How are you? Finally Trump becomes the 45th U.S. president. During his campaign, Trump has made so many promises on introducing new changes and making America strong. I hope he will deliver his promises and make America prosperous. Now let’s analyze his economic plans and see if they will work.
I think his economic plans are quite simple. As regard to the fiscal policy, President Trump wants to generate economic growth through tax cuts and government spending at the same time. He promised to generate 3.5 percent growth a year, which is much higher than many economists think it can be sustainable for a long period of time. He believes that a high economic growth will give Americans more disposable income to spend. To stimulate the economy, President Trump also promised to have more deregulations and cut taxes by $6.2 trillion over the next decade while spending more on the military and an extra $500 billion to repair and build the nation’s roads, bridges, airports, transit systems and other infrastructure. President Trump said that the increased government spending would not be a problem because faster growth will increase tax revenue even at lower tax rates.
The economic stimulus (i.e. the $500 billion spending on infrastructure) has helped send stocks higher in anticipation of higher corporate profits in addition to less regulation. Soon after President Trump made his first speech (which was very humble and quite acceptable by the public) pledging to unify a deeply divided nation, the global financial markets calmed down and then stock prices rebounded. The Dow was up 263 points, or 1.4 percent to 18,595. The S+P 500 rose 24 points or 1.2 percent to 2,163. Financial stocks took the lead, surging 4.2 percent based on the anticipation that interest rate will go higher (which benefit banks to earn more profits).
As regard to the monetary policy, President Trump favors an increase in interest rates. During his campaign, he said he was very unsatisfied with the performance of Janet Yellen, head of the Federal Reserve Bank, and would not re-appoint her when her term will expire in February 2018 because Yellen has kept interest rates ultra-low, creating asset bubbles and widening wealth disparity in America. He once said that persons like him can borrow money at low interest rates, giving him the advantage to acquire assets for future appreciation. This would only benefit the rich people and widen the wealth disparity in America.
During his campaign, he also promised to bring manufacturing jobs back to America. I think it would be difficult because the cost of manufacturing overseas is generally lower than that of the United States. In addition, now some U.S. manufacturing jobs are being performed by robots. In fact, it is the use of automation and robots that replace the U.S. workers in the factories.
As regard to job creation, his goal is to create 25 million of jobs over 10 years, which would be 2.5 million per year. In fact, U.S. employers have created 2.4 million jobs during the last 12 months. However, most of these are low-paying service jobs. I think the United States can continue to create about 2.5 million jobs per year if there are no recessions in the next ten years. Therefore, I think his goal of creating 25 million of jobs over 10 years is hard to achieve.
To attract the return of overseas assets being held by the U.S. multinational companies like Apple, President Trump will propose a drastic tax cut from 35 percent to 10 percent on overseas assets. It is estimated that the overseas assets being held by the U.S. companies amount to $2.5 to $5 trillion USD. The return of overseas assets will increase investment spending in America, creating more jobs and growth. However, I doubt that even a drastic tax cut would make it attractive enough for U.S. companies to bring overseas assets back home for investment. I think the U.S. companies have concerns other than a high tax rate.
As regard to trade policy, President Trump wants to renegotiate the NAFTA with Canada and Mexico because he thinks it is not a fair deal. In addition, he would not support TPP (President Trump called it “a rape of our country”). In fact, some of the terms in the NAFTA are not fair to the United States. For example, the Mexican government would levy custom duties on cars that are made in America, while there are no U.S. custom duties on cars that are made in Mexico.
During his campaign, President Trump said he would consider China a currency manipulator on his first day in office and impose a punitive tariff of 45 percent on Chinese imports into the United States. This could be a big blow to China’s economic growth as the country is struggling with mounting debt, excess capacity and declining exports. In the first presidential debate on September 26, President Trump said, “You look at what China’s doing to our country … they are devaluing their currency and there’s nobody in our government to fight them … They are using our country as a piggy bank to rebuild China.”
However, I don’t think it is easy for President Trump to pursue his trade protection policy against China. It is because the Republican Party, which regained control on both U.S. Senate and House of Representatives, are much more in favor of a free trade. Mainstream economists generally believe that free trade is good for an economy in the long run. I am pretty sure that President Trump will act tough on China to open her key industries to U.S. companies including finance and telecom, as it was promised by China to allow foreign companies to enter into these key industries when she was admitted to the WTO in 2001.
If President Trump were to aggressively implement the trade protection policy against China, it would spark a trade war, not only depressing the economies of both the U.S. and China but also possibly triggering a global recession. The trade war with China will cause backfire and reduce the U.S. GDP growth. Increasing tariffs could make Chinese goods more expensive to buy. U.S. companies will eventually increase prices in order to protect profits at the expense of consumers. In addition, China will certainly take retaliatory action against the United States.
A concern about a new trade relationship with the United States and a possible rate hike by the Fed in December, the Chinese currency slipped to 6.7907 per dollar in Shanghai when Trump won the presidential election on November 9, 2016. Yesterday the Chinese dollar further slipped to 6.84 per dollar, its lowest level in seven years. A rate hike makes U.S. dollar strong, causing the Chinese dollar to fall.
In fact, China has been relying on a prosperous United States to allow her economy to grow since the United States is her second largest trading partner and also the world’s economic locomotive. Free trade is important to China that needs foreign markets for her products to keep pushing its population into the middle class and achieve the dream of being a “moderately prosperous” country by 2020. To achieve this goal, China must have a growth rate of 6.5 percent a year.
If there is a trade war between the United States and China, Hong Kong will be vulnerable not only in trades and logistics (since Hong Kong is highly dependent on China’s imports and exports), but it will also affect the city’s financial service sector and property markets. Meanwhile, trade and logistics accounted for 23.4 percent of Hong Kong’s GDP in 2014 according to the Trade Development Council. It will be a serious blow to Hong Kong’s economy.
During his campaign, President Trump said he would repeal the Obamacare. I think this would be difficult. Although there are some defects in the Obamacare, repealing it can cause chaos because millions of Americans have already signed up the Obamacare. But I am sure that President Trump will make changes on some parts of the Obamacare. Hopefully, making changes to Obamacare can reduce the costs of health care, which account for a significant portion of the U.S. federal budget.
Now what worries me most is the rapid rise in bond yields. There was a selloff in bonds, driving the yield-to-maturity (or bond yield) on the 10-year U.S. Treasury bond to 2.08 percent after Trump was elected as the U.S. president. Today the 10-year bond yield further rose to 2.22 percent (after the Brexit, it was 1.31 percent, the lowest ever since WWII). I think it is because traders are selling bonds to hedge against the possible rate hikes (which have been super-low for many years since the financial crisis in 2009) and the expectation of a rising inflation (remember that bond investors hate inflation because it erodes the purchasing power of their fixed payments). Investors are worried that the fiscal policy of tax cuts combined with the increased government spending will cause inflation and increase the national debt sharply by $5 trillion to $7 trillion over a decade. Therefore, they expect higher debt, higher inflation and higher interest rates. All of these are negatives for bonds. This may end the bond bull market that has lasted for almost three decades.
In conclusion, I think President Trump has laid out economic plans that are very ambitious. If they are successful, it will bring economic prosperity back to our country and make America strong. However, they are risky too. In fact, I think electing him as our president is a gambling. He is lack of political experience and public administration. I still think he is unpredictable. Anyway, we need to give him a chance to try. Now the only thing we can do is to keep our fingers cross and hope for the best for America under God.
Note: This article is just my personal opinions and it does not offer any investment advice to readers.