Trump’s return as 47th President of the world’s largest economy alerted global leaders, investors and diplomats to wait and see what the unpredictable President will do. But the appointments that he has already made to the key positions make it amply clear that he is in a tearing hurry to implement his campaign promises—tariffs, tax cuts and deportation of migrants—which are bound to create economic uncertainty.
The first thing among his planned actions would perhaps be imposing tariffs of up to 60% on imports from China and 10 -20% on imports from the rest of the world. For, he believes that any country that has a large trade surplus with America is ‘cheating’ Americans. This imposition is likely to get transmitted to consumers triggering a return to inflation build up domestically. This price rise in the US will in turn seep through globally as the US commands a large export share of technology and agricultural products.
The next in line is perhaps, tax cuts. Trump intends to extend the tax cuts offered earlier for individuals that are due to expire in 2025, and to even lower the corporate taxes from the current 21% to 15% for companies that manufacture their goods in the US. This is certain to further worsen the fiscal deficit that has already touched 6.4% of GDP for FY24, which is around 3 percentage points higher than the average of the past 50 years. Any further expansion will only lead to sucking of global savings by the US, which is more likely to tighten the global financial conditions. This, coupled with higher inflation and relatively higher policy rates, will automatically increase the cost of money. Over it, as the US Treasury bills are considered as the safest investment in the world, money will flow to US, strengthening the dollar. This would trigger volatility in global currencies.
The third agenda is mass deportation of illegal immigrants from the US. This is also likely to have an economic impact of triggering inflation, for some economists believe that the influx of illegal immigrants into the US labor force kept wage-inflation under check. So, to summarize, Trump’s economic agenda, though apparently appealing, might as well lead to unintended consequences. The slump in the bond market witnessed immediately after the election results is perhaps a pointer to this phenomenon.
It is China that runs the biggest trade surplus with the US, followed by Mexico and Vietnam, and these countries will be hit hard by the uncertainties. Even India is in the hit list, though not to that extent. China may, however, cut its prices and even devalue its currency to circumvent the tariffs. Simultaneously, it will also redouble its efforts to penetrate further in the global South to protect its manufacturing base. Amidst these uncertainties, it is India with its inefficient manufacturing base and weak rupee that is likely to face more economic stress. For, with a strong dollar, our imports will cost dearer. The management of resulting trade imbalances is sure to pose a challenge for India.
Trump has also promised to raise oil and natural gas drilling, which means he is not that serious to abide by climate goals. Therefore, the fear among the climate policy advocates that Trump may once again withdraw from Paris Agreement and may even take tougher steps, as he did in his first term as President, and hinder the global decarbonization efforts, is perhaps all set to turn true. The fall out of the world’s biggest historic carbon emitter watching from the margins would be: emboldened leaders of other countries may also slowdown their efforts, and all this cumulatively might impact global energy transition for decades to come.
Next is his foreign policy initiatives: He may not outrightly abandon the protection of Europe, but may let NATO go dormant. It means Europe has to fix itself any military threat that it faces. The two military powers of Europe—UK and France—are passing through their worst Budget crisis. Germany’s economic outlook is equally scary. No wonder, Trump may come up with a peace proposal for Ukraine that involves Ukraine ceasing its right on the chunk of land already occupied by Russia. In this gloomy scenario, Putin may emerge as Europe’s problem.
These are some of the probabilities, though there are others
as well. Nonetheless, one thing is certain: the threat of uncertainty.
