2017, which are set to expire in 2025 (Kamala Harris announced she would keep them for incomes up to $400,000). The Republican candidate also proposes eliminating taxes on certain types of income, such as tips, overtime, and subsidies.
The message is clear and consistent with the more libertarian tradition of the Republican Party: no new taxes. On the contrary, he is upping the ante with an unprecedented tax cut package, expanding a measure that was the symbol of his economic policy during his first term. At the time, the markets welcomed these moves enthusiastically, and the prospect of rising corporate profits could again give businesses and markets a boost of confidence. The other side of the coin is the potential impacts on public finances.
Where will the resources come from?
Where would the resources for tax cuts and benefits come from? All estimates agree on placing the impact on the state coffers in the range of trillions of dollars over the next decade. For example, a study by the Committee for a Responsible Federal Budget, an economic analysis initiative from the University of Pennsylvania, estimates the federal budget cost of Trump’s promises—if fully implemented—at nearly $1 trillion annually in the median case1.
Part of this expense would be covered by tariffs. After all, trade revenues were the main source of government income for centuries before being replaced by taxes. What Trump is promising is a redistribution in this sense. However, in a modern economy, this type of rebalancing doesn’t seem entirely possible. To do a simple calculation, an indiscriminate 10% tariff on the $3.1 trillion worth of U.S. imports in 20232 could generate just over $300 billion a year. But these figures do not account for potential trade retaliations or a likely decline in imports in the medium term, which would erode the tax base.
To fill the gap, Trump said he would resort to a spending review: announcing that he would appoint a government commission, led by Elon Musk, to identify “trillions” of dollars in government waste. However, history suggests that such exercises rarely have a significant impact on spending trajectories. According to a Bloomberg analysis, even eliminating every dollar of non-defense discretionary spending, estimated at $9.8 trillion over the next 10 years, wouldn’t be enough to offset the projected costs of Trump’s large-scale tax cuts3.
The gamble, then, is all on growth. Even adopting optimistic forecasts, it’s hard to imagine that tax cuts will “pay for themselves,” as Trump’s campaign supporters claim. In a country where the federal deficit for 2024 is already expected to be quite large, standing at $1.9 trillion (roughly equivalent to Italy’s GDP), the issue of public accounts, which already keeps global investors on edge every year during budget approval periods, is likely to remain relevant. This is certainly a topic to monitor, as an increase in the deficit could lead to renewed inflationary pressure, potentially slowing down the Fed’s rate-cutting path.
A possible boost for businesses
That said, we shouldn’t fall into easy catastrophism, repeating the mistake of those who, in 2016, predicted a tragic outcome for the economy and global markets. First of all, the United States still has the ability to take on debt without jeopardizing its leadership in the global monetary system. Secondly, all fiscal policies are essentially redistributive. Trump’s plans would redistribute wealth toward businesses. Such a scenario could prove to be an efficient use of resources, as well as a positive one for investors.
American companies are among the most dynamic in the world and have shown in the past that they have the capacity and ideas to invest and grow. A recent seminal study on the Tax Cuts and Jobs Act of 2017 (Trump’s previous tax cut), which analyzed the tax returns of 12,000 companies, showed that businesses benefiting from the measures significantly increased their investments in the following years. However, the same study also highlighted the high costs of the measure (over $100 billion per year for public budgets) and showed that the most effective measures were not tax rate cuts, but rather some more sophisticated initiatives aimed at supporting investments4 (4).
Finally, it’s important to remember that any fiscal policy will have to be approved by Congress. It is likely that the parliamentary process will water down the proposal, as happened in 2017.
A different case is the choices regarding trade policy, which the President has the power to implement without parliamentary approval. In this case, we’ll have to wait to understand Trump’s real intentions. Especially when it comes to international policy, it’s not easy to distinguish concrete plans from provocations and threats aimed at strengthening his negotiating position. Trump has accustomed us to deliberately blurring these lines, a strategy he has successfully employed on several occasions. One example is how he handled the previous escalation of trade policy during his first term, after an election campaign in which he accused Beijing of cheating America. The effort was to find a legal basis for the tariffs, which were confined to certain sectors; the trade escalation was limited, and the protectionist policy was not only confirmed but was even expanded by the Biden administration, with recent tariffs on imports of Chinese electric vehicles.
We will see whether, in this case too, trade policy will be more pragmatic once the election campaign is over and the government’s activities begin. In McKinley’s time, protectionist policy helped develop American industry. However, even the president managed to change his mind before being assassinated by an anarchist during a rally. The optimism of the Belle Époque was fading, with rulers and statesmen falling victim to attacks. In a few years, one of these would impose the horror of war on millions of people.
In the meantime, if you have any questions about the impact of the 2024 Us election on your investments, you can submit them here. Our investment experts will try to answer your questions in our upcoming US Election Special articles and videos.
- The Fiscal Impact of the Harris and Trump Campaign Plans-Mon, 10/07/2024 – 12:00 | Committee for a Responsible Federal Budget (crfb.org) ↩︎
- https://www.worldstopexports.com/united-states-top-10-imports/ ↩︎
- Musk Efficiency Initiative Would Clash With Trump Spending Plans – Bloomberg ↩︎
- Lessons from the Biggest Business Tax Cut in US History (harvard.edu) ↩︎
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