It was a Republican sweep. Republican Presidential nominee Mr Donald J. Trump claimed an unexpected victory in the race for the White House while the Republican party retained control over both chambers of Congress. With an effectively Republican-controlled Congress, the implication is President-elect Trump should have some latitude to implement his more radical policies. Accordingly, focus has shifted towards his policy agenda. While the details remain sketchy, his policy rhetoric throughout the campaign process offers a glimpse as to what to expect.
We consider four broad policy areas and their economic consequences below:
(1) Increase government spending and lower taxes
From the outset, President-elect Trump has inherited a fairly strong economy. Unemployment rate is near pre-crisis lows and inflation pressures are starting to emerge. With the economy running close to if not at full-employment, there seems to be little spare capacity left to absorb more demand-led stimulus, meaning that any expansionary fiscal policy undertaken at this time would be inflationary. Should inflation rise rapidly, the Fed may have to act by increasing interest rates at a faster pace than was initially intended.
Taken at surface value, Trump’s debt-led infrastructure spending plans may give a much-needed boost to the economy in the short-run, but it may also lead to a great deal of long-term pain if GDP growth does not pick-up substantially which could mean running Bush-era-like deficits for a prolonged period of time, jeopardising longer- term fiscal health.
To be clear, investing in infrastructure is not necessarily a bad thing. In fact, it is necessary and has long-term productivity benefits. In 2013, the American Society of Civil Engineers (ASCE) released a scorecard of America’s infrastructure in which they gave domestic infrastructure an overall grade of D+ and stated that an estimated US$3.6 trillion in investments were necessary by 2020. Beyond just the usual highways, bridges and tunnels, the report recommended drastic improvements to the electrical grid, telecom and water infrastructure.
Hence, the longer term economic implications of such ambitious fiscal spending will depend heavily on the actual areas of infrastructure investment. The focus should be on projects that add to overall economic welfare, meaning selecting projects with long-lasting public benefits that can also help improve private sector productivity.
Chart 1: Some room for deficit spending
(2) International trade policy: Yes to protectionism
Throughout the stretch of his election campaign, President- elect Trump had adopted a tough stance against free trade, promising to reject the TPP, renegotiate NAFTA and even threaten to pull out of the WTO. He singled out China and Mexico as the key countries that had unfairly gained from badly negotiated free trade deals and threatened a 45 per cent and 35 per cent tariff on Chinese and Mexican imports respectively.
The hope is that talk of such a tariff war is just a negotiating stance to reduce Chinese export subsidies and improve U.S. access to Chinese domestic markets. Time will tell, but should his words turn into policy, it could very well incite a trade war and increase the risk of a global recession.
These are risks that we have to consider seriously in part due to the powers conferred on the Office of the President of the United States of America. While Congress has oversight over fiscal policy, they have less power to reign in Trump’s protectionist aims. Over the years, Congress has delegated much power to the executive branch in areas of international economic policy. In this case, President- elect Trump has broad powers to impose tariffs under widely defined circumstances and withdraw from trade agreements.
Ultimately, the concern is Trump’s aggressive anti-trade policies and ensuing trade wars could lead to a virtual collapse in already slowing world trade, spurring a global recession at a time when policy options in the developed world are sorely limited.
Prospects of higher U.S. tariffs would be a clear negative for Emerging Markers, especially the Asian region which depends highly on trade for growth. The impact would also be damaging for commodity demand and prices.
Chart 2: Global trade growth has been slowing
Beyond just Emerging Markets, Mr Trump’s protectionist agenda is unlikely to benefit the U.S. economy in the long- run given prevailing complexities in the global supply chain. Protectionism would mostly hurt local exporters with deep business linkages to foreign markets and also companies that rely on inputs imported from overseas. The damage from lower output of high productivity exports is unlikely to be offset by increased production of lower value-added goods substituting for imports. The higher price of imports would also hurt consumer spending and therefore compound the risk of a recession. In the longer- term, protectionist policies that shield firms from overseas competition could be bad news for productivity growth as well. In essence, no one wins if trade were sacrificed.
(3) Regulatory objectives: Less is more
President-elect Trump’s pro-business, less-is-more approach to regulations could be a plus for longer-term economic growth. In particular, he has promised to jettison intrusive federal regulations, substantially lower and simplify the corporate tax system and reduce the cost of regulatory compliance.
Lower corporate taxes should improve expected returns on investments and lead to higher private sector investments which could go far to improve labour productivity. Notably, non-residential, private sector investments have been quite weak and have weighed on growth for many successive quarters. Lower regulatory burdens should improve entrepreneurship and business sentiments as well.
Among the sectors which could heavily benefit from Mr Trump’s cavalier attitude towards regulations are financial services, pharmaceuticals and the domestic energy sector.
More specifically, companies which derive a large proportion of their revenues from the domestic economy would benefit the most, given Trump’s more hostile approach to international trade.
There is still great uncertainty over Mr Trump’s plans on immigration. Publicly, Mr Trump has adopted a hostile stance against immigrants, threatening to deport some 11 million illegal immigrants and implementing tighter immigration laws. The labour market is already functioning close to full employment and wages are rising at the fastest pace in seven years, so policies aimed at cutting the labour supply would only hasten the rate of wage growth and therefore inflation. These would have great ramifications to business costs. Export-oriented businesses will also be affected from Mr Trump’s anti-trade policy objectives which could crimp future company earnings. In the short-run, uncertainty over the extent of potential policy disruption could lead to caution on the part of businesses as they await clarity from the Trump administration.
(4) What will happen to the Federal Reserve
Trump has been awfully critical of the Fed’s low interest rate policy for much of his election campaign, with Fed Chair Janet Yellen receiving the brunt of his attacks. Yet, it would certainly be preferable for the Fed to keep interest rates low to accommodate his fiscal ambitions.
At this juncture, Trump’s ability to influence monetary policy is still unclear – Ms Yellen’s term as chair will run till February 2018 and the Federal Reserve Act only permits the U.S. president to remove a Fed governor “for cause”. In this case, the Federal Reserve’s independence seems fairly robust and would require legislation to have a big impact.
Thus, Trump would unlikely be able to impact Fed policy directly, but may still exert some influence through appointments to the Fed’s board of governors (two vacancies at the moment) as well as the choice of a new Chair when Yellen’s term ends. He may favour candidates that are more pliable and sympathetic to his policy objectives.
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