Trumpenomics: taxes and trade, a difficult mix?

Trumpenomics: taxes and trade, a difficult mix?

What will Trump’s economic policies mean for the USA?

Ask a bunch of strangers how the economy is doing, and you will probably get a different answer each time. While each response seems to build upon undisputable facts – GDP, interest rate, taxes, market prices etc. – people interpret them very differently. Take the US. As the New York Times’ exit polls showed, Americans have very different views on how their country is doing: 86 percent of those who thought the US economy was in excellent shape voted for the democratic candidate, while 79 percent of those believing the economy being in poor conditions supported Trump.

The tycoon did a terrific job at portraying a moribund America, robbed of its wealth by foreigner powers with the aid of the corrupt Washington political establishment, of which Hilary Clinton was the standard-bearer.

The description of a huge trade deficit with China looming over the American economy fuelled the fears of the white middle class and served as proof that, once again, other countries are preventing America from being great. This also happened to match the anti immigration narrative quite well.

Discussing China’s role in financing this debt he said: “Look, they have taken our jobs, they have taken our money, and on top of that they have loaned the money to us and we actually pay them interest now on money”.

To stop this, Trump’s recipe is simple: bring back the jobs that went overseas thanks to the reckless years of globalization and cut taxes. On the fiscal side, Americans earning $20-$48,000 might have to pay 12 instead of 15 percent in taxes; the same holds for those earning between $48-$52,000, who will enjoy a 12 percent tax cut. For the lucky big businesses the top corporate tax will be slashed, from 35 to 15 percent.

On the trade side, the Trump’s administration intends to renegotiate more favourable deals with its trading partners, and put high tariffs on Asian and Mexican goods, which represent together more than half of the country’s imports.

This is where economics starts ruining the party. If the lost revenues from the tax cuts, which according to some estimates will amount to 6.2 trillion over the first decade, are financed through new public debt, the financial position of the US will most probably worsen. More public debt will make interest rates increase, and the dollar will appreciate at the expense of exports which will become less attractive for foreign buyers.  Moreover, if his fiscal stimulus works as planned, domestic demand will increase together with imports. All this is going to worsen the trade deficit that was meant to be rebalanced.

What is even more ironic is that Trumpenomics will most probably most hurt the very same people who voted for him. Tariffs are going to make imports more expensive and looking at the kind of goods the US buys from outside it is clear that poor households, who spend a sizeable part of their income on clothing and food, are going to pay the highest price.

There is still a chance that, much like his speeches, this part of his economic plan is better understood as a way a showing discontinuity with the Washington establishment, than as a viable plan to make America great again. Perhaps economists are making the same mistake as journalists of taking him literally but not seriously, while voters did exactly the opposite. If America is lucky, Trump’s most delusional ideas will evaporate before reaching Congress.


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Stefano Merlo