The Trump Effect – what can we Expect from the ‘Hair Apparent’?
The election of Donald Trump carries deep implications for United States’ domestic and foreign policy even if these have yet to be clarified.
Apart from some of the hugely divisive proposals that emerged on the election campaign trail (building a Mexican border wall, banning Muslims entering the US), and wild promises (to lock up Hillary Clinton), Mr Trump has expressed intentions that could simultaneously stimulate the US economy (by cutting corporate taxes and encouraging repatriation of funds held by companies offshore to avoid tax) but undermine the rate of global economic activity by ushering in a period of protectionist policies. All part of ‘Making America Great Again’.
The fact that he appears to have changed his mind already on several issues risks alienating the grass roots voters who helped bring him to power. This could foment social problems in the future if, indeed, his campaign strategy of targeting voter groups on coldly detached statistical grounds means that he has no genuine empathy with them. His pre-election promises may morph into ones intended to please the mainstream.
Though it is still early days, Mr Trump’s Apprentice -style hiring of candidates to key government posts reveals a tendency to favour senior executives from top financial firms despite lingering public distrust in such institutions.
‘Making America Great Again’
Understandably, given that he is a Washington Outsider and not part of the Political Establishment, the President-elect seems keen to surround himself with a tight coterie of people he believes he can trust even though this may restrict his ability to attract the range of talents that he needs to be an effective President.
While he has pledged to shake up the way things are done, his apparent disregard for diplomatic protocol (such as the recent spat with China over taking a call from Taiwan’s President) may create problems for the US in its dealings with the rest of the world. While he may bring a fresh approach, his lack of political experience may mean he will not fully appreciate the wider ramifications of policies he proposes.
It is with this in mind that the Republican Party in particular (to which he has seemed to be only nominally linked after the acrimony evident between him and the ‘Grand Old Party’ during the election campaign) must decide which policies are to be supported and which are to be reined in.
This will be relevant to his tax reform proposals. These are said to include (i) a cut in the Corporation Tax rate from 35% now to between 15% to 25% (ii) introduction of a preferential rate of tax to encourage US corporations to repatriate an estimated $1 trillion-to-$2.5 trillion of funds held offshore (iii) overall simplification of the tax system and (iv) a reduction in corporate tax breaks.
Other measures may include a cap on mortgage interest deductions. The introduction of such changes which we could dub ‘Trumponomics’ would be facilitated by the Republican Party’s control of both the House of Representatives and the Senate. That said, the risk of a large initial increase in government debt as tax revenues fall, recalling the Laffer Curve and supply-side economic policies popularised by Ronald Reagan’s presidency, may unsettle some Republicans. One area of the economy already heavily flagged up as a likely beneficiary of higher expenditure is construction.
‘the Trump Presidency could boost GDP growth by around 1%’
Some observers have speculated that the Trump Presidency could boost GDP growth by around 1%. It remains to be seen how much such a gain would translate into increased global activity.
Already, US GDP growth has picked up, hitting an annualised rate of 3.2% in the third quarter of 2016. It has been suggested that part of the impact from repatriation of funds offshore (much already thought to be held in US$) may take the form of share buybacks, increased dividend payments and capital expenditure, all potentially positive for Wall Street.
So what might any of this mean for the UK? The changes in the US come at an interesting time for the UK given its proposed exit from the European Union. Early indications are that Mr Trump is proBritish and would welcome more trade deals, encouraged to some extent by former UKIP leader Nigel Farage’s arrival on the scene, allegedly much to the irritation of Theresa May’s government.
However, given that the US is expected to pursue an ‘America First’ policy, it remains to be seen what this will mean for the terms of deals struck between the two countries.