What Trump 2.0 would mean for the economy

• Donald Trump has proposed slapping a 10% minimum tariff on all imports and a 60% tax on all goods coming from China. Such moves would disrupt global trade and drive up US inflation, which could result in even higher interest rates to combat it.

• He has said he wants to permanently extend the individual tax cuts from 2017’s reform package, and that could slightly boost economic growth. But it also risks further widening the government's budget deficit, which could lead to higher bond yields.

• Trying to pick stocks that will benefit under a Republican or Democratic president have worked out poorly over the past eight years. Bigger picture, a Trump 2.0 White House could lead to higher inflation and interest rates, and a stronger US dollar, all of which could pose a challenge for stocks.

It’s easy to forget that voters generally care about one thing above all others: the economy. And for them, the US election in November comes down to this: continue President Joe Biden’s economic policies or change course and return former President Donald Trump to the White House. With the Republican convention less than two weeks away, let’s have a look at Trump’s plans for the economy and what it might mean for your portfolio.

Trade

Of all the things Trump says he’ll shake up, global trade is arguably the biggest. He’s proposed a 10% minimum tariff on all imports and a 60% tax on all goods coming from China (more on that later). The moves would lead to higher costs for American consumers, disproportionately hitting poorer households. Rising costs, naturally, would drive up inflation, which could result in even higher interest rates to combat it. Research group Capital Economics estimates that a 10% tariff could nudge annual inflation to as high as 4% – double the Federal Reserve’s (Fed’s) target – by the end of 2025.

How a 10% tariff on all imports would filter down to US consumers. Source: Bloomberg.

But the worldwide perspective is where things might get ugly. If trade partners were to retaliate in kind – levying tariffs of their own – it could upset global trade while shaving about 0.4% off US economic output, according to Bloomberg Economics. And that retaliation seems inevitable. The European Commission, for one, has new powers to hit back, without engaging in the World Trade Organization’s hobbled system for resolving disputes.Regardless of what Europe does, its producers would face increased pressure. Their access to the US market would be restricted and they’d face stiffer competition in other markets, including their own, as trade gets diverted from America. And that’d be especially true if Trump were to go ahead with his 60% tariff on goods coming from China, forcing Chinese producers to reroute their exports to other countries.Trump’s tariff moves could also have three big implications for the US dollar, all of which would likely see it strengthen. First, they would curb imports, resulting in fewer dollars “sold” to purchase foreign goods, which would naturally bolster the currency. Second, they could push the Fed to slow its interest rate cuts or even increase borrowing costs to address rising inflation, resulting in "higher for longer" rates that would boost the dollar by making it more attractive to foreign investors and savers. Third, they could set off a wider, more damaging trade war, ramping up safe-haven demand for the greenback.

China

Needless to say, a 60% tariff on Chinese goods wouldn’t be great for the world’s second-biggest economy. Businesses there might be able to reroute their exports to other places, but the shift would cause major disruptions and could be met with resistance from other countries. See, just this year, Chinese authorities encouraged more output from its manufacturing sector to help offset weak domestic demand, and that led to stronger exports – and a wave of accusations about overproduction and dumping from China’s trading partners. Tariffs would only make that worse.Having said all that, China’s pain could be other countries’ gain. Look at it this way: growth prospects and foreign direct investment in Latin America – specifically in Brazil and Mexico – have greatly improved on the back of the ongoing “friendshoring” trend, with companies pivoting their global supply chain strategies away from China. And that trend would likely only get stronger if Trump sought to further decouple the US economy from China’s.

The US is importing more from Mexico than from China for the first time in 20 years. Source: Bank of America.

Stateside, the proposed 60% tariff would lead to higher costs for American consumers and businesses that rely on cheap imports from China – and could drive up inflation. But the extent of the potential impact is tough to call. For example, one study found that while importers bore most of the cost of Trump’s tariffs on China during his first term, retailers (rather than consumers) swallowed the bulk of it, which limited the effects on inflation.

Taxes

Trump is no longer expected to push for another reduction in the corporate tax rate, but he has said he’d like Congress to permanently extend the individual tax cuts from 2017’s reform package before they expire at the end of next year. Now, normally, the logic here would be that more take-home pay might spur increased spending and boost economic growth, but since those tax cuts primarily benefited wealthy households, small-business owners, and folks in the real estate industry, they haven’t had a huge impact on the overall economy.The Congressional Budget Office, the independent watchdog, says the cost of extending all of 2017’s tax cuts would come in at almost $5 trillion over the next ten years, once the rise in interest payments is taken into account. And while Trump’s team says its proposed tariffs could plug any budget gap that the tax cut extensions create, the Peterson Institute for International Economics has said the revenues from the levies would, at best, amount to $2.75 trillion. In other words, those tax cuts could widen the budget deficit – that is, the difference between the government’s outgoings and its incoming revenue.

Budget deficit

Speaking of which, Trump has no real plan to address the US’s growing deficit. To be fair, neither does President Joe Biden. And it’s not hard to understand why: fixing the government’s finances requires short-term pain for long-term gain, and most politicians prioritize quicker wins.But the US’s ballooning deficit can’t be ignored forever. It hit $1.7 trillion in 2023 – a 23% increase from the year before. And the Congressional Budget Office predicts the figure will reach $2.6 trillion in 2034. Relative to the size of the US economy, the deficit is expected to be 7.1% next year – over three times the 2% average of other advanced economies, according to the International Monetary Fund.Plugging the growing gap between the government’s outgoings and incomings has meant that the US Treasury has been forced to sell more bonds. And that’s not ideal, but here’s the bigger problem: increased bond issuance only exacerbates the US's already swelling debt pile at a time when interest rates are a lot higher. So the country is shelling out more in interest payments and watching its deficit widen further. It’s a vicious cycle of even more bond sales, with even higher interest due, and so on.And, as you’d expect, all that issuance could put downward pressure on bond prices, leading to higher yields (since yields rise as prices fall). Should that happen, it won’t just be bond investors who feel the pain: the 10-year Treasury yield is considered “the risk-free rate” against which all other investments are measured. So a higher yield could lead to declining values in other asset classes too. What’s more, the yield impacts borrowing rates for households and businesses, because it serves as a benchmark for loans across the financial system.

Deregulation

Trump has said he’d seek to bring certain regulatory agencies under presidential authority and eliminate two existing regulations for every new one proposed. That could potentially benefit the financial sector through loosened bank regulation and capital requirements, or the oil and gas industry through relaxed environmental protections and emissions rules. But the key word there is “potentially”.

What’s the opportunity here?

Despite how it might seem, attempts to pick stocks that will benefit under a Republican or Democratic president have worked out terribly in the past eight years. The so-called Trump trades of 2016 (think: coal, defense, industrials, and financials) lagged the broader S&P 500 throughout his term. During Biden’s presidency, meanwhile, the Nasdaq Green Energy index has slumped, while the S&P 500’s big-cap oil and gas index has trounced the broader market.Long story short, it’s probably not worth trying to predict how various political outcomes might affect individual stocks. Instead, try to focus on the bigger picture. According to Capital Economics, a Trump 2.0 presidency would likely have a sizable impact on the top economic factors that investors are most concerned about: inflation, interest rates, and the US dollar. All three would likely turn higher if Trump is elected again, and that could ultimately present a challenge for stock prices.