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Market optimism surrounding a revitalised Donald Trump presidency hinges on the assumption of renewed capitalism and reduced war-related risks. Prospects of tax cuts including making the 2017 Tax Cuts and Jobs Act (TCJA) permanent and imposition of punitive tariff hikes are seen as precursors of a business-friendly administration that will boost the already robust US corporate earnings. But having both domestic and global dimensions Trump’s machinations deserve careful examination.
Trump’s re-election signals a resurgence of distrust against globalisation that has lingered since the Global Financial Crisis (2008) and a societal craving for autocratic nationalism, embracing neomercantilism and diminishing neoliberalism ushered in the post-World War era; it is now seen slanted in favour of adversaries in the emerging economies, particularly China that contributes 17 per cent of global GDP. Trump 2.0 canvas is wider as it aims beyond China, encompassing all countries having economic ties with the US.
Indeed, the structural decline in potential growth for emerging economies in the post-GFC (2008) protectionism aided the revival of the US share in global GDP to 26 per cent in 2023 from 21 per cent in 2011 after falling from the peak of 35 per cent in 1985. But still, with China just a third less than the US, it is emerging as a formidable challenger as it forges its dominance in the Global South. Trump 2.
0 “Make America Great Again” weaponisation, draws from the Hamiltonian American industrialisation (1791) and the pushback to Adam Smith’s free trade liberalism before the 1940s. He reminisces American economic ascendency between 1816-1947 engendered by a peak level of import tariff of over 95 per cent, with an average tariff of 37 per cent to overshadow European dominance and to bring down enlarged public debt. And his strong determination towards an “Eye for an Eye” reciprocal trade act including a 60 per cent tariff against Chinese goods and a 20 per cent blanket tariff for all mimics the pre-Great Depression levels against Europe.
Unsurprisingly, the top contenders for the next Treasury Secretary position, Scott Bessant and Howard Lutnick, are zealously protectionist. The gambit is to impose high tariffs on all imported goods while supporting the free trade of domestic goods and considering the cost of a tariff as an investment in building the nation’s future productivity. Revenue accretion from higher import tariffs is envisaged to reduce domestic taxes, and make US manufacturing competitive, thereby also helping create jobs and narrow the trade deficit.
Trade tariffs will also be weaponised to penalise countries attempting de-dollarisation. It promises a multi-decade expansion in US productivity, increased capital expenditure, a revival of manufacturing dominance, and a reduction of the public debt-to-GDP ratio from a record level of 123 per cent, as it happened following the peaks after the Civil War (1881-85), World War 1 (1914-18) and the Great Depression (1939-45). But is Trump’s imagination of reliving the Gilded Age anachronistic? Here is why it indeed is.
With the US’ ageing population, the mission to deport 1.5 million and tighter immigration laws can lead to loss of productivity. The envisioned gain to manufacturing from Trump 2.
0 plan is pivoted on government largess to a few sectors at the cost of the wider economy, including from reversion to fossilization, unlike the Gilded Age that was driven by scientific inventions. Evidence corroborates that the decade-long US trade war with China and the Phase 1 agreement under the Trump 1 administration did not bring back US manufacturing. It is likely that even with a higher differential tariff rate (60 per cent vs 20 per cent), there may still be scope for Chinese dumping and reexports to the US from other countries.
Since Trump 2.0 tariff hikes will also impact the rest of the world outside of China, the collective global drag could be a headwind for the US as well. Between the high growth phases of the neo-mercantilist Gilded Era of the late 1800s and the post-World War 2 neo-liberal era, Trump has chosen the former because it attempts to mime Chinese post-1970s success.
However, China’s metamorphosing mercantilism is demonstrating the practicality of changing global order. In his latest APEC CEO Summit (Oct 16, 2024), President Xi attempted to portray China as a dependable new flagbearer of equitable globalisation, innovation, Global South, and digital and green technology even as the US was seen backpedalling towards unilateralism, protectionism, fossilisation and technological fragmentations. Trump’s yearning for past glory deriving from inefficient resource allocation contrasts the Chinese endowment of cheaper and practical technologies and its leadership in AI, robotics, and green tech.
Consistent shrivelling of free trade by the US can trigger retaliation instead of reciprocity by large countries, thereby undermining the US and the dollar’s dominance in global trade. This is reflected in the Global South gravitating towards BRICS, which now has 22 members across Asia, Africa, Europe, West Asia, and Latin America with an addition of 17 members over the past two years; BRICS Pay is evolving as an alternative to the dollar based global transaction system, SWIFT. Quantifying the impact of Trump 2.
