Trump’s Rhetoric Will Be Reined-In By Reality

So, it’s official. Donald Trump is US President. Now the inauguration has happened, the transformation is complete – from fast-talking business-man-turned-reality-TV-star to leader of the free world.

“The Donald” was elected, of course, on a wave of pretty lurid campaign rhetoric. The question now is to what extent he will act on his talk of “mass deportations” and “sky-high tariffs” – and the potential impact on the world’s biggest economy.

As Trump enters the White House, the US is in reasonable economic health. Unemployment is below 5pc, down from 10pc in 2009 – and the outlook is relatively buoyant. The International Monetary Fund last week lifted its US growth forecast to 2.3pc this year and 2.5pc the year after, up from a lacklustre 1.6pc in 2016.

Trump campaigned on tax cuts, regulatory reforms and boosts to infrastructure spending he claimed would lift US growth to 4pc per annum. To some extent, the IMF seems to agree. A recent Reuters poll of 70 economists, though, said the biggest threat to both US and global growth was “Trump’s protectionist promises” – given his proposed trade barriers on the likes of China, that would almost certainly be returned in kind.

Financial markets have chosen to focus less on Trump’s tub-thumping protectionist rhetoric and more on pledges of better infrastructure and lower taxes. Despite the initial shock, and an initial 800-point plunge, the Dow Jones Industrial Average closed up the day Trump won. The same equity benchmark has since rising 9pc more, with the dollar up 6pc, having just hit a 14-year high.

So, which Trump will prevail – the tax-cutting deregulator or reckless protectionist? America’s rate of corporation tax, we heard during the campaign, will fall from 35pc to 15pc, with personal tax rates “down for all income groups”. Consider, though, that America’s national debt has doubled to $16,000bn-plus under President Obama – a development Trump repeatedly criticized.

Even if tax cuts boost growth in the medium-term, America’s deficit will get bigger before it gets smaller – so borrowing will rise. When Obama tried borrowing more, a Republican-controlled Congress stopped him, sparking the 2011 debt-ceiling crisis – and the same could happen to Trump. If enough hawkish Republicans feel he is acting irresponsibly, they’ll take the tax cuts without given way on spending – so the growth-boost could be less.

While Congress controls fiscal policy, there are no such checks and balances on trade. This is the where the prospect of a Trump Presidency is, on the surface, most alarming – but also where his literal campaign promises are least likely to happen.

Trump has pointed to huge 35pc tariffs on imports from Mexico and even bigger 45pc import levies on Chinese products to “stop foreign workers stealing American jobs”. The Chinese would almost certainly retaliate – and commerce between the world’s two biggest economies could crater. Diplomatic relations, already fragile given tensions in the South China Sea, would shatter. Anyone who doubts how quickly trade wars can develop, with economic rationality giving way to political chest-beating and mutual recrimination, should study the disastrous Smoot-Hawley tariffs of the 1930s. International relations collapsed and America was plunged into the Great Depression, shaking capitalism to its core.

If Trump takes serious liberties with US fiscal policy, we could see bond market squalls and related equity market turmoil, damaging growth and jobs. If he re-writes US trade policy, though, positioning America as a protectionist aggressor, we could see widespread economic stagnation and a far less stable world order.

My hunch is that, as a businessman, Trump believes in positive-sum games – “if I do a deal with my rival, we can both benefit”. And while he isn’t everyone’s idea of an ideal US president, it Trump certainly isn’t stupid.

The reality is that a trade war with China – and her growing band of commercial allies across the emerging markets – would do serious harm to the US economy. Not only would growth slow, but domestic inflation would rise given heavy reliance on consumer good imports from China. America’s heavy use of overseas finance, not least from Beijing, also means Treasury yields would spike, risking a disastrous bond market crash.

I’d say that Trump’s talk of “taking on the Chinese” – just like his plans to “deport millions” and “put up that wall” – mark the start of a prolonged bout of deal-making. Millions of Trump “rust-belt” voters do indeed want immigration slowed and US domestic markets to be better protected – and to some degree, that could happen. It would mean, though, taking on enormous commercial vested interests, both at home and abroad, that are doing rather nicely under the status quo. Trump’s pungent rhetoric, then, could turn out to be the open-gambit ahead of some serious negotiations.

Since being elected and entering the White House, Trump has begun to trim his rhetorical sails. He has backed away from his promise to “eliminate Obamacare” – no doubt given the complexity of social reforms and the howls of protest when such programmes are scaled back. His call for a total ban on Muslim immigration has also been toned down, with Trump now talking of a temporary suspension from nations “with a history of exporting terrorism”.

Trump’s tax cuts may happen, but his “mighty spending boost” looks vulnerable. Either way, if he avoids a financial crash, US growth should continue. If his trade and diplomatic rhetoric becomes reality, though, then not only will the US economy be seriously damaged, but broader global growth too.

“It’s the economy, stupid,” as Bill Clinton once said. That’s why, rhetorically speaking, Trump’s bark will be worse than his bite.

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