In January 2024, Donald Trump won a decisive victory in the U.S. presidential election and will officially take office as the 47th President of the United States. The new administration has revealed its economic agenda, which includes tax cuts, increased tariffs, withdrawal from key international agreements, and a gradual retreat from the rules-based global trading order. The implementation of these policies is expected to have profound effects on both the global and Australian economies.
U.S. Fiscal Policy and Global Interest Rate Pressures
Trump's campaign team promised to implement massive tax cuts, including reducing the federal corporate tax rate to 15% (currently 21%). In addition, the Trump administration proposed large-scale spending plans. While these policies are intended to stimulate economic growth, they could exacerbate the U.S. fiscal deficit and public debt. Estimates suggest that Trump's tax cuts and spending plans could increase the U.S. national debt by $7.75 trillion. This means the U.S. government will need to borrow more funds, pushing up global interest rates, particularly given the size of the U.S. economy. A larger fiscal deficit will lead to higher long-term borrowing costs for the U.S., which will further affect borrowing costs for other countries, including Australia. Despite Australia enjoying budget surpluses in recent years, rising global interest rates could lead to higher borrowing costs, forcing the Australian government to reconsider future fiscal policies.
U.S. Trade Policy and Challenges for the Australian Economy
Trump's protectionist trade policies will also have significant global economic consequences. Trump has pledged to impose tariffs of 10% to 20% on all imported goods to the U.S., with goods from China facing even higher tariffs of up to 60%. These policies could disrupt global value chains, creating severe challenges for the Australian economy. While the U.S. accounts for only 5% of Australia's exports, it remains Australia's fifth-largest export market. Specifically, more than 80% of Australia's high-tech products, such as engines, aerospace components, and machine tools, are exported to the U.S. Furthermore, U.S. tariffs on Chinese goods could negatively impact Australia's trade relations with China. China remains Australia's largest trading partner, and any reduction in demand for Chinese goods could directly affect Australian mineral exports, especially iron ore. Trump's tariff policies will increase global trade uncertainty and raise transportation costs, which will be particularly challenging for Australia, geographically distant from major markets. For example, when Trump imposed tariffs on China in 2018, container shipping rates surged by over 70%, further increasing pressure on the global shipping market.
The Future of the Global Trade System and International Organizations
Trump's protectionist stance could also weaken the international trading system, particularly the World Trade Organization (WTO). Trump has previously threatened to withdraw from the WTO, and if the U.S. continues to block the appointment of new members to the WTO's dispute resolution mechanism, it could lead to further breakdowns in global trade rules and increase international trade uncertainty. Should Trump continue to pursue unilateral policies, other global economies may retaliate, exacerbating volatility in the global economy.
Australia's Market Response and Exchange Rate Volatility
Following Trump's election, the Australian stock market showed mixed results. While the Australian stock market's response to the election results was mixed, the overall performance was relatively positive. The rise in stock prices was mainly driven by expectations of Trump's policies, particularly in terms of tax cuts and regulatory rollbacks. Technology stocks and manufacturing-related stocks saw increases, while Australian resource stocks may face challenges due to trade uncertainty and tariff policies. Additionally, the Australian dollar (AUD) depreciated against the U.S. dollar after Trump's election. The strengthening of the U.S. dollar was tied to Trump's policies, with investors anticipating sustained high inflation and interest rates during Trump's presidency, which would increase demand for the U.S. dollar. Since Australia's exports are primarily directed to China and other non-U.S. dollar regions, the AUD could depreciate due to decreased demand. This could lead to higher inflation for Australian consumers and importers.
Australia's Economic Relationship with China
Trump's trade policies could have far-reaching implications for Australia's economic relationship with China. As China's largest trading partner, Australia's exports of minerals, energy, and other raw materials could be affected. U.S. tariffs on China may slow China's economic growth, reducing demand for Australian minerals and energy. Additionally, China could implement countermeasures, further destabilizing global markets.
Future Uncertainty and the Implementation of Trump's Policies
Whether Trump will deliver on his campaign promises remains a key issue for markets and scholars alike. While Trump pledged to implement radical protectionist policies during the campaign, there remains uncertainty about their successful implementation. Global economic uncertainty and possible policy adjustments by the Trump administration could lead to market volatility. Furthermore, Trump's plan to deport illegal immigrants may exacerbate inflationary pressures in the U.S. economy and disrupt global supply chains, further impacting international trade.
Conclusion
Trump's election as the 47th President of the United States will have profound impacts on both the global economy and the Australian economy. His proposed tax cuts, tariff increases, and protectionist policies may lead to a larger U.S. fiscal deficit and put upward pressure on global interest rates. These policies will also affect global trade, the performance of the Australian market, and the exchange rate of the Australian dollar. For Australia, Trump's policies will not only impact trade relations with the U.S., but may also exacerbate economic friction with China, further increasing global market uncertainty. As Trump's policies are implemented, the global economy could enter a more complex and turbulent period.