The ‘Trump’ Factor in the Economy

The U.S. president vowed to change the U.S. and the international economic system, which has troubled many.

Donald Trump took the steering wheel of the largest economy in the world a year ago, pledging to radically amend the American and international economic system. The prospect has troubled many, from milk producers in Canada to those who farm marijuana in California, and it also excited Wall Street and led Communist China to take the position of being a world champion of free trade and capitalist globalization, writes the Bulgarian Telegraph Agency in a recent analysis.

Trump began his presidency with an energetic swipe of his pen in order to fulfill his mission to “Make America Great Again.” In the first days after his becoming the 45th president of the United States, however, this momentum met resistance from a number of factors, including legal rulings against his executive orders, an uprising among Republicans and chaos in his own administration.

Analysts, Nobel laureates and international organizations described Trump as a risk to the world’s economy, a risk that could lead to a new recession. Britain assessed Trump as being a stronger factor of uncertainty than Brexit. The Swiss bank, Credit Suisse, advised the World Economic Forum in Davos that Trump's presidency would mark the beginning of the end for globalization as we know it, thus jeopardizing the impact of global institutions such as the World Bank in favor of regional structures. A British startup company has developed a “Trump Alarm,” which provides warning signals to investors on the stock exchange based on comments made by the president on social media.

Trump, however, determinedly follows his conservative economic program, venturing into tax reductions to stimulate business and provide more money for investment in industrial and commercial policies, which have been marked by economic nationalism.

Trump came to power pledging to renew production in the American industrial heartland and to provide work yet again for American factories that were bled dry by unfair practices of countries like China and Mexico, which took away American jobs.

He vowed to be "the greatest jobs producer that God ever created," even though the statement that America suffers from a “plague” of unemployment is far from being statistically correct. The unemployment rate in the country has steadily decreased since 2010 and in November it reached a 16-year low of 4.1 percent; the number of people seeking unemployment benefits is the lowest it has been for nearly half a century. The labor force in the industrial sector definitely decreased by 40 percent between 1980 and 2015, but industrial production in the United States has soared by 250 percent, pushed upward by high productivity and automation.

The fact that technology affects employment is a global problem that was also recognized in Davos. Despite its cheap labor force, China is the biggest market for industrial robots. The transition of industries from within the United States to relocation abroad in recent decades has enabled other sectors of the U.S. economy to build up strength, and cheap imports have boosted consumption, although duty taxation hinders business development. At least this was how the delegation of U.S. retail chains explained the situation to Washington.

Trump relied on the business approach in his relations with large corporations. Industrial Asia launched a campaign to establish good relations with the president even before his inauguration. Conglomerates such as Samsung, Foxconnn and Alibaba, emblematic of the Asian economic miracle, pledged billions in investment and promised to create thousands of new jobs in the United States.

Asian and U.S. car manufacturers adjusted their investment plans in favor of local production. No sooner had Trump entered the Oval Office than he organized a series of meetings with leaders of companies such as Apple and General Motors, individually or by sector, seeking their assistance in meeting his economic goals. Trump’s unpredictable policies, though, bewildered business and distorted the image of the "president-entrepreneur" that he was trying to build.

Between March and June, the companies’ optimism that the new administration really wanted to improve the conditions in the labor market and in investment plummeted amid scandals and infighting in Washington. Many companies cancelled further meetings, investments and planned acquisitions as they awaited clarity with respect to future regulations with which they could have to comply.

Big technology companies reprimanded the White House for a number of its anti-immigrant measures that threatened their ability to attract skilled personnel.

The White House’s controversial reaction to the clashes between anti-racists and nationalists in Charlottesville in April sparked a mass withdrawal of business leaders and the subsequent dissolution of two advisory councils, which had brought together corporate leaders. Tesla founder Elon Musk refused to become Trump’s adviser after Trump withdrew the United States from the Paris climate agreement.

Wall Street and the President

Despite conflicting relations with business, there is hardly any personality over the past decades who has so often – almost on a daily basis – caused enthusiasm or panic in the investment markets with a tweet, an unexpected executive order or political reshuffle. Trump's election elated Wall Street, giving it hope that regulatory restrictions on financial sector activities and tax reforms would be repealed. Since his election, the stock market has been on the rise, continuously setting new records, the kind that bring investors and companies billions of dollars. This has occurred to such an extent that experts have already warned against “Trump’s bubble" and are concerned about the possible consequences if that bubble bursts.

