Global economy bracing for Trumpworld

On the eve of Donald Trump’s election win in November, the world economy was already under stress with a slowing Europe, a grinding war in Ukraine and a stagnant Chinese economy. Yet there was hope that as central banks started to bring high inflation under control, lower interest rates would buoy economic activity and the world economy in 2025.

But Trump’s victory is taking the shine off those hopes for several reasons. There is huge new uncertainty about the economic policies to come from the world’s leading economy and, at the same time, how Trump’s aggressive rhetoric toward China will play out in real terms.

There are three economic measures that Trump highlighted on the campaign trail that seem more certain than others to be implemented.

The first is mass deportations of illegal immigrants, a round-up that will dent the US’s labor supply with negative consequences for growth and inflation. The second is a corporate tax reduction, which should attract more capital to the US but will also raise the already high US fiscal deficit and national debt.

Third and more important for the global economy, Trump plans to hike import tariffs across the board but to the apparent greatest extent against China. Given the inflationary nature of all these measures, it seems clear that the US Federal Reserve will have to remain vigilant against a new spike or too-sticky inflation.

This risk is hardly present in Europe due to its comparatively depressed economic situation. That, in turn, points to a weaker euro in the year ahead as the European Central Bank will be more free to continue to cut rates.

In other words, the golden dream of a rapid normalization of US monetary policy – and thus a weaker US dollar – improving global financial conditions seems increasingly unlikely. This Trump-driven shift in global economy expectations is especially worrying for many developing and emerging economies with external financing needs.

For Europe, a weaker euro would be good news given the depressed economic situation in France and Germany, and the positive impact it would have on the external competitiveness of the eurozone. That’s especially true as Trump’s tariffs will also likely target the European Union, though to what degree is highly uncertain.

The fact that Trump’s first tariff declarations since his election victory aimed at neighboring Mexico and Canada (to be hit with 25% tariffs despite its trade deal with the US) should be seen as a warning to the EU that allies and friends won’t be immune to Trump’s tariff onslaught.

Another key question is whether Trump will extend his punitive tariffs to countries that assemble Chinese products for shipment to the US as made in their nations, including but not confined to Vietnam, Malaysia and Thailand.

This, among other factors, will determine whether the rest of Asia will be a relative “decoupling” winner from Trump’s tariffs, as has been the case with the Biden administration’s restrictions on China trade.

The other relevant factor relates to Trump’s plan to cut US corporate taxes and the consequences that will have on the repatriation of US multinational profits. That repatriation will likely draw more capital away from Asia to the US.

That’s already been the case under the Biden administration’s Inflation Reduction Act, which introduced subsidies to select companies that produce in the US. In other words, the US might remain the most attractive destination for footloose global capital under Trump’s tax scheme, with negative consequences for Asia and Europe.

Beyond ramped-up US protectionism and corporate tax cuts, both net negative for the rest of the world, Trump could unwittingly create another big problem for the world economy, namely the dollar’s collapse as the globe’s reserve currency.

Although these three prongs of Trump’s economic policy mentioned above should appreciate the dollar in time, which is just how the market reacted after his election win, Trump has repeatedly said he craves a weak dollar to reduce the huge US trade deficit.

Within Trump’s universe of economic advisers, there are voices proposing capital controls, which would be unheard of for the world’s reserve currency. Complicating matters further, Trump has just threatened BRICS members with 200% tariffs if they proceed with de-dollarization plans for their trade and finance.

But the elephant in the room is Trump’s plan for China. On one hand, Trump has been hotly confrontational toward Beijing, threatening 60% tariffs on all Chinese-made goods.

Yet Trump showed a willingness to strike a deal with China in his first term in a December 2019 pact that saw China pledge to buy $600 billion worth of US goods and give preferential access to US investors in certain coveted sectors of its economy.

How Trump deals with China will be key for the EU. A new US-China trade deal that is similar to the 2019 one would likely be a net negative for European companies seeking to do business with China. Notably, the 2019 deal saw European companies lose market share to American ones in China.

All in all, Trump’s 2025 arrival will bring with it a quantum leap in global economic uncertainty.

While Trump’s promised tariffs and tax cuts threaten a new rise in global inflation, worsened financial conditions for developing and emerging markets, and more capital outflows from Asia and Europe into the US, the impact of these measures on the dollar and US-China relations will reverberate everywhere.

This is a reprint. This article has also been published in Asia Times.

https://asiatimes.com/2024/12/global-economy-bracing-for-trumpworld/