How are world economies reacting to Trump's imminent return as U.S. president?

Caption

International newspapers report U.S. President-elect Donald Trump's election win, in central Rome on Thursday. / AP

LONDON — Economists and investors are expecting a series of seismic and wide-ranging impacts from Donald Trump’s second presidential term. A range of financial markets have already seen significant volatility this week, from currencies to commodities to corporate share prices.

Here are some potential economic and financial implications of what some economists and experts are referring to as “Trumponomics 2.0.”

Stock markets

The promise of lower taxes and looser regulation for companies could mean businesses can boost their profits, and that possibility has been reflected since Tuesday in the share prices of many major American businesses. A firm with the prospect of higher future profits attracts investors who buy its shares, and that in turn pushes up the price of that stock. This trend could continue for those operating in the banking, crypto, technology, defense and fossil fuel industries.

Goldman Sachs estimates the largest U.S. businesses could see a 4% jump in their earnings if corporate tax rates are cut. But around the world, there could be corporate losers as well as winners, particularly among companies that rely on imported products or materials, that sell to overseas buyers or that sit in the middle of global supply chains.

Emmanuel Cau from British bank Barclays has warned that a big portion of the profits from European companies could be wiped out next year, explaining in a research note that companies that manufacture cars, drinks and chemicals could be worst hit because of their reliance on trade with the U.S.

“Those companies are suffering in terms of their share prices,” says Stephen Woolcock, an expert in international trade policy at the London School of Economics. “This is quite a complex network of supply chains, and increased tariffs by the U.S. — which would probably lead to retaliation by other major trading powers — would disrupt those existing supply chains, which leads to uncertainty, increased costs, and therefore has a knock-on effect on companies.”

Companies that end up facing higher costs due to tariffs could earn lower profits, which in turn might mean lower share prices — unless they raise their consumer prices. But higher prices could lead to higher inflation.

Trade, inflation and incomes

“To me, the most beautiful word in the dictionary is tariff,” Trump said in Chicago last month. Based on Trump’s previous term in the White House, as well as campaign pronouncements like this, many economists say investors are already anticipating the introduction of tariffs ranging from 10% on some countries' products, and up to 60% to be applied to goods from China.

“If tariffs are applied across the board, this will have implications for consumers, and these implications will be increased prices,” says Sébastien Jean, an economics professor at CNAM university in Paris and associate director at the French Institute of International Relations.

Economic scholars at the nonpartisan Peterson Institute for International Economics in Washington, D.C., estimated this summer that reinstating expired 2017 tax cuts that largely benefitted wealthy Americans and imposing higher tariffs on imports — as Trump floated on the campaign trail — could reduce post-tax incomes for poorer Americans by around 3.5% and would “cost a typical household in the middle of the income distribution about $1,700 in increased taxes each year.”

A frequently publicized intention behind Trump’s previous tariff plans was to strengthen domestic production. However, Trump’s tariffs on China didn’t bring a lot of manufacturing to the U.S. — but just shifted it to other countries.

In fact, says Federica Ghiretti, an expert on economic security at Rand, it was really only consumers in China and the United States who lost out during what's often called the "trade war" that flourished in 2018.

“The impact on the world has been relatively limited,” she says. “In some instances, actually, there have even been opportunities for third countries to go and occupy those areas of the supply chains that were left empty or restricted by China or by the United States.”

One thing global financial markets dislike is unpredictability, but that's something they should now expect, says Jean. “Trump's presidency will open an era of increased uncertainty,” he says, “and that's always pretty bad for trade.”

Debt

Thanks in part to tax cuts and to emergency spending linked to the COVID-19 pandemic, the U.S. government during the last Trump administration saw its total debts soar, alongside a widening in the fiscal deficit that measures the difference between how much the U.S. Treasury takes in through taxes and other revenues, and how much it spends on government programs.

Following Trump’s win on Tuesday, the prospect of fresh, “unfunded” spending — which would rely on borrowing more money from the financial markets rather than raising taxes — has left investors alarmed about future U.S. deficits and hence its debt pile. Some estimates put the extra deficit at more than $7 trillion over the next decade.

When investors worry about the sustainability of a country’s debt, they essentially demand higher rates of interest on loans they make to that country’s government. And even before the election, concerns over America’s public debt translated into higher yields on existing loans, an indication of increased borrowing costs for the U.S. government.

“There seems to be a continued desire to go ahead with the economic program without any regard towards reining in the deficit spending — the ever-increasing debt quota of the U.S., which will get the U.S. into trouble at some point,” says University of California, Berkeley, economist Ulrike Malmendier.

And if inflation also looks likely to rise as a consequence of Trump’s actions once in office, it will meanwhile be difficult for the Federal Reserve to lower interest rates. That fact would also likely encourage yields on government debt to remain elevated, making it even more expensive to reduce the deficit in the future.

Climate-linked investment

The president-elect has repeatedly insisted he will end regulatory restrictions on oil drilling, gas exploration and coal mining, and would work to limit further expenditures tied to President Biden’s Inflation Reduction Act. Experts say the act has not only boosted projects, businesses and technologies designed to help address climate change, but has also helped incentivize vast volumes of private capital to invest in “green tech,” including solar, wind power, carbon capture and electric battery storage.

Trump will try to maintain America’s role as the world’s largest petroleum producer by encouraging more domestic fossil fuel projects, with all of the consequent impact on global carbon emissions, and analysts warn this could end up harming sustainability-focused financial funds that have helped underpin much of the energy transition and the ongoing work to achieve previously agreed global climate goals.

“There will be less push for financing means to combat climate change — there will be a reversal,” says Malmendier. “That is really bad news for the world, because the U.S. is a big part of the global economy, and not having them push alongside with their other countries will make it extremely difficult to make progress.”