America, despite Trump's imposed tariffs and a significant budget deficit, remains a risky bet for those considering against it.
In the final years of his presidency, Donald Trump's trade policy has raised significant concerns about its long-term effects on the global economy. The policy, characterised by tariffs and protectionist measures, has been met with both optimism and pessimism.
Pessimists predict that the Federal Reserve will adopt a restrictive monetary policy due to high inflation caused by Trump's tariffs. They warn that mortgages and interest rates for car loans and other debts will become much more expensive as a result of the rise in U.S. government bond yields. The pessimists' fears are rooted in the fact that U.S. tariffs are much higher than anyone expected a year ago.
The direct shock from these tariffs reduces global economic output, with estimates showing a 1% contraction in GDP under the most aggressive tariff scenario. Business confidence also declines significantly as uncertainty around tariffs grows, negatively affecting investment and employment decisions worldwide.
The initial economic boost observed after the 2016 U.S. presidential election waned as tariff announcements weighed heavily on global industry and trade sentiment, weakening economic growth prospects. Beyond direct impacts, spillover effects through financial markets and sentiment could amplify the economic drag, potentially doubling the initial GDP impact.
Trump's trade policy has introduced substantial uncertainty and protectionist measures that have slowed global economic activity, hurting trade flows and global integration. These consequences are expected to persist and weigh on long-term growth globally.
Despite these concerns, stock markets in the U.S., the U.K., and many parts of Europe have recently reached record highs. However, companies on both sides of the Atlantic are unsettled and holding back on investments. The yield on U.S. government bonds is expected to rise sharply as a result of Trump's tariffs, making debt servicing more expensive for the U.S.
Foreign observers often ignore positive U.S. news and overinterpret bad data due to Trump's controversial character. This tendency has been observed in the response to Trump's imposition of 30% punitive tariffs on a significant portion of Mexico and Canada's exports. Trump has erected the highest tariff barriers around the United States since the Great Depression.
However, it's important to note that the economy is not a just, punishing god that will teach Trump a lesson in good time when he sins against economic principles. The agreements with the U.K., Japan, Indonesia, and the EU show no return to the world before Trump 2.0.
Trump's trading partners are reluctant to make major concessions, and the judiciary is unlikely to stop him from imposing tariffs. Despite these challenges, Trump may face political pressure and seek scapegoats more eagerly than before, and if he fires Federal Reserve Chairman Jerome Powell, it could exacerbate the downward pressure on the dollar and U.S. government bonds.
In conclusion, Trump's protectionist trade policy has had a significant impact on the global economy, slowing economic activity, hurting trade flows, and global integration. These consequences are expected to persist and weigh on long-term growth globally. It remains to be seen how these policies will evolve under future administrations.
[1] Sources: International Monetary Fund, Peterson Institute for International Economics, and Bank for International Settlements.
- Concerns in the realm of politics and general-news have arisen about the long-term effects of Donald Trump's tariffs on the finance sector, as the Federal Reserve might adopt a restrictive monetary policy due to high inflation caused by these tariffs, leading to increased expenses for mortgages and other debts like car loans.
- Trump's trade policy, characterized by protectionist measures and tariffs, has caused a decline in business confidence, negatively affecting investing decisions worldwide, contributing to the overall slowdown in global economic activity and potentially harming long-term growth.
