Trump’s own plans affect his economic success

Fri Jan 17 2025
Nikki Bailey (1376 articles)
Trump’s own plans affect his economic success

Trump’s proposed strategies hinder the possibility of replicating his previous economic achievements.  The sequence of actions can significantly influence the outcome.

Such a scenario may indeed materialize with the economic policies of President-elect Donald Trump. During his initial term, broad tax reductions were followed by the introduction of targeted tariffs. The economy was already exhibiting robust momentum prior to the adverse effects of trade disruptions taking hold.

This time, the sequence is expected to be inverted. The scope of the tariffs may be considerably broader, whereas the extent of new tax relief remains limited. Such a scenario appears to be a precursor to an economic contraction.

Longview Economics noted that “Trump’s economic agenda is initially (mostly) detrimental to the economy, whereas factors that could foster growth are primarily deferred until the latter part of 2025 and thereafter.” The note indicated that tariffs will function as a tax increase on consumers, akin to elevated oil prices.

An examination of Trump’s final administration offers valuable insights. Following almost a year of legislative contention, the Tax Cuts and Jobs Act was enacted in late 2017 and came into force at the beginning of 2018. The reform resulted in a reduction of individual income-tax rates, notably decreasing the top marginal rate from 39.6% to 37%. However, its most significant effect was on enterprises, as it lowered the corporate income-tax rate from 35% to 21%.

The legislation proved to be an economic triumph. In 2018, real gross domestic product growth surged to 3%, up from 2.5% the previous year, representing the most robust performance since the onset of the financial crisis. In that year, the economy saw an increase of 263,000 manufacturing jobs, marking the highest growth since 1997.

However, Trump’s trade confrontations quickly disrupted the machinery. Their approach commenced with a focused strategy, introducing tariffs on solar panels and washing machines in January 2018. In March 2018, tariffs on steel and aluminum were implemented.

While constrained in their reach, these factors significantly impacted the economy by interrupting supply chains and increasing manufacturing expenses. The Peterson Institute for International Economics has calculated that tariffs have led to a 9% rise in the domestic price of steel products, resulting in the creation of 8,700 jobs within the steel sector, albeit at an expense of $650,000 for each job generated.

Retaliatory measures were implemented by trading partners in response to the tariffs. In June 2018, the European Union enacted tariffs on a range of U.S. exports, including steel, aluminum, agricultural products, and iconic American items like whiskey, motorcycles, and blue jeans.

The adverse effects on the economy were, at least in the short term, overshadowed by the robust impetus provided by tax reductions. However, the situation was complicated by the intensifying trade conflict with China. A timeline of events from PIIE indicates that the imposition of tariffs commenced in July 2018, targeting $34 billion of Chinese goods. This figure escalated to $50 billion in August and reached $250 billion by September of the same year.

In September 2019, the imposition of new tariffs on an additional $112 billion worth of Chinese goods marked a significant escalation in trade tensions. Whereas earlier phases primarily targeted capital and intermediate goods, the current tariffs are now affecting consumer apparel and footwear. Every escalation prompted a corresponding retaliatory response from China.

The ongoing trade disputes have resulted in significant volatility in the markets. More significantly, they started to weigh on the industry, culminating in what numerous analysts referred to as a “manufacturing recession” in 2019. From its zenith in January 2019 to February 2020, manufacturing employment experienced a contraction of 48,000 positions.

The conclusion of this narrative remains uncertain, as the pandemic’s intrusion altered its trajectory. However, numerous analysts expressed apprehension regarding the imminent threat of a recession. The ISM Manufacturing PMI, a barometer of manufacturer sentiment in the United States, declined to 47.9 in December 2019, marking its lowest level since 2016.

Looking ahead to 2025. Trump is poised to implement tariffs ranging from 10% to 20%, targeting not only China and specific goods but all imports, a move that could affect trillions of dollars in annual trade. The legality of executing such a measure via executive action remains somewhat ambiguous; however, in principle, this could enable him to circumvent Congress and implement changes right upon assuming office. In a somewhat perplexing development, Trump has issued separate threats regarding the imposition of additional tariffs on China, Mexico, and Canada.

The precise outcomes remain shrouded in uncertainty. It appears wise to anticipate a greater prevalence of broad-based tariffs compared to previous instances, with their implementation likely occurring at an accelerated pace. This could signify a sudden and detrimental impact on the economy, potentially surpassing the cumulative disruptions caused by his tariffs in 2018 and 2019 by a considerable margin.

One approach to mitigate this risk could involve gradually implementing tariffs at a rate of approximately 2% to 5% per month, as indicated by reports from Bloomberg regarding considerations by Trump’s advisers. However, this scenario implies that tariffs would escalate to significant levels prior to the implementation of any tax relief legislation.

The proposed legislation is expected to undergo extensive negotiations in Congress, suggesting that mid-2025 may be the earliest feasible timeline for its passage, with late 2025 appearing increasingly probable. The primary focus should be on prolonging many of the initial tax reductions scheduled to lapse at the year’s end, with the Tax Foundation projecting a revenue decline of $3.4 trillion over the next decade.

Importantly, this would not provide any additional stimulus to the economy; it would simply maintain current tax rates.

Trump has additionally suggested a range of other reductions, such as abolishing taxes on gratuities, Social Security benefits, and overtime compensation, while reinstating the complete deduction for state and local taxes. However, these would contribute trillions more to the total, leaving uncertainty regarding how many can successfully navigate the process.

The prevailing euphoria in markets, evidenced by stock indexes approaching record highs, appears somewhat complacent. A potential second Trump administration that initiates a significant tariff shock, subsequently followed by an indeterminate timeline for tax relief of ambiguous magnitude, is likely to inflict considerable strain on both the economy and financial markets. Investors may face an unexpected shock.

Nikki Bailey

Nikki Bailey

Nikki Bailey reports on US Stocks. She covers also economy and related aspects. She has been tracking US Stock markets for several years now. She is based in New York