What impact will a second Trump term have on the global economy

Donald Trump has won a second term in the White House on 5 November 2024 not in a landslide but in a not-so-close election as expected by the polls, splitting his country in two. Now Trump has already nominated key names in his cabinet – including Scott Bessent as Treasury Secretary and Howard Lutnick as Commerce Secretary – and we can look at what would be the results of his radical economic policies on the global economy after 20 January 2025 when his term actually starts.

Markets are expecting a slow to global growth and have already priced at 75% the risk of a global recession during a new Trump term since his election on the prospect that his promises to raise tariffs and other protectionist policies could trigger a trade war.

Trump’s economic promises are in five key areas: trade and tariffs, migration, tax cuts, deregulation, protectionism (America first)

In the area of trade and tariffs, Trump has promised to impose tariffs of 10% to 20% on importations from all countries, including friendly countries like Canada, Mexico, Europe and Australia, and as much as 60% from China, in a goal to protect domestic industries and repatriate delocalised jobs in the US.

Tariffs have long been studied in the economic theory. Before they are implemented, they can actually cause an increase of growth as consumers want to anticipate the effect of the price increases caused by the tariffs by moving their purchases forward. But then, there is a countereffect of reducing growth once the tariffs are in place.

On the short run, tariffs cause inflation, disruption in supply chains and reduce confidence, leading to a reduction in consumption and investment. The only positive effect is that trade balance is improved as imports are reduced, but exports are not necessarily increased as other countries impose retaliatory tariffs of their own. This has an increasing effect on the value of the currency of the country implementing the tariffs.

This is why tariffs are more beneficial or less detrimental to larger countries like the US who have the capacity to manufacture locally and more bargaining power. In the long run however, tariffs bring more limited consumer choices, higher prices, lower productivity, more unemployment and a lower global growth. This has been demonstrated among others by the Armington model[1].

Trump’s migrant deportation plans could cause staff shortages in key industries

Regarding migration, Trump has a radical plan to deport all undocumented immigrants. Many of these people are actually working in vital sectors for the US economy, like construction, agriculture, housekeeping, catering, cleaning. The sudden removal of all this labour force could cause disruptions, lack of staff in these key industry areas leading to shortages and price increases.

Tax cuts will increase inequality and interest rates, slow the economy

With respect to tax cuts, Trump has promised to extend permanently his 2017 Tax Cuts and Job Act which included an increase in the standard deduction, lower marginal income tax rates for most income brackets and an extension of the estate tax exemption. Additionally, Trump has called for lowering the corporate tax rate to 15% while his TCJA reduced the top corporate tax rate from 35% to 21%. These measures would disproportionately benefit the wealthy. These types of policies have been found to lead to higher income inequality in both the short and medium-term and to not have any significant effect on economic growth or unemployment (no ‘trickle-down effect’), according notably to the works of David Hope and Julian Limberg on the economic consequences of major tax cuts to the rich[2].

Furthermore, the president-elect has vowed to implement a series of targeted tax break, including eliminating taxes on tip, Social Security benefits and overtime pay. This leads to interrogations on how these federal services would be financed and could result in spiralling budget deficits. He has further promises such as to make interest paid on car loans fully tax deductible which would benefit the wealthier and would not help the fight against climate change. On the whole, lower taxes will have a ‘sugar rush effect’ that will prompt more expensive imports and higher interest rates from the Fed, slowing the economy.

Trump’s and Musk’s deregulation plans are a threat to the US population’s education and welfare system

On the deregulation front, Trump has appointed Elon Musk and Vivek Ramaswamy – his former competitor in the Republican nomination – as DOGE, i.e. leaders of the ‘Department of Government Efficiency’, pushing federal employees to resignation and cancelling whole units, mainly targeting the federal departments of agriculture, commerce and education, in a push to cut $2 trillion or one third of the US government’s annual budget. Not mentioning conflicts of interests, this appointment and policies could result in lasting damaging effects on education and welfare of the US population.

With regard to protectionism, besides his tariff policies, Trump wants to boost domestic oil and gas production (‘drill, baby, drill’) and punish companies who move manufacturing from the US to other countries. Here again, while probably helping in the short run to keep jobs in America, in the long run, they will lead to higher prices, these companies will lose in competitiveness and ultimately it will lead to more failures and more unemployment in the US.

Trump 2.0 policies could actually resurrect inflation

Many US voters along with foreign commentators have looked with wistfulness at Trump’s first years in office where the economic growth was good, unemployment and inflation were low until Covid hit and thought a new Trump term would bring these good economic results back, even better with more radicalism. It can even be inferred that is the main reason of the Trump election as many US voters went beyond an initial revulsion for the character but endorsed him for his presumed skilfulness in economics, while blaming Biden for the high inflation of the recent years, which was actually more a consequence of global tensions and central bank decisions, while the good economic figures of Trump’s first term could be attributed more to Obama’s good economic policies and to the ‘adults in the room’ who were in Trump’s first term but are no longer with him. Trump’s policies could in fact resurrect inflation and make it worse and lasting with his tariffs and resulting trade wars.

Trump’s economic along with non-economic policies precipitate the risk of a recession

Trump’s non-economic policies, such as his foreign policy of decoupling with Europe and letting down Ukraine, radical conservative political stances on abortion and diversity, and his ignorance of climate changes could also result in social tensions and uprising that would precipitate a recession in the US in the coming years.

A global recession is also on the cards as all other countries trading with the US will be heavily impacted by the tariffs imposed by the first economic power.

Sources:

Caliendo L., Feenstra R.C., Romalis J., Taylor A.M. (2016), Tariff Reductions, Entry and Welfare: Theory and Evidence for the Last Two Decades*

Elliott L. (2024), The Guardian, From higher tariffs to lower taxes, will Donald Trump’s economic plan pay off?

Lobosco K., Luhby T. (2024), CNN, Here’s what Trump is proposing for the economy

[1] Lloyd P.J., Zhang X.G. (2006), The Armington Model, https://www.pc.gov.au/research/supporting/armington-model/armingtonmodel.pdf

2 Hope D., Limberg J. (2022), The Economic consequences of major cuts for the rich, https://academic.oup.com/ser/article/20/2/539/6500315