Economics

Gearing up for Trumponomics

What a Trump presidency could mean for infrastructure, taxes, and trade

January 24, 2017
©CNP/SIPA USA/PA Images
©CNP/SIPA USA/PA Images

Speculation about the economic policies of a Trump Administration has been “hot” in financial markets since the end of last year, but for most folk the serious discussion starts now that the president is in the White House. Well it would, if Steven Mnuchin, his nominee for Treasury Secretary, had been confirmed.

Or Mick Mulvaney, his nominee for Budget Director. Or a slew of other nominees for posts at the Departments of Transportation, Energy, Housing, Health, Labour, Commerce and Trade among others. Most, if not all, though, will gradually slot into place and before long, the new US government will articulate a plan for the economy which will have to fuse with plans originating in both Houses of Congress. But we can already reflect on what so-called Trumponomics is going to look like—especially given that Trump yesterday pulled the US from the Trans-Pacific Partnership.

Then look at what the president said in his inaugural address. He promised: “we will build new roads and highways and bridges and airports and tunnels and railways all across our wonderful nation. We will get our people off welfare and back to work, rebuilding our country with American hands and American labour.” He also (now famously) said that “protection will lead to great prosperity and strength.” The White House website, updated as soon as the inauguration was over, also mentions cutting taxes for all individuals and companies, along with deregulation to relieve the alleged $2trn cost of regulations to the American economy in 2015.

There will be controversy around many of these issues—and others. The three most important from a macroeconomic standpoint are infrastructure, taxes, and trade.

Infrastructure

“We need more—and better—infrastructure” is, in principle, a position most people will agree with. Infrastructure creates jobs; integrates businesses, communities and regions to produce so-called economies of scale; and “should” generate its own momentum of renewal and maintenance. In the US, as elsewhere, infrastructure investment has been neglected, and so here, the Trump presidency is tapping a potentially rich vein. Trump’s list of what comprises infrastructure is fair. But there are newer, potentially productive projects in the highway, energy and broadband systems that derive from fast-changing developments in, for example, driverless cars, energy storage and transmission, and communications technology.

The questions for the US government are whether it will have the vision to articulate and back projects, and who pays? Commerce Secretary nominee Wilbur Ross and the new head of the National Trade Commission, Peter Navarro have proposed a system of tax credits which would effectively return four-fifths of the cost of spending on infrastructure to private developers and contractors. In principle, there may be projects in which tax credits are useful, but if the government is serious, it should not allow private companies to cherry-pick only the most immediately profitable and juicy programmes. Infrastructure is long-term. It generates social as well as economic costs and benefits, and the paybacks sometimes accrue over time spans better suited to publicly funded schemes. If the government presents a plausible plan over a decade, costed at say, $1-2trn, we might judge that it had at least made a start.

Tax cuts

Though it is expected the administration will propose tax cuts for individuals, with major benefits accruing to the well off, the more interesting proposals relate to corporate taxation. Trump has promised to cut it from 35 per cent, allow companies to depreciate capital spending immediately rather than over many years, and disallow the deduction of interest expenses for tax purposes. These proposals probably get plaudits from most observers.

There’s a lot of interest, though, in the Republican-sponsored “border tax adjustment,” technically known as the “destination-based cash flow tax.” Trump has blown hot and cold about this, but there’s a sporting chance it will make progress. Basically, US companies are supposed to pay tax now on their worldwide profits, but the border tax would change this completely, so that they would pay tax only on the revenues and costs generated at home. Goods and services bought abroad, or imports, would in effect be taxed at the corporate tax rate, and those sold overseas, or exports, would in effect be subsidised to the same extent. Analysts think that this tax system would lead to a significant rise in tax revenues, allowing the corporate tax rate to be lowered to about 20 per cent, along with a 2-3 year rise in inflation, exports and the US dollar.

The tax is controversial though. Other countries have similar systems based around VAT, which is an indirect tax. The US proposal is based on a direct tax, and would therefore fall foul of World Trade Organisation regulations, and be deemed a covert form of protectionism because it discriminates actively in favour of exports and against imports. Whether the Trump Administration would care—Trump having once threatened to leave the WTO—is a moot point.

Trade

Trade is certainly going to prove contentious. Trump yesterday withdrew the US from the Trans-Pacific Partnership Free Trade Agreement, and it is being reported that he will issue an executive order to begin a renegotiation of the North American Free Trade Agreement. There is no doubt about the intention to punish countries that, in the US government’s view, violate trade agreements. This is aimed largely, though not solely, at China. This is going to be a very different America from the one that built and nurtured the liberal, rules-based trade system over the last 70 years.

Having threatened 45 per cent across the board tariffs against China, high tariffs and a wall against Mexico, 35 per cent tariffs against BMW in the US, and “tweeted” threats to other named companies, it would be complacent to take Trump’s protection statements lightly. The likelihood, though, is that the administration will threaten the use of tariffs as a tool to secure concessions. It may actually order tariffs on specific products or apply them on a sectoral basis, rather than go hell-for-leather into an outright war over trade.

As an aside, Theresa May will go to see Trump this week, confident she will be able to declare America’s willingness to strike a free trade deal with the UK at the first opportunity. We shouldn’t mistake speed (in reaching an agreement) as a substitute for content and leverage, both of which the US will push hard in its own unilateral interests. Remember the phrase used in Trump’s inaugural address: “buy American and hire American.”

It is possible that the realities of office, a pro-free trade Republican Congress (mostly), and the influence of business and banks in the administration and in lobbying will end up softening the government’s trade strategy. Yet, it has so far not paid off to doubt whether Trump and his team mean what they say. If they overplay their hand, or spur political tensions with counter-parties, notably China, which then retaliate, there’s no telling where and how trade conflict will end. And that could cost the US dear and puncture any optimism that clings to Trumponomics.