If you’re studying, or preparing to study economics, you might know already that the ascension of Republican candidate Donald Trump to the American Presidency represents a significant break in economic policy with the 8 year tenure of Barrack Obama. Trump has promised to slash taxes, boost infrastructure spending, repatriate jobs to America from overseas, renegotiate international trade deals and take a hard line with China, and has already taken a number of significant actions in the past few months. Representing a third of global GDP (Gross Domestic Product), the USA is the world’s largest economy and investment destination, and so what happens to America’s economy has profound ramifications for the rest of the world.
For economics students, Trump’s presidency is a great opportunity to study how government policy can affect the economy, with policies like deregulation, tax cutting and protectionism, over the next four years. For now, here’s what economists are saying Trump’s presidency could mean for the world’s economy.
A combination of tax cuts, infrastructure spending, financial de-regulation and corporate-friendly policies could boost economic activity and investment within the US. If banks are allowed to loosen lending standards, it’ll put more money into the hands of the average US consumer. This growth, will, however, be accompanied with an increase in inflation, becoming more dramatic as the US nears full employment, which could be storing up problems for the future. While deregulation in the financial sector also tends to boost short term growth, it’s worth remembering that this tends to lead to the bad practises which led to the 2007 financial crisis in the first place, from which the world is still struggling to recover a decade later.
Trump has made clear his desire to see American companies shift jobs from overseas to the US and cancel or amend free trade agreements which he believes are detrimental to the US economy. He decided to withdraw from the Trans-Pacific Partnership agreement which had been agreed by the Obama administration but never ratified by Congress. He has also threatened to impose tariffs on US companies that move production overseas. These policies may help the US at the expense of developing countries, whose economic models are based on exporting manufactured goods. The US is the biggest global market with a trade deficit of $500bn – something Trump wants to address. This means that any moves to restrict imports from overseas will hurt export-dependent countries like China and Bangladesh.
Trump’s stated aim of bringing manufacturing jobs back to the US from Asia is popular with working class voters. Forcing American companies to open factories in the US would likely have some benefit for the US economy. However, many experts say this is unlikely to bring the significant increase in manufacturing jobs that Trump promises. Automation is becoming increasingly sophisticated in factories, and this has already replaced most manufacturing jobs in developed economies. Only in very cheap labour markets is it more economical to use human workers rather than robots, which become more capable, efficient and cost-effective with each passing year.
It is unlikely, therefore, that manufacturers would employ relatively expensive American workers on anything like the scale they would in developing countries. Imposing tariffs on imports in the attempt to promote industries to relocate to the US will also inevitably mean an increase in costs for many consumer goods, something that will push up inflation and hurt working and middle class Americans the most.
Additionally, imposing tariffs on imports from other countries could cause a tit-for-tat trade war with other countries, as they impose their own tariffs on American exports – something which has been borne out before when America imposed tariffs on Chinese tires. Protectionism tends to be bad for global economic growth and usually causes an increase in political tensions.
Trump’s policies of tax cuts and increased military spending will, certainly in the short to medium term, have the effect of increasing the US budget deficit. Vigorously enforcing US immigration law could be incredibly expensive too, in terms of federal spending and economic losses. With the US government in debt to the tune of $20 trillion, any loss of confidence in the American government’s ability to pay this debt back could have enormous consequences. America’s debt mountain risks growing to entirely unsustainable levels, and ideas that Trump has floated about buying the debt back at a discount would effectively amount to a default – similar to what almost happened to Greece.
At the end of the day, though, the truth is nobody really knows how much of Trump’s rhetoric will be translated into reality, and what the effect of his presidency will be. More than anything, the catch-phrase for the next few may very well be ‘unpredictable’.
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