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Trumponomics rolls into Town

Deregulation and the simplification of regulatory frameworks can be a powerful boon for potential and realized growth, says Nikolaj Schmidt, Chief International Economist at T. Rowe Price.

31.01.2017, 14:25 Uhr

Redaktion: jog

When Donald Trump was elected U.S. president in early November, his pledges to cut taxes, boost infrastructure spending, and reduce regulation prompted rallies in U.S. stocks and the dollar and led to a surge in business confidence. How do these pledges stand two months later? Well, House of Representatives Speaker Paul Ryan and members of the Senate have already made it clear that when the Republicans speak about tax cuts, they are referring to tax reform, not fiscal stimulus. Taxes will be cut and the tax code will be simplified to enhance the competitiveness of corporate America, but the objective of the tax reform is not to expand the fiscal deficit.

What about the promise of a large infrastructure program? In recent interviews, Trump has made it clear that while new infrastructure is coming, the economic thrust of his policies will come through deregulation; infrastructure will be a secondary priority. This slightly tweaked view stacks up very nicely with that of congressional Republicans, who have little to no appetite to finance a large infrastructure program. So all is lost? Not quite. Deregulation and the simplification of regulatory frameworks can be a powerful boon for potential and realized growth. Additionally, although significantly watered down relative to his election promises, we expect the incoming administration to deliver a small fiscal stimulus of the order of 0.75% of gross domestic product.

On trade, Trump’s key nominees have indicated that they are pro-trade but they want it to happen on terms that are more favorable to the U.S. One can sympathize with the idea that old trade agreements should be open to renegotiation; however, it is concerning that high-ranking members of the incoming administration appear to perceive trade to be a zero sum game—in other words, assuming that if the U.S. runs a trade deficit, the U.S. must be losing out. This view stands in stark contrast with classical economist David Ricardo’s view that both parties can be made better off through trade. Equally (if not more) worrying is Trump’s indication that he is willing to renegotiate the U.S.’s entire relationship with China, including its position on the One China Policy, as a negotiating strategy to potentially achieve a more favorable trading relationship.

So what will happen to geopolitics under President Trump? The pressure on the new president to deliver on his promise to repatriate jobs from China to the U.S. heartlands, and his willingness to mix geopolitics and trade, suggests that the China/U.S. relationship will come under strain. By contrast, the relationship between Russia and the U.S. is seemingly getting warmer. Notably, during the confirmation hearings, Trump’s key nominations were unwilling to unconditionally endorse the sanctions that are currently in place against Russia.

With regard to the European Union (EU), rightly or wrongly President Trump has indicated that he believes the bloc was formed to gain ascendancy over the U.S. in international trade. It is therefore not too surprising that Trump endorses Brexit and predicts that additional countries will leave the EU. Trump has also indicated that the U.S.’s relationship with NATO should be revisited, causing some alarm in Europe. The combination of a potential warming of U.S. relations with Russia and a de-emphasizing of its traditional alliance with Europe could lead to a loss of global influence for the EU.

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