What to expect from Trump

Policy under a potential second Donald Trump presidency, like his first (Trump 1.0), might sometimes be unorthodox. But a check on the more extreme policy positions of any US president is likely to be their desire to foster a strong equity market and economy as validation of the administration’s economic competency.

A second Trump term (Trump 2.0) is likely to present as much opportunity as it does volatility. This new global political era began in 2016 with Brexit and Trump 1.0, and the global economy has improved since then.

Geopolitical flux better describes the environment than geopolitical risk. The new era has even benefitted some sectors.

Domestically

If Trump wins the US election in November, tariff increases seem highly likely, but probably not to the degree that has been foreshadowed. Along with more expansionary US fiscal policy (and for this point, the final makeup of the next US Congress will be critical) and reduced immigration, inflation is likely to be higher. This may spillover globally.

Tax cuts and any relaxation of regulation would likely be modestly positive for growth, but uncertainty around higher tariffs and attempts to undo some of departing President Joe Biden’s industrial policies would likely weigh on business sentiment.

Trump is seeking to extend or make permanent the 2017 tax cuts in the Tax Cuts and Jobs Act (TJCA) set to expire in 2025. According to the Congressional Budget Office in the US, the cost of the TCJA through to 2027 may total $US1.6 trillion, and an extension of the cuts over the following decade would cost $US4 trillion.

Trump supports cutting the US corporate tax rate from 21 per cent to 15 per cent. In his previous term, he wanted the company tax rate to be cut to 15 per cent from 28 per cent, but encountered pushback owing to the adverse implications this would have on the budget balance and debt over time.

Trump is likely to continue with an ‘America-first’ strategy involving reshoring manufacturing and bolstering domestic production in chips, high-tech manufacturing, chemicals and rare-earth minerals. He may seek to wind back environmental aspects of the Inflation Reduction Act but may encounter challenges attracting the required congressional support.

ANZ Research is sceptical Trump will be able to influence the US Federal Reserve. This suggests less Fed easing under a Trump Presidency than under the current trajectory.

Current chair Jerome Powell’s term runs until May 2026, and precedent suggests Trump would not be able to fire him without cause. Even if Trump appoints a sympathetic Fed chair in 2026, policy decisions require a majority vote of Fed members, and neither the chair nor the president can remove long-serving members.

As with Trump 1.0, the reality of delivered policy is likely to be less extreme than the stated positions, but there is uncertainty over where these gaps will be largest.

Offshore

On foreign policy, Trump seems likely to broaden the Biden administration’s hawkish approach to China to other economies. This may leave China less singularly exposed, but exposed nevertheless.

China’s dependence on production and exports to fuel gross domestic product growth suggests any tariffs, even if substantially less than Trump has mentioned, will be costly. Large economies also have less potential to redirect exports than smaller economies.

A re-elected Trump would have the legal authority to impose tariffs without congressional approval. He has proposed a 10 per cent across-the-board tariff (the current average is 3 per cent), a 60 per cent tariff on Chinese goods and a Reciprocal Trade Act whereby the US would match any tariff/tax levied by a foreign government on US goods imports. Even moderate tariff increases will tend to heighten tensions with trade partners, including Europe.

Asian exporters have been agile in response to the relative economic strength of the US over China and are likely to again demonstrate that agility in response to any other shifts in global trade. More domestically-driven economies with policy room are likely to be less impacted.

Connector economies like Vietnam, Indonesia and India may benefit from displacement of Chinese activity, at least initially. How long this persists may depend on whether the Trump administration tightens rules of origin.

Trump has limited appetite for multilateral trade agreements and is more likely to focus on bilateral agreements to increase pressure on trading partners. The US would almost certainly withdraw from the Indo-Pacific Economic Framework (IPEF).

The economic relationship between Australia and the US is dominated by investment, rather than trade. The US is the largest investor in Australia, accounting for 25 per cent of the $A4.7 trillion invested by the 20 largest investing economies, but is only Australia’s third-largest trading partner, with an 8 per cent share. Investment flows are likely to be less vulnerable to broadened US protectionism.

Richard Yetsenga is Chief Economist & Tom Kenny is a Senior International Economist at ANZ

This is an edited version of the ANZ Research report “Blue Lens: Trump 2.0 - opportunity as much as volatility”, published July 24, 2024.