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Inevitably, there would be a response by America’s trade partners to Trump’s tariffs, as there was by China and the Europeans to his earlier trade wars. Retaliatory tariffs and trade restrictions would be almost inevitable, harming the global economy and again fracturing relationships that have been repaired by the Biden administration.
If he wins the presidency, Trump plans, over his four-year term, to ban all imports of essential goods from China.Credit: Bloomberg
The last thing a fragile and slowing global economy needs is a full-scale trade war. In the 1930s, when an isolationist and protectionist America raised its tariff walls and others retaliated, it presaged the Great Depression and eventually World War II.
Tariffs are essentially an invisible tax on US consumers in the form of higher prices. The cost of the tariffs Trump imposed on $US360 billion of China’s exports has been variously estimated at between $US50 billion and $US80 billion a year, along with the loss of about 250,000 jobs. Compensation to American farmers alone amounted to more than $US28 billion.
The Trump plan envisages using the revenue raised from the new tariffs to fund another round of tax cuts while extending the existing tax cuts enacted in his first term, with the reductions for individuals in that first round scheduled to end in 2025. In effect, he would be taxing the poor and middle class via the higher cost of consumer goods to fund more tax cuts for the rich.
The 2017 tax cuts are estimated to have added more than $US2 trillion to America’s debt over a decade, with their extension lifting that number to about $US3.5 trillion.
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The 2017 corporate tax cut reduced the US corporate tax rate from 35 per cent to 21 per cent. If his second round of corporate tax cuts were to materialise, it could be lowered to the 15 per cent rate that Trump originally wanted in 2017. That would eventually add trillions more to US debt.
Between them the tariff and tax policies would be inflationary. The Peterson Institute for International Economics has estimated that the additional tariffs could add two to three percentage points to the inflation rate. If the second round of tax cuts were implemented, it would also probably add to inflation.
Whether that would lead to higher interest rates than would otherwise be the case might also be determined by the new administration.
Trump tried, and failed, to stack the Federal Reserve Board with unconventional nominees (a pizza company chief executive, an economist being chased by the IRS for unpaid taxes and an economist who advocated a return to the gold standard) and threatened to sack Jerome Powell if he didn’t lower US rates in the lead up to the 2020 election.
With sharemarkets near record highs and unemployment at record lows, the US doesn’t need a radical shift in economic policies.Credit: Bloomberg
Inevitably, if a second term were to eventuate, he’d try again to bring the Fed under his thumb, just as the Fed appears to have gained control over the US inflation rate. If his tariff and tax plans were to rekindle the inflation rate, the Fed would be under immense pressure from the White House to let it rip.
Those aren’t the only source of prospective inflationary pressure. Many American businesses, particularly its agricultural sector, rely on low-cost immigrant labour. If Trump does pursue his plan for “the largest domestic deportation operation” in US history, it would inevitably lead to higher labour costs for those sectors, higher prices for consumers and an increase in the inflation rate.
The US isn’t in obvious need of a radical shift in economic policies.
Unemployment is, at 3.7 per cent, around historic lows. The sharemarket is near record highs. Nominal GDP growth has been running at close to 5 per cent and the inflation rate has been trending steadily, if slowly, down towards the Fed’s target range. Interest rate cuts are expected this year.
Biden’s Inflation Reduction Act (which Trump would abolish), with its incentives for green and other strategic investments, has triggered a significant increase in domestic investment, as has the “re-shoring” of some manufacturing in response to the experience of the pandemic.
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Trump and the trade hardliners advising him on his trade policies see the US trade deficit (which widened during his first term, despite his tariffs) as a measure of weakness. They think foreigners are ripping America off and costing US jobs, the latter of which is true to some degree, although those jobs tend to be low wage within low-tech manufacturing. Trump wants to end the trade deficits.
Those deficits are to a significant degree a function of the US dollar’s role as the world’s reserve currency, with dollar dominance benefitting America both strategically – it can and has been weaponised against rivals like Russia and China – and financially, through interest rates that are lower than they might otherwise be.
The dollar’s dominance is under creeping, long-term threat from a concerted effort by China and Russia, the “global south” countries and even the Middle East to undermine its primacy in international trade and finance. Trump’s second term agenda, if implemented, would probably help their cause.
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