The public perception of President Donald Trump’s economic program is that it is a chaotic mix of protectionist measures, tax relief for rich people, uncoordinated increases in infrastructure spending and antisocial cuts in healthcare benefits.
You might also be interested in:
However, it may be worth taking a closer look at the administration's agenda before jumping to premature conclusions.
The United States, along with Europe, has a long track record of Keynesian overspending. This means that the present administration is saddled with a difficult economic, financial and fiscal legacy.
The biggest public focus is now on claims of protectionism. But the mantra of the present administration is not against free trade per se, but against the unfair practices of some U.S. trading partners. Obviously, it would be best for the world to have an unrestricted global exchange of goods and services. Realistically, however, every country will have its restrictions.
China and bilateralism
Unfortunately, behind the praiseworthy aim of fighting unfair practices is the largely unfounded claim – featured prominently in the presidential campaign – that unfair Chinese labor practices have caused the loss of millions of U.S. industrial jobs. No mention was made of the real culprit: failures by American labor unions and politicians, which have resulted in insufficient modernization of industry and improvements in worker skills and productivity.
It is correct that the U.S. has a huge trade deficit with China and that the U.S. imposes fewer restrictions on trade and business in general than China does. However, one must also consider that China’s total purchasing power is still inferior to the U.S., which contributes to its lower import figures. That doesn’t mean President Trump is wrong to insist on fair practices by China, which is something that previous U.S. presidents have done.
Multilateral deals such as TPP and TTIP had protectionist characteristics: they excluded third parties and used exemptions and excessive regulation
The Trump administration avoids multilateral trade agreements and prefers bilateral ones. Each type has advantages and disadvantages. However, it should be acknowledged that multilateral deals such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) had protectionist characteristics. Some were obvious, such as the exclusion of third-party countries, and others were disguised, such as exemptions and excessive regulation within the so-called free trade area.
A telling sign of hypocrisy was that President Trump’s decision to withdraw from TPP and TTIP was harshly criticized by some European groups – the same ones that had previously railed against TTIP, for their own protectionist reasons.
More damage to the world economy could result from the proposed 20 percent Border Adjustment Tax – a fiscal levy on imports. This short-term protectionist measure probably won’t be enacted, however, since it appears to lack sufficient support in Congress.
Canceling the North American Free Trade Agreement (NAFTA) would have more serious long-term consequences than scrapping TTIP and TTP, many of them unintended.
The ostensible goal is to reduce Mexico’s $60 billion trade surplus with the U.S. There is no doubt that Mexico’s economy is strongly dependent on this export trade, which mainly provides low-cost manufacturing services to U.S. companies. Certain industrial centers such as San Luis Potosi and Monterey would be hit hard by higher tariffs; other regions would suffer much less.
The loss of export business could force Mexico to adopt a more comprehensive strategy to develop the whole country
Losing some of this lucrative export business would be a bitter pill for Mexico. In the long term, however, it could force the government to adopt a more comprehensive strategy to develop the entire country. It offers an opportunity to escape U.S. tutelage and strike out on its own economically.
South of the Rio Grande, this message appears to have been received loud and clear. Mexico is reaching out strongly to Asia, Europe and its Latin American neighbors. If the country succeeds in diversifying its economy, the U.S. protective measures could prove to be a blessing in disguise.
An economically more independent Mexico has strong implications for the U.S. While a few manufacturing jobs could be gained in the short term, American agricultural output will probably suffer as Mexico – its largest export market – reduces imports. In the medium term, U.S. economic growth will suffer as the inflow of young workers from the south dries up. On the other side of the ledger, the U.S. could potentially gain from having a stronger, more self-confident Mexico as an economic partner.
President Trump wants to reduce the level of corporate taxes in the U.S. This makes a lot of sense, as its corporate income tax rate is among the highest in the OECD. Such a step would genuinely boost the competitiveness of U.S. business globally. A lower tax rate would also encourage the repatriation of foreign profits to the U.S. What the previous administration failed to achieve by pressure and penalties, the present one could accomplish through incentives.
Another burden on American business is high regulatory costs. For example, the 10 largest U.S. banks have paid more than $50 billion in advisory fees over the past five years to ensure compliance.
Investing in infrastructure as opposed to consumption usually brings a return
The new administration’s budget will be expansionist, but it will focus on infrastructure investments rather than consumption. This is an area that usually brings a return on investment. The outlays are necessary because U.S. infrastructure is outdated and crumbling, especially its power grid and highway network.
Starting with Alan Greenspan’s term as chairman, the U.S. Federal Reserve’s dogma has been to stimulate the economy by consumption. As GIS has repeatedly pointed out, this upsets the necessary balance between consumption and investment. Neglect of investment is one of the important reasons for today’s malaise in the old industrialized economies.
The success of any economic program depends on its implementation. Since economics is not a precise science, there will be unintended consequences, both good and bad. The Trump administration’s plans for taxes, infrastructure and deregulation should all bring positive effects.
As for the negative, the Border Adjustment Tax appears to be mostly bluster and unlikely to pass. The impact of new bilateral trade treaties is impossible to foresee, and will very much depend on the skill of negotiators. The most critical issue is Mexico, where the remedies proposed by Mr. Trump would seemingly lead to a dead end. However, if Mexico grasps the opportunities presented by this new challenge, its economy might emerge strengthened from its current difficulties.
Viewed in this light, there are grounds for optimism about the economic effects of Donald Trump’s presidency – even with all the concerns about protectionism.