Reading the tealeaves on Trump’s protectionism
On 20 January, Donald Trump will be inaugurated for the second time. On the campaign trail, Trump has promised to take the US in a much more protectionist direction. On trade, Trump vowed to levy tariffs on all imports to 20% and on Chinese imports to 60%. He also proposed to increase tariffs on automobiles to 100%. On immigration, his protectionism is even more apparent. He has not only promised to tighten illegal and legal migration, but also vowed to deport all undocumented immigrants currently living in the US (estimated at around 13 million people). Yet the proof of the pudding is in the eating. Given the potentially large stagflationary impact of such policy proposals, he might hesitate to implement them in full once in office. In this economic brief, we assess his cabinet nominations and other announcements to get some indication of how protectionist his second term in office could actually become.
Trump’s trade policy
On tariff policy, Trump’s nominations for various key economic policy positions have reassured financial markets somewhat. That was especially the case with the nomination of Scott Bessent, a partner at Soros Fund Management, as treasury secretary. On the day of his nomination, American and European stock markets jumped up by around 1%, while the typical safe haven, the US dollar, depreciated. Trump also nominated Kevin Hassett, an economist, to the National Economic Council and Howard Lutnick, CEO of Cantor Fitzgerald, as commerce secretary. All are seen as relatively moderate and Wall-Street-minded. Markets see similarities with the moderating roles played by Steven Mnuchin and Gary Cohn in the first Trump administration.
Yet markets might be overly optimistic. Indeed, Trump has also nominated Jamieson Greer as the US trade representative. Greer was chief of staff of Robert Lighthizer, the architect of Trump’s trade wars during his first term. He has espoused several anti-trade views, such as his proposal to revoke China’s Most Favoured Nation status. Trump has also made Peter Navarro a trade counselor, a very vocal anti-trade economist.
Furthermore, the current so-called moderate nominees are more open to increasing tariffs than Mr. Mnuchin and Mr. Cohn were, even if they see them as instrumental in obtaining other, higher-ranked objectives. Mr. Bessent sees them as a valuable “negotiating position”, while Mr. Hassett and Mr. Lutnick believe they could help onshore global production and bring manufacturing jobs back.
In contrast to the first Trump term, when tariffs were only first announced two years into his term, Donald Trump now fired the opening salvos of his trade war even before his inauguration. On 25 November, Trump pledged to impose 25% tariffs on Mexican and Canadian goods on Day 1, which would cause substantial damage to both their economies (see figure 1). He said the tariffs would be maintained until both fentanyl and undocumented migrants stopped coming into the United States across the Mexican or Canadian border. Following phone calls with both countries’ respective leaders, Claudia Sheinbaum and Justin Trudeau, he toned down his rhetoric. However, we could still see executive orders to hike tariffs on both countries (and on others) in the first weeks following his inauguration. Those weeks will indeed give us further indication of how restrictive his policies will be towards global trade over the course of his term. For now, KBC Economics works on the assumption of a gradual phasing in of a 10% blanket tariff on all imports and a 60% blanket tariff on Chinese imports.
Trump’s migration policy
While Trump’s economic nominations were a mixed bag, on migration, his migration-related nominations point in a very protectionist direction. Stephen Miller, an immigration hardliner who helped craft Trump’s family separation rules during his first term, will become Trump’s deputy chief of staff. Tom Homan, another immigration hardliner, will become Trump’s border czar. He threatened to deploy the National Guard to help with deportations.
Though Mr. Trump hasn’t made any concrete announcements on immigration, we can expect multiple executive orders to be issued on the topic during his first weeks in office. After his inauguration in 2016, Trump immediately issued multiple migration-related executive orders, including the so-called Muslim ban. We can also expect Congress to pass more comprehensive legislation on immigration. On 7 January, the House of Representatives already passed the Laken Riley Act, which makes it easier to deport undocumented immigrants for minor crimes.
Though Trump clearly aims to crack down on illegal immigration, his views on legal migration are more unclear, however. Following a spat between Laura Loomer, a right-wing influencer and Elon Musk, Trump declared his support for the H-1B visa program, a visa program for so-called specialty occupations. We still expect tougher legal migration policies overall, though. We don’t foresee a major nation-wide deportation operation, however, as this plan would face daunting legal, financial and logistical challenges. Overall, we assume relatively mild reductions in new foreign-born labour over the course of his term.
Conclusion
Donald Trump’s post-election nominations and announcements have given us some indication on how protectionist his administration may become. On migration, Trump’s nominations point in a restrictive direction, especially towards illegal migration. In contrast, Trump’s actual trade stance remains unclear. He made several moderate cabinet nominations to key economic posts. However, many trade hardliners still joined his cabinet and recent tariff threats to Canada and Mexico still suggest a more intense trade war than during his first term. We expect more clarity on Trump’s economic policies after the inauguration, when Trump will start his second term as US president.