Trumponomics: Feeding the Bull Steroids

trump

Donald Trump’s economic policies focus on three key areas; protectionism, loose fiscal policy and deregulation. In this summary report, we will give an overview of Trump’s policies before exploring the effects that they have had on financial markets. For conciseness, we will not look at Trump’s immigration policies and plans to ‘clean up Washington’.

Protectionism

Trump is no proponent of free trade. Branding NAFTA as the “worst trade deal ever”, vowing to withdraw from the Trans-Pacific Partnership (TPP) in his first day in office and promising to apply heavy tariffs to US companies who outsource, Trump’s election could spell uncertain times for the US and its key trade partners.

One of Trump’s main campaign pledges was to renegotiate or withdraw from the North American Free Trade Agreement (NAFTA), blaming it for destroying the US manufacturing sector. It is true that since the adoption of NAFTA in 1994, the US goods trade balance with Mexico has swung from a $1.6bn surplus to a $60.7bn deficit. Over the same period, the goods trade deficit with Canada increased from $10.8bn to $15.5bn. However, this is not necessarily a direct result of the trade agreement. Between 1993 and 2015, the US global (excl. Canada and Mexico) trade deficit in goods exploded by 529% from $106.5bn to $669.5bn, marking a clear trend in corporate outsourcing. While one cannot doubt that the US manufacturing sector was hurt by this trend, many argue that it cannot be attributed to NAFTA. A renegotiation of the deal requires the approval of congress but no approval is required to withdraw from the deal, provided Canada and Mexico are given 6 months’ notice.

In his 100-day plan and in a consequent video following the election, Trump vowed to withdraw from the Trans-Pacific Partnership during his first day in office. Due to his post-election persistence in the matter and lack of congress approval required, the move is highly expected.

Japanese Prime Minister, Shinzo Abe, said that the deal would be “meaningless without the US”. Analysts believe that the abandonment of the partnership, which excludes China, will boost China’s competitive advantage within the APAC region and fuel discussions on the China-led Regional Comprehensive Economic Partnership. Trump is also very critical of TTIP (Transatlantic Trade and Investment Partnership) and is widely expected to discontinue its negotiation.

Trump’s ‘End the Offshoring Act’ proposes to establish tariffs to prevent US companies from outsourcing their manufacturing to other countries, although no additional details were given. The president elect talked during the election about a 45% tariff on Chinese goods and a 35% tariff on Mexican goods. Whilst most agree that this extreme tariffs will not be applied, Trump is likely to increase tariffs with America’s key trading partners.

Loose Fiscal Policy

Highly irregular during a bull market, Trump’s second key policy area is that of cutting taxes and increasing government expenditure. This comes in the form of the American Energy and Infrastructure Act, the Restoring National Security Act, the Restoring Community Safety Act and the Middle Class Tax Relief and Simplification Act.

The ‘American Energy and Infrastructure Act’ consists of $1 trillion of investments in infrastructure in order to boost the economy and ‘put millions of people to work’.

In what he dubbed the ‘Restoring National Security Act’, Trump promised to eliminate the defence sequester and expand military investment. In the ‘Restoring Community Safety Act’ he similarly promised to increase funding for federal law enforcement agencies and programs that train and assist local police.

During the election, Trump proposed an overhaul of the income and corporate tax system in what he called the ‘Middle Class Tax Relief and Simplification Act’. The new system would see inheritance and estate tax abolished, reduce the corporate tax rate from 35% to 15%, reduce income taxes (a middle class family with 2 children would get a 35% tax cut) and allow income tax deductions for childcare and eldercare. Critics of this plan claim it would disproportionately benefit the wealthy.

Deregulation

Trump has also promised to vastly reduce regulation in the US, which he states is “killing jobs”. In his 100-day plan, he stated his aim to submit a requirement that two regulations must be removed for every new federal regulation. Although he speaks very broadly on deregulation, giving few specifics, he has signalled his intentions with regards to two key areas; financial services and energy production.

After vowing to repeal the Dodd-Frank Act during his campaign, Trump has since nominated Paul Atkins, an ex SEC commissioner, as part of his transition team. Atkins is a staunch critic of heavy financial regulation and large fines for offending companies, and an assailant of Dodd-Frank. Other than his comments on Dodd-Frank, Trump himself has said very little about financial deregulation but his sentiment is clear. While a full dismantling of Dodd-Frank does not seem likely, analysts are expecting its reform under the Trump administration as well as a lighter regulatory burden on banks.

Trump once stated that global warming was “created by the Chinese in order to make US manufacturing non-competitive.” His policies reflect this sentiment, vowing to “lift the restrictions on the production of $50 trillion dollars’ worth of American energy reserves, including shale, oil, natural gas and clean coal” and to cancel payments to UN climate change programs.

 

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