US president elect, Donald Trump. (Photo by Chip Somodevilla/Getty Images)
The results of the US elections, and the expected economic policies of the incoming Donald Trump administration, have already had a significant effect on the global economy.
This has been expressed through various asset classes, including equities, bonds and currencies. Two of the linchpins of Trump’s policy are likely to be tariffs on China and market deregulation, the latter of which could provide further impetus to the US economy.
Trump made various policy proposals on the campaign trail that, if fully implemented, will have wide-ranging consequences for the global economy. But there is reason to believe that he might not be able to fully implement those policies.
The most significant of the proposals focus on tariffs, immigration, deregulation and taxes. In addition to tariffs on China, Canada and Mexico have found themselves in Trump’s crosshairs, despite the conclusion of a new trade deal in North America (the United-States-Mexico-Canada Agreement) during his first term, which sought to restructure, modernise and balance trade. The new deal replaced the North American Free Trade Agreement and came into force in 2020.
Brics countries also face the risk of tariffs if they de-dollarise and form their own currency, although this looks unlikely. South Africa’s finance minister Enoch Godongwana suggested as much in a recent interview.
Both the Republicans and the Democrats have been punished at the polls over the years, for two main reasons: the state of the economy (economic growth) and the state of the consumer (inflation).
Over the past 30 years or so, a change in the party holding the presidency has typically coincided with lower growth in the four quarters before the election, relative to the four quarters before the previous election. We saw this in 1992, 2008 and 2016.
The same has been true for inflation. When inflation has been relatively higher in the four-quarters before the election than the four quarters before the previous election, the incumbent party has been punished. We saw this in 2000, 2008 and now 2024.
Republicans will therefore be acutely aware of how Trump’s policies might affect the economy and inflation. There is broad-based consensus that the combination of the policies is both inflationary and negative for the economy.
Republicans will face midterm elections in two years and will defend the presidency in four years. The current marginal majorities in the House of Representatives (one seat majority at the time of writing) and in the Senate (three seat majority) serve as deterrents and might force a more rational policy to prevail.
To protect the Republican Party from losing the trifecta, Trump will have to manage inflation and maintain robust economic activity. That is one reason he could be hindered from fully implementing the measures that he hopes to.
On immigration
Trump has taken a strong stance on immigration. Over the past two years, the US has dealt with an excess labour demand problem. This environment meant that workers set wages, which has resulted in higher wage growth. THis was also, in part, caused by higher inflation and higher wage demand settlements.
Of late, the labour market has approached a balance in supply and demand. Trump’s proposed immigration policies would lead to a resurgence of the labour supply-demand mismatch caused by the deportation of available labour.
For instance, deporting 11 million immigrants would significantly reduce the labour market and, crucially, affect aggregate demand caused by the loss of consumers. Lower aggregate demand can damage corporate profitability, which would be exacerbated by rising wages resulting from labour supply shortages. This diminished corporate profitability and increased risk of layoffs in such an environment would harm the US economy.
Trump’s policies do attempt to answer for this through tariffs, tax cuts and deregulation. Tariffs encourage local production, tax cuts answer for corporate profitability, while deregulation makes for ease of starting companies and doing business.
Tax cuts in themselves create a fiscal predicament for the US, at a time when the debt-to-GDP ratio is elevated, and the budget deficit makes it more difficult to fund government spending. GDP hits from reduced aggregate demand will be additionally negative for fiscal sustainability.
Building enterprises takes time and capacity might not be immediately available for the imports lost. The same is true for deregulation, although there are benefits from reduced red tape.
Demand drives inflation and perhaps lower demand would give the US Federal Reserve more room to cut interest rates. But there is some contradiction because the tariff policies are expected to be inflationary and thus unhelpful when it comes to the extent to which the Fed can cut rates in the prevailing environment.
The relative ability of the Fed to cut interest rates should have implications on the extent to which consumers can spend and continue to contribute towards the performance of the US economy.
On tariffs
When it comes to tariffs, it’s worth understanding the inherent comparative advantages and absolute advantages in the Chinese economy. US business interests in China know that there are comparative advantages to having operations there. It is not only about lower wage costs but also about the interconnected networks and infrastructure in China. Of late, we have seen Chinese exports to the US fall, while Mexico’s exports to the US have increased.
Perhaps Mexico has found a way to take advantage of the situation, but it could find a capacity shortfall or, in the way Russia managed to continue to export despite sanctions, has been on-selling Chinese goods. Growth in Chinese exports to Mexico and increasing gross fixed capital formation (investment spending) in Mexico suggest as much.
There is also an argument that tariffs might not be inflationary if they come with a stronger dollar. This makes imports relatively more affordable and perhaps tariffs will not have the intended effect.
The last bastion
The last bastion holding against the Republican trifecta and the relative ease of implementation of Trump’s policies is the filibuster tradition in the Senate. Some legislation is subject to a 60-vote threshold to move from debate to a vote to pass the legislation.
Over time, the filibuster has been more frequently used, despite Republican or Democratic Party trifectas. The result of the invoking of the filibuster is that legislation is typically watered down, with various concessions made to reach the 60-vote threshold. Some of Trump’s policies could be subjected to this and might require bipartisan support.
Even if the US under Trump manages to go the full monty, it is unlikely that the Chinese authorities will grin and bear it. Recently, the People’s Bank of China kept rates on hold in what was regarded as a measured stimulus-response, given that the extent of stimulus might be in response to more concrete indications of what the US will actually do regarding tariffs, but also to understand the effect of recently introduced stimulus measures.
Recent announcements from the Chinese Politburo show that the country will step up “unconventional” countercyclical adjustments in 2025 through both monetary policy easing and fiscal expansionary responses.
The US is China’s single biggest customer — the US makes up 14% to 15% of Chinese exports — so Trump’s policies will have a significant effect on the demand for Chinese goods. This comes when China is grappling with a local demand-and-deflation problem. So, although the US and China can both bark, it is unlikely that only one will bite.
The proposed policies might not be fully expressed by the incoming Trump administration. He actively pursued his policy proposals in his previous first term so, even if there are reasons for a more measured implementation, we should take cognisance of the risks.
Policy proposals might be a “bark”, but if they are implemented fully, the “bite” will hurt the global economy.
Osagyefo Mazwai is an investment strategist at Investec Wealth and Investment International.