Tariff pe tariff to narrow the deficit
Donald Trump's comment this week that one of his first acts after re-entering office would be to impose tariffs on US imports from Mexico, Canada and China. Markets are familiar with the MAGA magus' negotiating tactics from his first term as president. Yet, volatility is unavoidable.
China came in for special mention in Trump's latest tariff threat, which indicated more are in the offing once he gets down to business. The positive outcome of the incoming prez's announcements is that they leave room for a negotiated settlement, rather than any ideology-driven approach to tariffs. Yet, tariff changes may be easier to accomplish than Trump's tax and regulatory agenda.
Debt servicing costs are likely to limit Trump's options over tax giveaways. Lowering the incidence on companies will pass the burden of deficit management on to voters grappling with inflation. His policies will have to address both the size of government debt as well as interest rates that jack up the cost of paying it off.
Trump's maths suggests tariffs can narrow the deficit. However, his administration would need to be convinced about the effects of trade spats. The Trump administration will want to trim spending that helped the Democrats avert a recession.
Some of it was directed at restoring domestic manufacturing, a cause Trump endorses. Other areas such as addressing climate change are likely to feel a Republican squeeze.
A second Trump presidency may not allow enough headroom for his economic agenda.
Inflation and interest rates will define how fast he can move. Sabre-rattling over trade is important for optics. But the budget needs more profound mending.
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