The course of deregulation the White House is taking, one that began with steps to counter the Dodd-Frank Act back in April, has encouraged a feeling of euphoria. The Dodd-Frank Act is legislation comprising more than 2,000 pages that was adopted by former President Barack Obama’s administration in order to limit risky behavior by banks and to avoid a repetition of the 2008 financial crisis.

Also under attack are the Volker Rule, which restricts certain speculative investments, and the influential Consumer Financial Protection Bureau, whose former director, Richard Cordray, was well known for his strict approach toward banks. It is expected that the new administration’s proposals will lead to an increase in bank profits as higher risk products and practices generate higher returns, regardless of the fact that the sector is achieving substantial results at this moment.

Corporate America

Corporate America placed its hopes in the tax system, which is urgently in need of reform. The tax law, consisting of 5,000 pages, hasn't been significantly updated for nearly 30 years, and provisions are so complicated that in order to complete a tax form, most Americans need expert (and highly paid) assistance. The administration urgently needs approval for its tax proposals given its failure to repeal Obama's health care law and replace it with a new system.

According to Trump, tax reform will create a new era of American prosperity. However, according to his critics, one of them being Democratic Sen. Bernie Sanders, the plan is a gift to the super-rich and one of the greatest daylight robberies in American history.

Each house of Congress has its own proposals which need to be reconciled in a single piece of legislation which could increase government debt by $1.4 trillion to $20 trillion in 10 years. Hopes are high for final agreement by the end of the year.*

With the reduction of the corporate tax rate from 35 percent to 20 percent, the simplification of the personal income tax process and repeal of the inheritance tax (applicable at the moment for inheritances over $11 million) the plan aims to reduce the taxation burden on the middle class and the wealthy, and to stimulate business. However, according to this year's Nobel Prize winner for Economic Sciences, Charles Taylor, this will intensify inequality and provide new opportunities to avoid paying taxes.

The European partners of the United States are also not amused. First, five of the largest European economies sent letters to Washington, with the European Commission following suit a day later, expressing concerns that the reform may hamper trade and investments between the two sides of the Atlantic as well as prove incompatible with the rules of the World Trade Organization concerning discrimination against foreign companies.

Trade Wars

Trump's tours of Asia, the Middle East and Europe brought U.S. companies contracts for billions of dollars, but this wasn't able to soften his view on trade. Before and after the presidential election, Trump flamboyantly condemned the terms of trade treaties as being unfair to America, noting multilateral agreements in particular.

One of Trump’s first acts after assuming the presidency was to withdraw the United States from the Trans-Pacific Partnership, a free trade agreement with 11 countries in the Pacific region. The North American Free Trade Agreement, an agreement signed more than 20 years ago with Mexico and Canada, also fell under the hammer. As for the planned agreement with the EU known as the Trans-Atlantic Trade and Investment Partnership, it was barely mentioned this year.

Trump's repeated attempts to guide his partners toward a bilateral trade deal was not met with a positive response in Europe, and German Chancellor Angela Merkel firmly replied, "We negotiate together."

In North America, Canada and Mexico continuously stressed their determination to work trilaterally and renegotiate the NAFTA agreement, but also expressed the idea that the pact might continue without the U.S. if necessary. Only Japan and South Korea showed some interest in bilateral negotiations, probably seeking much-needed U.S. support against the North Korean threat. Negotiations for the modernization of the NAFTA agreement began in August, but they are currently at a stalemate due to the disagreement between the United States and Canada, and the TPP countries have agreed to continue trading without the United States.

Despite warnings that the impending trade war will damage everybody, Washington was not dissuaded, and it launched procedures that may lead to imposed restrictions on imports of steel, aluminum products and other goods based on provisions for national security protection from the 1970s. The administration got into an argument with the Word Trade Organization as well, and the United State’s withdrawal has pushed the EU, Canada and China to form closer ties.

Consequently, this has led to the following paradox: Communist China, whose economy can barely be described as open and liberal, has proved to be on the front line when it comes to protecting world trade and globalization.

*Editor’s note: President Trump signed a Republican tax bill approved by Congress into law on Dec. 22, 2017.