Donald Trump’s unexpected victory in the recent U.S. elections has the potential to cause profound impacts on the global economy and investment markets. In this update, we provide an overview of Trump’s main policy proposals and our preliminary views on their potential implications.

Key proposals

Individuals

• Lowering marginal tax rates for individuals including replacing the current seven personal income tax brackets with three and reducing the top marginal rate from 39.6% to 25%.
• Taxing capital gains and dividends at a 20% maximum rate.
• Eliminating federal estate and gift taxes.
• Eliminating the tax on investment income of high-income households.
• Limiting the value of itemised deductions, except for charitable contributions and mortgage interest payments.

Corporates

• Reducing the corporate tax rate to 15% from its current 35%.
• One-time repatriation tax of 10% of corporate profits held overseas.
• Foreign subsidiaries of U.S. companies pay taxes on profits in the year they are earned.

Border Protection

• Remove 11.3 million undocumented immigrants living in the U.S., making up about 5% of the labour force.
• Triple the number of Immigrations and Customs Enforcement officers from 5,000 to 15,000.
• Build a permanent wall on the Mexican border to stop the movement of illegal immigrants. The cost of this project has been estimated at between $15 and $25 billion. This does not include the ongoing cost of maintaining the wall and associated security requirements.

Trade

• Trump has argued that a number of trade arrangements are not in the best interest of the U.S. and should be renegotiated. These include the North American Free Trade Agreement, China’s entry into the World Trade Organisation’s trade framework in the early 2000s, and the Trans-Pacific Partnership agreement.
• Trump has argued that the Chinese are keeping their currency artificially low relative to the U.S. dollar in an effort to run big trade surpluses with the U.S. In response, he has proposed that a 45% tariff be imposed on Chinese imports to the U.S. until China allows its currency to freely float.
• In retaliation for illegal immigrants crossing the U.S. border, Trump has argued for a 35% tariff on products imported from companies that outsource U.S. jobs to Mexico and for Mexico to pay for the wall between the two countries.

Defence

• Proposes to significantly expand spending on veterans and the military.

Infrastructure

• In his victory speech, Trump talked about his desire to rebuild America by significantly updating outdated infrastructure. Details of specific projects and associated costings have not been released at the date of writing.

Economic Impacts

In his victory speech Trump spoke of his desire to put in place policies that would double the rate of growth in the United States. Certainly his rhetoric about rebuilding America by updating infrastructure (roads, tunnels, bridges etc) has the potential to be positive for growth. Especially if the infrastructure spending helps increase the productive capacity of the economy by more than the cost. Additionally, his proposed tax cuts for business and individuals would equally be positive for growth. However, proposals to cut taxes and potentially significantly increase government spending can only be financed by an increase in government debt (which is already very high).

Larger budget deficits and ballooning debt cause an increase in demand for funds, which is likely to increase interest rates. In many ways, this will be a short term positive as it will help stave off the deflationary forces that have suppressed global demand in recent years. However, rising interest rates will equally have negative medium term impacts as households and business adjust to a higher proportion of their earnings being consumed by interest payments, which in turn will feed through to lower investment and consumption decisions.

The proposed crackdown on illegal workers, estimated at about 5% of the labor force, is likely to increase labor costs, given the already low levels of unemployment. This would add further pressure to inflation and interest rates.

In regard to Trump’s trade proposals, the U.S. imports nearly $500 billion in goods a year from China, and another almost $300 billion from Mexico, accounting for approximately 35% of total U.S. imports (excluding oil). The U.S. exports over $100 billion in products a year to China, and almost $250 billion to Mexico. Adding a tariff to imports would significantly increase prices and give China cause to retaliate with sanctions of its own. Under this scenario, demand for exports from both the US and China would fall. In other words, any trade war would be negative for global growth.

Conclusion

Trump’s victory speech was rather conciliatory and gives rise to hope that his policies may not be as divisive and destructive as first feared. In any event, many of his policies may well encounter stiff opposition from within his own party and may never get implemented. Nevertheless, we remain wary of any policy that may impact trade with China. This has the potential to be particularly negative for Australia given our strong reliance on China’s demand for our natural resources and rising demand for other goods and services. We will be watching further foreign policy developments with interest. For now, we believe it is appropriate to be alert but not alarmed.

Views by Martin Fowler

Contact

Martin Fowler

Partner, Wealth Management

+61 2 8236 7776

martin.fowler@pitcher.com.au

pitcher.com.au