Washington - Donald Trump has a steep climb to claim victory on 8 November, but Hillary Clinton’s liabilities as a candidate – from her physical health to the continuing questions hovering over her use of private email to handle classified materials while Secretary of State – inject a wild card element into the race.
While we regard a Trump victory as unlikely, that is not the same thing as impossible. Should he win the election, Control Risks believes that it will be due to some unforeseen revelation or failure on Clinton’s part that not only deprives her of the White House but also leaves the GOP in control of both chambers of the US Congress. In this scenario, a Trump presidency could rely on Democrats to back selected elements of his agenda, particularly those regarding tariffs and other hawkish actions aimed at raising the prices of goods imported from low-wage manufacturing countries like China and Mexico.
Trump, without need to consult Congress, could use executive powers to repeal a host of Obama-era regulatory schema in the financial services, energy, mining and corporate sectors. With Congress, he would seek to push through a modified austerity plan that includes sweeping cuts of the public sector workforce, the elimination of the federal departments of Labour, Energy and Education, and steep cuts in corporate and individual tax rates. Oxford Economics, our macroeconomic joint venture partner, reckons Trump’s plan would lead to a major shortfall in government revenue, which by the end of his first term could push the US deficit from 2.5% of GDP in 2017 to as much as 7% in 2020, with commensurate effects on the cost of sovereign borrowing.
In keeping with his campaign promises, Trump would launch new complaints against China at the World Trade Organisation (WTO) that amount to ultimatums, and would impose new tariffs on China, Mexico and other low-wage nations. He would have the ability to withdraw the US from the North American Free Trade Agreement (NAFTA), but again, will use that threat to demand changes in the terms of trade that add to the cost of items imported from Mexico. The resulting retaliatory incentives would threaten a general downturn in global growth.
In foreign policy, we discount some of Trump’s more radical proposals but foresee him ordering several brigade-sized US combat units back into Iraq to fight IS, ignoring Syrian and Russia complaints when they enter Syrian territory in pursuit. However, Trump would back away (and has started to already) from campaign promises to renege on US security guarantees to the North Atlantic Treaty Organisation (NATO) Japan, Taiwan and South Korea.
The seven pillars of a Trump presidency
- Tariffs and moves to isolate China economically spark trade retaliation. Trump launches punitive tariffs on Chinese, Mexican and other low-wage manufacturing imports, sparking global retaliation. In the US, retail inflation returns but manufacturing jobs do not. The US labels China a currency manipulator, and launches an effort to expel it from the WTO, threatening to leave otherwise. All work on the US-China Bilateral Investment Treaty (BIT) comes to a halt, and Trump issues protectionist guidelines for the review of inbound Chinese FDI by the Treasury Department’s Committee on Foreign Investment in the US (CFIUS). China retaliates with tariffs of its own and US firms doing business on its territory or with its corporate sector feel at a disadvantage.
- Trump demands to renegotiate or end most US trade agreements, including NAFTA, driving down global GDP growth. Before Trump is inaugurated, Republicans in the outgoing Congress help Obama ratify the Trans-Pacific Partnership (TPP) free trade accord. However, as one of his first moves in office, Trump immediately rescinds US participation in the recently ratified accord. Although talks on a separate trans-Atlantic version, the Transatlantic Trade and Investment Partnership (TTIP), remain stalled and, in light of BREXIT are unlikely to progress anyway, he also definitively ends talks with Europe. Citing NAFTA Article 2205, Trump also announces his intention to withdraw from NAFTA, the US-Canada-Mexico accord, but this move is blocked by his own party in Congress. Similar demands are made to partners in recent bilateral trade deals with Colombia, South Korea, Singapore and Panama (though not Israel), and a dozen more such deals are abrogated unless they accept a unilateral US right to render judgement on terms of trade. This seriously increases the complexity of trade and supply chain relationships across the world and saps global growth in GDP in both the Emerging Markets and industrialised world.
- Radical reforms of individual and corporate tax rates channel money to equity markets and real estate but undermine the US fiscal position. Trump wins GOP congressional support for new tax rates that drastically lower the tax burden for individuals, particularly those earning more than USD 100,000. This incentivises investments in equities and secondary real estate but is not offset with alternate revenue sources. Oxford Economics, our joint venture partners, estimate that this pushes the annual current account deficit from 2.5% in FY2016, Obama’s last budget year, to 7.5% by FY2018. The cost of US borrowing to meet this deficit rises commensurately.
- Trump sends 20,000 combat troops back into Iraq and they are soon operating openly in eastern Syria, too. US brigade combat teams (approximately 4,500 troops each) take casualties but also hold territory, thereby raising the prospect of a second period of prolonged US occupation in the region as well as new tensions with Russia and Iran. Trump also rescinds US participation in the Iran nuclear accord, prompting a congressional vote to re-impose all economic sanctions. The resulting tensions raise new questions about global oil supply chains, pushing up energy prices. He also breaks diplomatic relations with Cuba, cancelling the opening that began during Obama’s tenure. But Trump backs away from more radical campaign vows to demand renegotiation of the US security commitments to NATO.
- Trump reverses Obama-era executive rulemaking on energy and environmental issues. Trump uses his executive power to reverse Obama-era regulatory action on clean air, clean water and greenhouse gases, significantly lowering regulatory risks for energy and mining sectors. He also re-authorises oil drilling in the coastal waters off the Atlantic, in the Alaskan Arctic and removes Obama’s moratorium on coal mining on US federal land.
- Trump reorganises the US cabinet level departments, firing thousands of public sector workers. Making good on longstanding Republican promises, he eliminates the departments of Labour, Energy and Education. Statistical data handled by the labour department is taken over by Treasury, but agencies handling labour mediation and workplace safety issues (the Federal Mediation and Conciliation Service (FMCS), the Occupational Health and Safety Administration (OSHA), are eliminated. The Department of Energy (DOE)’s nuclear laboratories are transferred to the Defence Department and its statistical units, including the Energy Information Agency (EIA) are privatised. Education is eliminated wholesale, with all functions reverting to the states. The net fall in public sector employment exceeds 50,000, adding short-term costs to federal and state unemployment benefit outlays.
- Reversal of Obama-era financial and domestic policy reforms results in an increase in social unrest. Trump, with GOP congressional support, rescinds the Dodd-Frank banking sector regulations imposed after the 2008 financial collapse. He also re-enacts mandatory sentencing guidelines in the criminal justice system, and ends police reform initiatives, reinvigorating the Occupy movement and leading to new friction in majority black urban communities. These moves reanimate the Occupy movement and supporters of progressive Democrat Sen. Bernie Sanders, and add new impetus to the Black Lives Matter movement. Together they stage massive protests in major US cities, often specifically aiming to disrupt traffic or commerce. Meanwhile, relations between minority black and Hispanic communities and urban law enforcement agencies fray further, with tit-for-tat violence following incidents of shooting deaths at the hands of police.