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Trump’s economy in a globalised world: tax cuts, tariffs and spending

Image credit: Gage Skidmore (Flickr: Creative Commons)

After one of the most divisive elections in modern political history, the US election has now come and gone. The outcome leaves the democratic party in a period of soul searching and Republicans celebrating a populist revival. Yet beyond the political machinations between the two parties, this is a crucial time to critically analyse the economic policies set out by Donald Trump throughout his campaign for the next four years. Unfortunately, Mr. Trump’s economic policies suggest that the global economy has re-entered down a path with little hope for prolonged economic or political stability. The sole global superpower has voted for a different direction; neoliberal economics is now seemingly on the ropes after being successfully challenged by a mercantilist candidate. Throughout the campaign, Trump’s ‘three pillars’ economic policy was plain to see and simple to grasp: tax cuts, tariffs and spending. However, when policy meets reality, Trump’s economic policies will be unworkable and ineffectual.

Tax Cuts

According to the Tax Policy Centre (TPC), the heart of Trump’s economic plan revolves around tax cuts. The tax code will be rewritten into three brackets, 12/25/33% for low-to-high incomes respectively, with the largest beneficiaries being high income earners with a 6.6% tax reduction. Furthermore, a rewrite of the tax code will also lead to a substantial decrease in corporate taxes from 35% to 15%. The impact of these tax cuts on the economy does not portray a positive picture.

Looking back at the Bush-era tax cuts for wealthy Americans, the cuts drove increased budget deficits and income inequality. Analysis of the Bush tax cuts before the Global Financial Crisis also found that jobs growth slowed between 2001-07, whilst also failing to reinvigorate wage stagnation. The reason for these issues is that tax cuts are not always a ‘net good’. A Brookings Institute report argues that deficit-increasing tax cuts over the long-term, no cuts to overall spending and raising taxes in other sectors to make up for revenue decline hampers any positive attributes associated with cutting taxes, and that cutting taxes has little impact on economic growth overall. Analysis of Trump’s tax plan shows the same deficit and alternate tax-raising concerns.

The TPC suggest that as the policy stands today, US federal debt would increase by USD$7.0 trillion in one decade and by a minimum of USD$20.7 trillion by 2036. The TPC also modelled deficit projections that show deficit increases would jump by USD$290-350 billion in 2017 alone. Using Brookings' research as a ‘litmus test’, Trump’s tax cuts already fail the first economic hurdle. Adding to this, Roberton Williams from the TPC argues that Trump’s tax plans would significantly burden working families as a compact tax bracket system, automatically raising taxes on people who were in lower tax brackets before. In fact, Williams suggests working parents will experience a USD$2000-$8000 increase in taxes from 2017. Overall, this advances legitimate concerns that job, income and GDP growth under president-elect Trump’s tax plan would either be slow and ineffectual or actually reverse all three. When it comes to trade things are potentially worse.

Tariffs and Trade

A significant aspect of Trump’s economic policy on the campaign trail was the potential reintroduction of tariffs and to ‘rip up’ trade deals. In regards to tariffs, there is the potential for significant harm. Trump has suggested labelling China as a currency manipulator as a roundabout way to impose a 45% tariff on Chinese exports entering the US, as well as a 35% tariff on Mexican imports. The problem with this plan, and with tariffs overall, is that they inevitably lead to ineffectual results, become unworkable and create trade wars. The use of tariffs on other states leaves the US open to retaliatory tariffs on US exports. There is no reality in which China and Mexico openly allow tariffs on their US exports without retaliation. However, the most pressing problem with tariff increases on countries is that they make the exports of other countries increasingly competitive.

Tariffs by their very nature automatically gain political relevance because they fuse political popularity with economic success. If Trump applies tariffs to China and Mexico, thus rendering Japanese, Canadian and European exports more competitive, he will be forced by political popularity and sheer economic reality to increase tariffs on every country. This in turn would then lead to every other country increasing tariffs on US exports. The ultimate result of such shift back to a retaliatory tariff system is a global trade economy that would cease to exist and the complete decimation of US export trade. The notion that Mr. Trump can return manufacturing jobs with tariffs is nonsensical, unworkable and downright self-harming. Looking back at the Brookings report once again, a global economy ravaged by tariffs can only supercharge government deficits and debts, which would already be drastically increased by Trump’s tax cuts. Nonetheless, when it comes to trade deals, Trump might just find himself some strange allies.

In contrast to tariffs, Trump also spent a lot of his campaigning time on past and future trade deals. He has threatened to rip up North Atlantic Free Trade Agreement (NAFTA), block Trans-Pacific Partnership (TPP) and has successfully politicised NAFTA and TPP as job-killing trade deals to the electorate. As David Autor highlighted before the election, as trade has increased over the decades, US blue collar workers have lost their jobs and wages stagnated. While Mr. Autor disagrees with Trump’s positioning on trade, there is a solid political message that Trump has been successful in exploiting.

Interestingly, Trump might find unlikely allies on trade. As the Democratic party looks for a new direction, Bernie Sanders and Elizabeth Warren are two likely candidates to lead a new Democratic party down a progressive path. Bernie Sanders in particular used the primaries and the election cycle to echo similar points around trade agreements. However, the goal for both sides moving forward on trade deals should not be to stop them completely. Rather, the path forward is to seek out ways to carefully address employment concerns in adequate detail so future trade deals don’t create a forgotten class of working people. The simple answer on trade deals is that not every deal is worth the sacrifices and not every deal will be awful.

Spending Priorities

Lastly, throughout the campaign, Trump solidified two large spending priorities: defence and infrastructure. In regards to defence, Mr. Trump has called for troop, ship and nuclear defence increases. Charles Tiefer, law professor from the University of Baltimore, suggests Trump’s spending commitments on defence will increase overall spending by USD$500 billion to USD$1 trillion. Yet if one looks back over the Brookings report cited earlier, defence spending at this magnitude in tandem with significant tax cuts will ultimately eat away at any economic/jobs benefit because of their deficit raising potential; or more likely, spending be scrapped in Congress. Congress under GOP-control will seek to implement tax cuts above all, thus hampering any political will for increasing an already bloated defence portfolio.

Regarding further spending, an extremely popular aspect to Trump’s numerous promises was the 10-year infrastructure package for roads, bridges and airports. Estimated at USD$1 trillion, democrats and progressive politicians alike will be clamouring to pass this policy from day one. The twin-promise to fix crumbling infrastructure and create blue-collar jobs is enticing to many democrats in Congress. However, the infrastructure plan could also be unworkable from day one. Republican policy groups are already suggesting that they will not support large infrastructure spending over tax cuts and regulation repealing priorities. This waning commitment around infrastructure has the potential to hamper promised economic growth and ends any hopes of widening the tax base with new workers.

Ultimately, Trump’s campaign winning policies are unworkable and ineffectual as a whole. His three core economic pillars are in complete conflict with one another and with his party’s overall priorities. Any positive outcomes from tax cuts are hamstrung by his commitment to increase spending. Tariffs hurt the ability to create jobs, which ultimately impact the tax base, and the Republican preference for tax cuts over spending means spending for job growth is held hostage. Going forward, Mr. Trump must address these issues and ultimately prioritise a sustainable path. Failure to do so will turn the populist backlash that drove him into government back onto himself.

Charles Bryant is the International Trade and Economy Fellow for Young Australians in International Affairs.

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