0 neomercantilism is difficult given the implied uncertainty. But it will likely be a lose-lose for both the US and the world, more so for emerging economies. The tax cut proposal is feared to increase US fiscal deficit by $3 trillion over 10 years (Tax Foundation, October 2024), thereby aggravating the extant unbridled US public debt/GDP projections.
Estimates from the Peterson Institute (PIIE, May 2024) and Tax Foundation (June 2024) indicate an annual GDP loss of 2 per cent and 1.7 per cent, respectively, assuming a 10 per cent blanket tariff for world ex China, 60 per cent tariff on China added to the pre-Trump 2.0 punitive tariffs.
We use the PIIE model, and tweak estimates to accommodate for a higher blanket tariff of 20 per cent. Accordingly, the loss to GDP due to Trump 2.0 would amount to 2.
3 per cent annually or $7.8 trillion over the next decade, 2.8 times gains in tax revenues from additional new tariffs estimated at $2.
7 trillion. Since Trump 2.0 intends to impose a 20 per cent universal tariff against all countries, there will also be retaliatory actions.
Estimates from the Australian Productivity Commission (2017) simulated that a 15 per cent uniform increase in import tariffs in all G20 countries can trigger a recession including a fall in world trade by 22 per cent, a global output loss of 3 per cent or the equivalent of one full year of global GDP. Adverse trade measures in the aftermath of the Global Financial Crisis (2008) caused considerable drag for Emerging Markets and Developing Economies (EMDE). It got aggravated due to the pandemic shock and the Trump-1.
0 stridency. The economic damage for EMDE since 2008 is demonstrated in: (a) narrowing growth differential of EMDE vs World; (b) sharp deceleration in real household income; (c) widespread decline in savings and investment rates; (d) rising public debt; (e) weak private investments; and (d) declining capital flows, both FDI and FPIs. All these have been aggravated by the pandemic event, which has translated into peak levels of public debt/GDP ratios.
India’s real GDP decelerated to 3-5 per cent from 8-10 per cent prior to 2013 and China’s growth decelerated from 10-14 per cent to 4-5 per cent. Indian government debt (States and Centre) at ₹270 trillion (FY25E) has risen by ₹110 trillion over the past five years or 2.2 times the increment in labour income (1.
2x in FY12). This demonstrates India’s debt sustainability problem and high tax incidence on households leading to a diminution of their spending power. During the global trade liberalisation phase (FY93-FY08), India’s real trade of goods and services expanded by 14.
8 per cent CAGR. But since then, it has decelerated to 5.7 per cent CAGR in the post-Covid era.
Rising global protectionism resulted in a deceleration in private capex, employment creation, household disposable income, real consumption, and higher public and household debt. US restrictions would prompt China to intensify the dumping of manufactured products in Asia, including India. India’s trade deficit with China has widened from pre-Covid despite the weak consumption demand.
Chinese dumping is faced by Indian companies, especially in sectors such as chemicals, engineering goods, electronic goods, non-electrical machinery, and metals. Thus, a renewed bout of global mercantilism could make EMDEs even more fragile. Given the limited fiscal bandwidth, the policy options in defending livelihood issues will be narrowed.
Recent thoughts from the NITI Aayog and the Chief Economic Advisor advocating RCEP membership and Chinese FDI testify to India’s volta face from its earlier aversion to Chinese dominance. This stance could be reinforced as Trump 2.0 unfolds.
Overall, the Trump 2.0 risk-on trade may be sustained till he resumes office in January 2025. But the response may change depending on the sequencing of his policy promises.
It will be paramount for the package to deliver higher corporate earnings amid elevated risk-free yield; the risk of a steep correction can ensue if it precipitates an economic contraction. Tariff hikes may likely precede tax cuts, as it will provide a counterbalancing buffer later. The tax cuts and tariff hikes will imply higher near-term inflation thereby limiting the scope for Fed rate easing even as it contends the rising pace of de-dollarisation.
Global spillover impact can make things tricky for other central banks. The medium to long-term implications of renewed US mercantilism are decisively adverse both for the US and the world which can cause financial instability if it causes economic disruptions as it did during the Great Depression; China’s advocacy to shun US unilateralism in favour of equitable globalisation is an ironic role reversal. But it could well be a global saviour.
The writer is is Co-Head of Equities & Head of Research - Strategy & Economics, Systematix Group. Views are personal Comments.
