QNB expects Trump’s “second presidency” to bring major changes to the US economic agenda, especially in the areas of finance, trade and immigration.
Overall, the proposed agenda should have mixed effects on growth, with fiscal policies set to boost economic activity, while trade protectionism and tougher immigration measures would weigh on GDP growth, QNB’s weekly report said.
The report pointed out that the US elections are important not only at the domestic level in the US, but also reverberate around the world due to the power, wealth and influence of the United States. With a nominal GDP of $28.8 trillion, far more than any other major economy, and a household net worth of more than $150 trillion, the United States is at the heart of the global movement of information, capital, goods and services. No other country plays a similar role in determining the direction of the global economy.
The report stressed the need to understand the repercussions of the US elections on the global economy, especially since both main candidates (Donald Trump and Kamala Harris) adopt different economic agendas.
The report examines three key points about Trump’s economic agenda. First, if elected, Trump would be aggressive on fiscal stimulus. In fact, during his presidency, tax cuts and spending increases have pushed the government deficit from a below-average 3.6% of potential GDP to 6% in 2019, before the pandemic forced a broader deficit.
Trump is currently proposing to cut the corporate tax rate from 21% to 15%. It’s also worth noting that if Trump wins the presidency, he would likely extend the individual income tax cuts he signed into law in 2017, which are set to expire in late 2025. Together, these fiscal measures are expected to cost $3 trillion to $4 trillion in revenue, widening the already large deficit.
But this should provide a boost to the economy, spurring investment and consumption. It should also support longer-term US Treasury yields and flatten the yield curve, as wider deficits and higher debt-to-GDP levels can scare off some fixed-income investors and require higher duration premiums.
The second point analyzed by the report related to the possibility of Trump relaunching his protectionist agenda, as he advocates imposing higher customs duties of no less than 10% on imports from the rest of the world and 60% on China in particular.
If such measures are fully implemented by a Trump administration if elected, and not used solely as leverage in trade and investment negotiations, they are likely to cause a significant shock to trade and investment flows, with other countries likely to impose retaliatory measures, potentially leading to a “beggar-thy-neighbor” spiral of competitive currency devaluations and tariff hikes, the report said.
More importantly, the report notes, higher tariffs would not generate enough revenue to cover the cost of the tax cuts. The tariff hikes are estimated to generate an additional $1.5 trillion in revenue, less than half the estimated cost of the proposed tax cuts. In terms of high-level impacts, higher tariffs would negatively impact real income in the rest of the world and in the United States, as they would raise the costs of final goods and services. But they would likely support domestic investment and manufacturing, as supply chains would have to be reallocated and new arbitrage conditions would be created in favor of domestic producers.
Addressing the third point, the report pointed out that Trump’s stance on immigration could also have major repercussions on the country’s demographics and labor markets if he returns to the White House. He proposes the mass deportation of about 15 to 20 million illegal immigrants, in addition to restricting the flow of legal immigrants who hold entry visas.
The report showed that this is dangerous, even for a country with a population of more than 335 million and a labor force of 162 million workers. It is unlikely that this law will be enacted on this scale if Trump is elected, and implementing a smaller deportation program would also contribute to tightening the labor market, especially for low-wage hourly workers. In the medium term, this could lead to higher average wage growth, creating additional inflationary pressures. And unfavorable demographics would negatively impact growth.
