What will the economic impact of the Donald Trump presidency be? I take five big policy areas and five economic blocks and try and do some open thinking. The five policy areas I consider are: Tariffs, immigration, tax, oil and emissions and the war in Ukraine. Global Gross Domestic Product (GDP) in 2024 is expected to be $105 trillion. The US ($29.2 trillion), the European Union, or EU ($19.4 trillion), China ($18 trillion), Japan ($4.1 trillion) and India ($3.9 trillion) make up over 70% of it. How will Trump’s stated policies impact these economic blocks?
Tariff: On the campaign trail, Donald Trump said that tariff was the most beautiful word in the dictionary. He has promised a 10% tariff across the board on imports into the US and a whopping 60% tariff on goods of Chinese origin and this week announced a 25% tariff on Mexico and Canada, his largest and third largest trade partners.
This will be a very consequential move and will lead to higher consumer prices in the US on goods including gas, cars, and agricultural products. It is also likely to halt the current rate cut cycle of the Federal Reserve (Fed). Tariffs like this will hurt exporting nations — China, Mexico, and Canada — and for an export-led economy like China slow down GDP growth. In addition, China has massive overcapacity in many manufacturing segments which will push it to dump goods at throwaway prices in other markets if the US gets closed.
The EU will hurt too, especially exporting Germany and outside the EU, Japanese exports may also get hit. There may be opportunity for tariff arbitrage by some countries of replacing Chinese exports to the US but overall, one can expect inflationary pressure in the US, which will slow rate cuts and see a large flow of dollars back to the US giving the Dow and the dollar a lift at least for the next two years. China, the EU and Mexico will face headwinds and their economies will likely slow down.
Immigration: Trump has promised massive deportation of illegal immigrants on his first day in office. If large-scale deportation happens, the labour market will tighten raising wages, putting more pressure on prices. Again, making Fed rate cuts more difficult with all its global implications.
Tax cuts: Trump has promised to extend the tax cuts that he had introduced in his last term as president. He also has promised reducing corporate taxes from 22% to 15%. Given the fiscal deficit in the US is currently at 6%, a further reduction in taxes will put severe pressure on the fiscal deficit. To pay for this he intends to cut government expenditure — a job he has given Elon Musk and Vivek Ramaswamy — by $2 trillion. It’s unlikely they will succeed in cutting this much. So, by 2027, the deficit will increase, inflation expectations will rise, bond markets will panic, the dollar will weaken, and interest rates then may need to be raised rather than cut to steady the ship. If the US Federal Reserve raises rates, the global interest rate environment will harden with all the allied consequences.
A separate strand to consider here will be the impact on crypto currencies, a favourite on the West Coast. Musk likes it but so will countries such as Russia, China, and Iran wanting to escape the dollar and the ever-present threat of US sanctions. So cryptos may rise.
Fracking and oil: The cry of “drill baby drill” from Trump rallies was heard by all. This will give fracking a fillip. The US will become the largest producer of oil. If the Ukraine war is ended quickly and sanctions on Russia lifted, then Russian oil will also be part of the “formal” supply. This will increase oil supply; as global GDP slows down, oil prices should soften. This will negatively impact oil producers and benefit oil importers including India. But if Saudi Arabia and the United Arab Emirates see their budgets contract, it may have other spill-on effects to their spending plans and the number of immigrant workers they need.
Ukraine and West Asia: Trump is not likely to pay more to Ukraine and will seek a settlement. Depending on how this happens, the EU’s relations with the US will sour. And should the EU continue to support Ukraine, then one may not be surprised by a major EU pivot away from the US to China. Germany, France, and Italy, all benefit from the Chinese market for their goods. Thus, Russia may move closer to the US and away from China. This is speculative but may become possible. I find it hard to interpret Israel and West Asia. Trump will be all in with Israel. First signs appear to signal a stand down by Israel in Lebanon and Iran may seek diplomacy due to its weakened situation.
Trump seems unlikely to come after India, as he likes Prime Minister Narendra Modi and Indians. That does not mean he will not be transactional. On balance, India will gain by lower oil prices. India will also benefit by being seen as an alternative to China for offshoring. Some Indian exporters may be able to displace some Chinese exports into the US taking advantage of tariff arbitrage.
But, equally, a higher interest rate regime will be bad for the private sector capex cycle, which was gaining steam. India will also need to be ready to deal with dumping of goods from China (steel, chemicals, electronics) due to its overcapacity. H1B visas may be harder to get for the US and there will be tariffs on Indian goods too. But as NVIDIA CEO Jensen Huang urged, India should not want to stay a global back office and should use its talent to ascend and become a front office with arterial intelligence (AI). The outlook will become clearer early next year, in the meantime CEOs need to be alert and agile and react quickly to the changing global environment.