US: What is Trump up to? – Commerzbank

Research Team at Commerzbank, analyses the economic consequences of the Trump’s victory in presidential elections for the US.

Key Quotes

“Trade: One of Trump's central campaign issues was his view that the US would be disadvantaged by their trading partners in global trade. This is why he wants to renegotiate the NAFTA agreements with Mexico and Canada and bury the TPP trade agreement with Asia (which has not yet been ratified). China is to be stigmatised as a currency manipulator. Moreover, Trump has held out the prospect of imposing punitive tariffs on Chinese imports.”

“Tax cuts: Trump has promised massive tax cuts, particularly for companies. For instance, the corporate tax rate shall be slashed from 35% to 15%, albeit with most tax benefits dropped in turn. Trump’s plan provides a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%. As regards the individual tax, the number of tax rates shall be lowered from seven to three, with the top rate falling from 39.6% to 33%. This would imply an increase in the budget deficit by around 2% of GDP per year. Budget policy under former president George W. Bush had a similar effect.”

“Deregulation: Trump announced that he would order a moratorium for new federal regulations on his first day in office, planning considerable deregulation in different areas. This applies to energy production, the abolition of the health reform ("Obamacare") and, to some extent, also to the financial sector.”

“Fed: For some time, the Republican Party has been trying to keep the US central bank more on the short leash and make it revert to less expansionary monetary policy. For instance, it has set in motion legislative initiatives that would require the Fed to stick to a monetary rule. This would argue for much higher key interest rates. On the other hand, Trumps criticism of the Fed's low interest rate policy was mainly based on the fact that it benefits the governing Democrats. As a president, Trump would not be interested in higher key interest rates that would cool the economy and damage his own popularity. All in all, it is unclear what this will imply to the Fed's monetary strategy long-term. What is relatively clear, however, is that there will be conflicts between a Trump administration and Fed Chair Janet Yellen after Trump had severely attacked Yellen in his election campaign. The bridges between both of them appear to have been burnt. Yellen is likely to drop out of office at the end of her term on 3 February 2018 at the latest.”

“Many believe that these issues would be a maximum programme based on the election campaign, assuming that things will not turn out as bad as they seem. Moreover, as a result of their bad performance in the Congress elections, the Democrats will not be able to stop the future administration without the support from Republican delegates. And the Republicans are likely to back their president, at least initially.”