Commentary: Implications of Trump’s policies for Singapore’s economy

IMPACT ON THE US ECONOMY

The US is the world’s largest economy, accounting for a quarter of global gross domestic product, and most of current growth.

Despite decades of declinist predictions and rising-China boosterism, the US share has actually increased in recent years, as its growth has outpaced that of Europe, Japan and other high-income countries, while China’s has slowed. This has entrenched the US’ position as the largest source of external final demand for its trade partners.

Much therefore depends on the US domestic growth impacts of the Trump administration’s policies. These are difficult to predict.

Trump’s signature policy proposal of a 10 to 20 per cent tariff on all imports, and 60 per cent on imports from China, would increase investment in import-competing US-based industries, adding to growth. But by raising costs, tariffs would hurt import-consuming sectors, and by inviting retaliation, hurt competitive export sectors.

Facing higher prices, consumers may cut back on spending, reducing growth. With an economy already operating at capacity, close to full employment, the promised mass deportation of illegal immigrants – another signature policy – would worsen labour shortages and add supply constraints to growth.

Trump has promised tax cuts for corporations and individuals. This will result in revenue losses that would not be made up for by tariff revenues, especially if the tariffs work as intended in reducing imports.

Significant cuts in government spending are unlikely, since only a quarter of the Federal budget is “discretionary” (the rest are “entitlements” like Social Security and Medicare), and half of that is defence spending, which could increase. Thus the nonpartisan Congressional Budget Office estimates that the budget deficit under Trump will amount to US$9 trillion over 10 years, resulting in a huge stimulus to growth.

Tax cuts and proposed deregulation will increase corporate earnings and investment – the current expectation of this explains the recent boom in stocks. A positive “wealth effect” from rising asset prices could also increase consumption. So overall growth could increase in the short run, though with US GDP already growing at 2.8 percent in 2024 – high for a large, mature economy late in the business cycle – a substantial increase is unlikely.

Much higher growth may even be undesirable, because these policies will be inflationary.