06282017

Talking Business

Jobs, trade, infrastructure, fiscal policy: What will Trump do to secure and enhance the US’s status as the world’s largest economic power?

© Roy Luck - Flickr Attribution 2.0 Generic (CC BY 2.0) https://creativecommons.org/licenses/by/2.0/

© Roy Luck – Flickr Attribution 2.0 Generic (CC BY 2.0)
https://creativecommons.org/licenses/by/2.0/

How sustainable is the United States’ new economic policy, to the extent that it has yet been revealed? The agenda is “America First”. What does Donald Trump say he wants to do in order to secure and enhance the US’s status as the world’s largest economic power? Immediately after the elections in November 2016, the US stock markets responded with euphoria. During his campaign Trump had promised extensive tax cuts. Though he did not present a coherent or comprehensive economic-policy program, he had a catchy slogan: “Make America Great Again!”
Trump boasted he would be “the greatest jobs producer that God ever created” and indicated he supported wage growth. He promised big tax cuts for businesses and the rich as well as for families and ordinary working people. He announced the biggest “tax revolution” since the tax reforms of President Ronald Reagan more than thirty years ago.
Trump said he wants to raise tariffs on imports and do more to shield the US economy from foreign competition in order to protect American jobs. He vowed to scrap two free-trade deals, the Transatlantic Trade and Investment Partnership (TTIP), and the Transpacific Partnership (TPP), and to renegotiate the North American Free Trade Agreement. He said he would focus on bilateral trade deals with other countries.
Trump also said he wanted to radically reshape trade relations between the US and China. He accuses China of artificially depressing its currency in order to attain unfair trade advantages. As to energy and climate policies, Trump announced radical changes. He wants to ease or reverse current regulations on the environment and emissions, champion fossil fuels and revive the coal industry. He has no problem with fracking, despite the controversy over the risk it poses to the environment.
Trump vowed to invest in infrastructure and spend many billions on upgrading airports, harbors, highways and bridges or building new ones. He also vowed to slash public debt, which amounts to about US$ 20 trillion. He calls it an “unfair burden” on future generations. He also said he would cut red tape for businesses.
Trump vowed a massive rise in defense spending and called on other members of NATO to spend more on their own defense. He said he would spend less on military operations overseas.

Delicious moments

All these promises and proposals are what triggered the euphoria on US markets in the aftermath of Trump’s election victory. The Dow (DJIA) reached a new high of 19,945 at the end of December. Even in the absence of legislation to implement these promises, the euphoria has not subsided. The Dow has remained above the 20,000 mark since February. Analysts predict Trump’s policies would trigger a boom in certain industries – construction, defense, IT, banking, energy, raw materials, gold mines and more.
One of the first things Trump did after taking office in January was to pull out of TPP, which had already been signed in early 2016 but not yet ratified, and to halt talks on TTIP, which were quite close to completion. For months he has been criticizing China and Germany for their large trade surpluses with the US. That has led to some delicious moments: At the World Economic Forum in January it was Chinese President Xi Jinping of all people who spoke out in favor of free trade, exhorting the global elites gathered in Davos to commit to open markets and international cooperation and to reject protectionism and isolationism.
German politicians and business leaders are also worried about trade relations with the US. Trump’s economic advisor Peter Navarro recently described Germany’s trade surplus with the US as a “serious issue”. He said it would be “useful to have candid discussions with Germany about ways that we could possibly get that deficit reduced outside the boundaries and restrictions that they claim that they are under.” That is a not so veiled accusation of currency manipulation and protectionism. In January Trump shocked German auto manufacturers with plants in Mexico when he said he intended to impose a 35 percent border tax on cars made in Mexico imported to the US.
As to tax, Trump has promised nothing less than a revolution. His advisors have proposed replacing the current 35 percent tax on corporate profits with a 20 percent tax on cash flow. Exports should be tax-free and imports should no longer be tax-deductible as business expenses. That would in effect mean that imports would become 20 percent more expensive and exports roughly 12 percent cheaper.

Powerful opponent

Even experts find all these ideas confusing. They have never been implemented before. The aim is to tax only what goes on within the US, tuning out everything beyond its borders. There would then no longer be an incentive for major US corporations to pile up profits in tax oases overseas. Some experts say that if other countries adopted the same approach it would mean the end of destructive tax competition between jurisdictions.
Trump may have big ambitions, but the US central bank, the Federal Reserve, could well prove to be a powerful opponent. In March the Fed hiked US interest rates and indicated there would be more rises. Clemens Fuest, the president of the IFO Institute for Economic Research in Munich, says higher interest rates are likely to cause problems in the US because it will eventually be almost impossible to finance more debt. The Fed raising US interest rates would also cause problems for the rest of the world because other central banks would have to follow suit and raise their rates. European states and companies with high levels of debt could be plunged back into crisis.
In an interview with the German magazine Börse Online, the chief economist of Commerzbank, Jörg Krämer, said he considers the US president to be a committed protectionist and foresees more barriers rising rather than new impulses resulting from free-trade agreement such as the now aborted TPP and TTIP. All this could prove to be a “catastrophe” for Germany because of its export-driven economy. Krämer considers the euphoria on US markets since Trump’s victory to be “short-sighted” and unsustainable. While endorsing tax cuts and infrastructure investment, he says the “Damocles sword of protectionism” is hanging over the global economy.
In an interview with the Frankfurter Allgemeine newspaper, Marcel Fratzscher, president of the German Institute for Economic Research (DIW) warned of a possible downward spiral in Germany should car exports to the US decline. He reckons 200,000 jobs depend on those exports.
But will all this come to pass? Trump is sure to encounter resistance to many of his initiatives – also from within his own Republican party in both houses of Congress. Europe and the rest of the world would, however, be well advised not to bank on the strength of that resistance. The G20 finance ministers meeting in Baden-Baden, Germany, in March ended with something of a shock when US Treasury Secretary Steven Mnuchin prevented the closing statement from including an explicit endorsement of global free trade as had been standard in earlier statements. It would seem that Trump indeed means business.

Photo Credit: © Roy Luck - Flickr Attribution 2.0 Generic (CC BY 2.0)

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