Two of the many pivotal campaign pledges of the Republican camp that sent Donald Trump emphatically back to the White House were tax cuts, both individuals and corporate, and deregulations. As discussed below the promised lowering of taxes is likely to trigger inflationary pressure in the medium-term or at least will be a contributor but it appears that for now the planned decrease of corporate tax rates to 15% and lenient scrutiny of corporate America triggered a euphoric buying spree in US equities. The Nasdaq Composite Index gained 5.74% on the week and the S&P 50 Index briefly powered through the 6,000-point milestone and ended the week 4.66% higher. Trump’s isolationist policies are aptly mirrored in equity markets as growing anxiety of trade wars between the US and basically anyone who records a trade surplus with it keeps the rest of the world under pressure. Whether this isolation remains splendid or otherwise is ambiguous.

In the immediate aftermath of the election oil was dancing to the tune of the dollar but in the second half of the week focused shifted to practical matters. As a result, the complex finished the week on a sour note, but it managed to eke out minuscule weekly gains. Hurricane Rafael proved to be friendlier than feared. The Chinese stimulus package unveiled on Friday will not stimulate consumer confidence and spending since it focuses on easing the debt burden of local governments. Consumer prices rose at their slowest pace last month. The latest support measures will not revive the country’s oil demand growth or oil crude oil imports. After last week’s US presidential election attention is slowly drifting back to the underlying fundamentals. These include this week’s updated reports on oil balance, where global, Chinese and US demand estimates will surely be closely scrutinized.

Panem et Circenses and Democratic Inertia

The autopsy of last week’s shocking result of the US presidential election will last for weeks and months. The strong mandate Donald Trump received from voters and the probable trifecta, which gives total control of the US Congress to the Republican party is most probably the combination of Trump’s divisive, disruptive and charismatic personality, and the incompetence of the Democratic party. America was more than willing to overlook that it voted for a convicted felon, who lost the previous mid-term and presidential elections. The incoming president’s ability to turn politics into showbusiness, where style and volume are more salient than content, combined with the reluctance of the incumbent president to bow out of the race until after the last minute, leaving his defensive vice-president in an almost impossible position were most likely the major contributors of Donald Trump’s win – admittedly in hindsight. His use of social media and his transactional friendship with Elon Musk have also provided an invaluable tailwind to his campaign. What is genuinely disturbing to observe is the increasingly powerful influence of corporate America on the Administration. Musk’s investment of around $120 million in the Trump campaign handsomely paid off as Tesla’s market value (remember, Trump is anti-EV) surged by over $100 billion overnight and bought him a seat at the Trump family’s dinner table.

Politicians and investors, allies and foes alike, are preparing for a turbulent four years, frankly, with unpredictable consequences. Whilst headlines label the improbable Trump win as the beginning of a ‘new era’ there is actually something to fall back on. It is the first four years of the President-elect’s in the White House, during which the administration’s economic policies were similar to the ones announced during the latest campaign, only less extreme. The 2017-2021 period was also characterized by tariffs and protectionism, therefore looking back at that period might provide clues as what to expect during the next four years. It is logical and reasonable to assess the potential impact of Donald Trump’s economic policies through the prism of tariffs.

Tariffs are effectively tax on imported products, which can be a source of revenue for the government or protectionist moves to support domestic industries from competing with other countries. The incoming administration is proposing 10%-20% tariffs on all US imports and 60% on Chinese products. During his first stint in the White House, Trump increased tariffs on solar panels, washing machines, steel, aluminum and a wide range of imported goods from China. In 2019, tariffs enriched the US Treasury by $79 billion, the Brookings Institute estimates, a significant rise from the pre-Trump era. Back then and now the official narrative is that these tariffs are paid by foreign companies. Studies, however, conclude that the extra costs were borne by American importers and the consumer in the past. Import tariffs benefit US workers as they protect domestic industries, the argument goes. They, on the other hand, harm consumers and those who make a living in industries that use imported goods as inputs. Additionally, because of retaliation measures, export-oriented companies will suffer, leading to loss of revenue and redundancy.  A change in trade policy is always a choice that benefits one group at the expense of the other; it is a trade-off. Tariffs under the first Trump administration led to bigger losses in exports and in industries that use imported inputs than the gains realized in sectors that compete with foreign goods and products. Currently, whilst keeping an open mind, there is no reason to believe that the picture would be markedly different this time.

Tariffs will make imports more expensive. As a result, domestic manufacturers and producers will increase their prices. Tariffs collected on reduced imports will not cover the loss of revenue that entails individual and corporate tax cuts. A potentially tight labour market, the outcome of the planned deportation of undocumented migrants, will drive up wages. The rise in federal debt will increase government borrowing costs. The inflationary impact of the Trump administration’s protectionist economic policies is plain to see. Generic, and not targeted, taxing of imports will do nothing to mitigate this pressure and ultimately will create economic headwinds, even if the pledged spending cuts materialize. It is, in its current proposed form, a populist move, which will do more harm than good for the domestic and global economy.
 

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