Donald Trump’s victory in the US presidential election is often characterized as a surprise. Ahead of the November vote, the opinion polls certainly suggested Hillary Clinton was set to win. Some bookmakers even paid out early, so adamant were the television pollsters that the former first lady was heading back to the White House.
To the overwhelming majority of the Western world’s political and media class, then, Trump’s victory was a shock, as well as shocking. Having reacted slack-jawed to “The Donald’s” lurid campaign rhetoric – with its talk of “mass deportations” and “sky-high tariffs” – many professional white-collar US voters, including the media, figured that there was no way he would become president. To paraphrase the pithy observation of The Atlantic’s Salena Zito, they took Trump’s pre-election pledges literally, but not seriously. However, tens of millions of ordinary Americans thought precisely the opposite, taking Trump seriously but not literally. Swathes of blue-collar workers and multi-job suburban strugglers, while sensing Trump could beat Clinton, assumed the policies wielded in his campaign stump speeches were largely pre-election bluster.
The result is that, as the year begins and with inauguration day set for January 20, much of the “establishment” – in America and across the Western world – remains aghast at the thought of “The Donald” as president, but has no clue what the business-man-turned-reality-TV-star-turned-leader-of-the-free-world will actually do. After all, the rural and semi-urban swing-voters who backed him, having spotted his White House bid could go all the way, were probably also right to suspect that many of Trump’s campaign pledges won’t actually come to pass.
From the moment Trump won, events have confounded most mainstream forecasts, including those warning of instant economic meltdown. Despite the shock of his victory, and an initial 800-point plunge, the Dow Jones Industrial Average closed up the day after he was elected. The same equity benchmark, at the time of writing, has since risen 9% more.
With the economic programme of the incoming 45th president amounting only to a series of slogans, financial markets seem focused not on Trump’s tub-thumbing campaign promises to “deport 11mn illegal immigrants” and “build a wall against Mexico”, but on more low-key statements about infrastructure spending and tax cuts.
Trump’s fiscal spiel, so far, is reminiscent of Ronald Reagan. Like his 1980s predecessor, Trump wants to “ride the Laffer curve” – lowering tax rates sharply in the hope that faster growth and better compliance will raise more revenue. America’s rate of corporation tax, we heard during the campaign, will fall from 35% to 15%, with personal tax rates “down for all income groups”. Consider, though, that America’s national debt has doubled to $16,000bn-plus under President Obama – a development Trump repeatedly criticized. It’s also clear that if the Laffer curve exists – the Reagan-era evidence is mixed – it doesn’t kick in at once.
Sharp tax cuts, then, in the short run at least, cost money. America’s deficit will get a lot bigger before it gets smaller, which means borrowing will rise further and could even accelerate. On top of that, Trump’s pledge to “more than double” Clinton’s proposed infrastructure spending on roads and bridges, while extending massive tax credits for private construction spending, will generate further floods of red ink.
When Obama tried borrowing more, a Republican-controlled Congress stopped him, sparking the 2011 debt-ceiling crisis, with the US looking down the barrel of a potentially cataclysmic sovereign default. Ironically, the same could happen to Trump – even with Republicans now controlling both parts of the US Congress. House Speaker Paul Ryan says he’ll work “hand in hand” with his new president. Remember, though, Congress is packed with fiscally conservative GOP members who think Trump is an imposter who has hijacked their party.
If enough hawkish Republicans feel Trump is acting recklessly, then they may, while backing tax cuts, not give him his way on spending. Having promised to create 25mn new jobs over a decade and “double economic growth”, Trump-voter expectations are skyhigh. But if lower taxes don’t work quickly, and borrowing spirals amid sluggish growth, America’s already atrocious public finances will get even worse and Trump’s fiscal hands could be tied. And if that very spending boost financial markets are banking on doesn’t materialize, expect the Federal Reserve to come under enormous pressure not to repeat December’s interest rate rise.
While Congress can defy the White House on fiscal policy, there are no such checks and balances on trade. This is the area of economic policy where the prospect of a Trump Presidency is, on the surface, most alarming – but also where his literal campaign promises are probably least likely to happen.
The president-elect says he wants huge 35% tariffs on imports from Mexico and even bigger 45% import levies on Chinese products to “stop foreign workers stealing American jobs”. Could Trump take such a retrograde step, particularly against China, an economy second only to America in size and which, on some measures, now eclipses the US?
The Chinese would almost certainly retaliate. Commerce between the world’s two economic powerhouses would crater. Diplomatic relations, already fragile given tensions in the South China Sea, would shatter. Anyone who doubts how quickly trade wars can develop, with economic rationality giving way to political chest-beating and mutual recrimination, should study the disastrous Smoot-Hawley tariffs of the 1930s. International relations collapsed and America was plunged into the Great Depression, shaking capitalism to its core.
If Trump takes serious liberties with US fiscal policy, we could see bond market squalls and related equity market turmoil, damaging growth and jobs. Congress will likely step in before that happens. If he re-writes US trade policy, though, positioning America as a protectionist aggressor, Trump could provoke widespread economic stagnation and international tension, ushering in a far less stable world order.
