IMF estimates Trump’s tariffs, if fully implemented as threatened, could redound more severely on US than China
William Pesek reports for Asia Times…
As Donald Trump returns for a second round of shaking up the global economy — especially China — he may end up doing far more damage at home than abroad.
Though this argument has been made here and there since the US president-elect’s win on November 5, the picture the International Monetary Fund is painting about the next four years is worth considering.
On the eve of Trump’s January 20 inauguration, the IMF’s chief economist, Pierre-Olivier Gourinchas, counts the ways tariffs, trade curbs and blunt force responses to waning US competitiveness could backfire on the biggest economy.
The bottom line: the next wave of tariffs Trump 2.0 threatens could make trade dislocations worse, reduce investment, distort market pricing mechanics, disrupt supply chains and spook global markets in chaotic and unproductive ways.
The tariffs alone, Gourinchas worries, “are likely to push inflation higher in the near term.”
Huge tax cuts in an economy at or near full employment could hasten America’s path toward overheating. Trump’s mass deportation hopes would cause even greater disruptions for restaurants, construction and myriad other businesses already short of workers. Labor costs could surge as a result, intensifying inflation pressures.
Even Trump’s promised deregulatory Big Bang might not go as Treasury Secretary-nominee Scott Bessent argues. Yes, the US might “boost potential growth in the medium term if they remove red tape and stimulate innovation,” Gourinchas says.
But, he adds, “excessive deregulation could also weaken financial safeguards and increase financial vulnerabilities, putting the US economy on a dangerous boom-bust path.”
When “we look at the risk for the US, we see an upside risk on inflation,” Gourinchas notes.
As Gourinchas’ institution points out, Trump is fortunate to inherit a US economy that’s recovered from the Covid-19 crisis better than peers. The IMF expects 2.7% US growth in 2025, faster than the 2.2% it predicted back in October.
That hasn’t stopped Trump from signaling a fresh stimulus boom to come. On top of making permanent the Republican Party’s US$1.7 trillion 2017 tax cut, Trump promises additional corporate tax cuts. Trump also has hinted at reprising his 2017-2021 role as Federal Reserve-basher-in-chief.
Back then, Trump cajoled his handpicked Fed chairman, Jerome Powell, into cutting interest rates at a moment when the buoyant US economy didn’t need it. Trump attacked the Fed in speeches, press conferences and on social media. Trump even mulled firing Powell. By 2018, the Fed surprised world markets by suddenly adding liquidity, ending efforts to normalize rates post-Lehman Brothers crisis.
On the campaign trail last October, Trump mocked Powell’s policymaking team. “I think it’s the greatest job in government,” Trump told Bloomberg. “You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a god.”
Team Trump also argues that presidents have the right to demand that the central bank do their bidding. In August, Trump said the “Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot.”
He added “I feel the president should have at least stayed there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
One motivation may be paying for Trump’s fiscal plans. The lower US rates go, the more latitude Trump may believe his administration has to add to the $36 trillion national debt.
This raises obvious threats to Asia’s vast holdings of US Treasury securities. China is the second-biggest holder of Treasuries with about $770 billion worth. Japan is Washington’s top banker, with US$1.1 trillion of US debt. Altogether, Asia’s largest holders of dollars are sitting on about $3 trillion worth of exposure.
Yet it also means that policy mistakes in Washington could be transmitted Asia’s way at blistering speed.
Beyond the risk of financial shocks from the US, China is very much on Trump’s mind as Beijing’s nearly $1 trillion trade surplus angers his administration. At more than 5% of gross domestic product (GDP), China’s surplus is the most since 2015…
Continue this analysis at Asia Times
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