There’s been no shortage of apprehension around the possibility of Trump becoming president, both because of the potential international relations fallout, as well as the potentially detrimental effect his economic policies could have globally.
A cornerstone of Trump’s economic approach includes a significant hike in tariffs on international trade, notably imposing heavy tariffs on Chinese imports. Trump purports these increased tariffs could negate the need for federal income tax, thereby drastically slashing personal tax bills.
However, this sort of thinking is somewhat misguided. Various scholarly studies demonstrate that even upwards of 50-80% tariffs on all imports would only account for less than half of the current revenue generated by federal taxes. Furthermore, this solitary action from America could potentially escalate into a trade war with reciprocal measures from other countries.
A recent investigation by French economic researchers at CEPII examined the likely implications if such a conflict was to arise. The results indicate that such retaliatory tariffs could hit most countries, while simultaneously backfiring on the US.
The researchers suggest that, while higher US tariffs might encourage Americans to favour domestic over foreign products, the US could see its own overseas markets shrink due to reciprocal tariffs from trade partners. Thus, they argue, the US could be out of pocket, with the losses outweighing the benefits and contributing to a 1.3% decrease in US GDP. Additionally, US wages could fall by up to 1.5%.
Globally, the GDP could see a smaller decline of about 0.5%. However, due to the US being a key destination for Chinese exports, a trade war could have serious implications for China, where GDP could drop by 1.3%. Trump’s promise of high tariffs, while sounding desirable to some due his intention to impact China, could actually be counterproductive and hurt the US more.
If voters understood the true impact of Trump’s trade policies – potentially benefiting Mexican workers more than their US counterparts, for example – it might impact their voting choices significantly.
The potential beneficiaries of a prospective Trump-induced trade conflict could be Mexico and Canada, due to their existing free-trade agreement with the US. If tariffs caused purchases from other global regions to increase in cost, it’s possible that Mexican exports to America might escalate, offsetting the impact from other countries. Therefore, American workers could find themselves on the losing end, as research indicates a possible wage surge of 5% in Mexico as a result of a trade conflict.
A slightly altered election behaviour might be observed if US citizens realise that Trump’s trade strategies could inadvertently enhance Mexican workers’ financial status at the expense of their own. Moreover, if Trump takes notice of the findings from the CEPII report, he may include Mexico and Canada in his agenda if he wins the election.
The French study also hints that France, Germany, and large parts of the European Union may experience less disruption due to a trade war. However, Ireland might be put in a precarious position, given its large US business base. If the EU decides to make retaliatory moves on corporate taxation or competition aspects against US corporations based in Ireland during a trade conflict with the US, it could cause significant challenges for Ireland. Especially since if outstanding corporate tax collections are excluded, Ireland is suffering from a budgetary deficit.
The implementation of Trump’s economic strategies is not certain even in the event of an election victory. He may opt to overlook his election pledges, or his second presidential term could see the recurrence of an ineffective administrative team in the White House, coupled with a president displaying little enthusiasm for regular governance.
Significantly, for any trade or tariff strategies to be implemented, consent from both the US Senate and House of Representatives is required. The current surveys indicate that the Republicans are likely to gain the Senate, whereas the potential exists for the Democrats to take over the House. This could provide the Democrats with the capacity to obstruct any radical trade strategies proposed by Trump if he is elected.
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