My hunch is that, as a businessman, Trump ultimately believes in positive-sum games – “if I do a deal with my rival, we can both benefit”. Career politicians, in contrast, usually think in zero-sum terms – “my rival cannot be allowed to gain under any circumstances and his loss benefits me unequivocally”.
The world has, for several years, been marred by rising protectionism. An inexperienced president is now about to enter the White House, on a protectionist ticket. This is a cause of concern. Since taking office, Trump has appointed Peter Navarro to head a newly-established White House National Trade Council, an economist who has urged a hard line against China. Beijing describes this appointment as “no laughing matter”.
Trump isn’t everyone’s idea of an ideal US president, but for all the bombast and tasteless campaigning, he isn’t stupid. The bottom line is that a trade war with China – and her growing band of commercial allies across the emerging markets – would do serious harm to the US economy. Not only would global growth slow, impacting America, but domestic inflation would rise given heavy reliance on consumer good imports from China. America’s heavy use of overseas finance, not least from Beijing, means Treasury yields would also spike, risking a disastrous bond market crash.
Trump’s talk of “taking on the Chinese” – just like his plans to “deport millions” and “put up that wall” – are most likely the opening gambit of a negotiator in what will turn out to be a prolonged bout of deal-making. Millions of Trump voters do indeed want immigration slowed and US domestic markets to be better protected. To some degree, that may happen. But pushing that through means taking on enormous commercial vested interests, both at home and abroad, that are doing nicely under the status quo.
Trump’s pungent pre-election rhetoric, then, is partly about convincing angry rustbelt voters he “gets it”, but also indicates to the business world that something now has to give. Maybe he means it, maybe he doesn’t – we shall see. But if the incoming president is serious about imposing new barriers to trade and immigration, he’ll be kept in check by the realization that if he goes too far, and does anything too rash, confidence will take a serious knock – and the still extremely fragile US recovery will be stopped in its tracks.
Under that scenario too, if Trump does opt for policy insularity, the resulting economic fallout will almost certainly scupper the Fed’s aim of multiple 2017 rate rises.
A new American century?
This new year isn’t just the 100th anniversary of the Russian Revolution. It also marks a century since America entered the World War 1, an act that transformed relations between the “New World” and Europe, declaring that America – then newly-crowned as the world’s largest economy – would from now on be calling the shots on the world stage.
It was this US military intervention in 1917, followed by President Woodrow Wilson’s audacious “14-point” speech early the following year, which marked the start of the “American century” –with the US going on to lead a “liberal coalition” of Western democracies, aided by client states elsewhere.
Under former president George W Bush we saw the limits of America’s military might in both Afghanistan and Iraq. Under Obama, America’s economic hegemony has been increasingly challenged not just by China, but also by a coalescing group of increasingly strident emerging markets. Now, the incoming president hopes to “make America great again”, but with his country taking a more inward-looking, if diplomatically more assertive, global role.
When it comes to blocking trade and seriously challenging America’s status as an immigrant nation, taking Trump’s campaign rhetoric literally, and turning it into action, will prove not only practically difficult but economically counter-productive.
Turning America’s back on the World Trade Organization – and even the United Nations – will likewise prove an act of commercial self-harm. And while Trump still talks of “kicking Isis in the butt”, it’s undeniable that, for all America’s patriotism and military prowess, the US electorate is tiring of foreign interventions.
Already, with his election victory in the bag, and his inauguration looming, Trump is trimming his rhetorical sails. He has backed away from his promise to “eliminate Obamacare” – no doubt given the complexity of social reforms and the howls of protest when such programmes are scaled back. His call for a total ban on Muslim immigration has also been toned down, with the president-elect now talking of a temporary suspension from nations “with a history of exporting terrorism”.
When Ronald Reagan was elected, many observers derided him, given his previous status as a B-movie actor. Yet following Richard Nixon’s Watergate disgrace and diplomatic drift under Jimmy Carter, Reagan restored America’s strong global leadership, pumping up the arms race to such an extent that the fragile Soviet economy couldn’t cope, precipitating its collapse.
While a deeply unconventional candidate like Reagan, the new president is unlikely to share his Republican predecessor’s strategic success. Trump’s victory was in part a symptom of the US no longer having its own way in the world, both economically and militarily. Yet his stint in the White House, could see an acceleration of that trend, which began under Bush and continued under Obama.
Trump’s tax cuts may happen, but his “mighty spending boost” looks vulnerable. Either way, if he avoids a financial crash, US growth should continue. If his trade and diplomatic rhetoric becomes reality, though, then not only will the US economy be seriously damaged, but broader global growth too.
“It’s the economy, stupid,” as Hillary Clinton’s husband once said. That’s the main reason Trump’s rhetorical bark will ultimately prove scarier than his presidential bite.
Liam Halligan is Editor-at-Large of bne IntelliNews. Follow him on Twitter @liamhalligan