Trump: the American Economy on Trial

Does Donald Trump's election to a second term mark a turning point? On a US scale, it might. But in the course of history, it's unlikely. His rise to power is merely a mirror image of the current era, which is ripe for a rise in nationalism as a result of the failures of globalization. Under the banner of Make America Great Again 2.0, the re-elected president's economic program is a sign of patriotism. It combines aggressive protectionism, massive deregulation and targeted tax cuts. These Trumponomics reveal the new president's image: combative, sometimes authoritarian, but resolutely focused on domination. Beyond the post-election euphoria, however, a complex picture emerges, marked by colossal financial difficulties, growing social inequalities and, more broadly, declining American power.

The first few days following Trump's election have been filled with enthusiasm. Consumer confidence has risen sharply, employment results are good and wages are outpacing inflation. Financial markets continue to climb, whether it's the S&P, technology stocks, bitcoin, or all short-term assets. This rise is reminiscent of the Reagan years, when deregulation and fiscal policies boosted market prices. 

But times have changed. Unlike the 1980s, when the United States dominated a still relatively unglobalized world, the country today operates in a very different context. On a national scale, it continues to be hit by major social fractures and a financial headlong rush, while its domestic stability depends on international confidence in the dollar (which is in constant decline) and the country's military might. Internationally, history is moving in the opposite direction to that of the United States, as the world today more than ever rejects its past (and thus American domination), as we are reminded by the lexical field in vogue: deglobalization, decolonization, decentralization, etc. Economic interdependence has enabled new players to assert themselves, such as China, India, and other emerging powers, and is preventing the United States from calling the shots.

Even so, over the coming months and four years, Trump intends to make American dominance heard. And to do so, protectionism will be at the heart of his strategy. Chinese imports could be subject to 60% tariffs or targeted tariffs, while other trading partners will see their exports to the U.S. taxed by 10-20% (on the equivalent of $3 trillion in trade) particularly for the European automotive industry. These measures will serve to revive the much-heralded “economic patriotism” and reduce the US trade deficit, a long-standing obsession of the American president. However, they are likely to have far-reaching economic and political side-effects. In 2018, a similar initiative had already led to tensions between China and the United States and a 10% depreciation of the Chinese yuan, making American products less competitive. Moreover, the effects on inflation are to be expected, in a context where the Fed is still unable to get rid of it. This rise in prices would then create the conditions for a tug-of-war between Trump and the chairman of the US Federal Reserve, suggesting a challenge to the central bank's independence (Basically, the new American president is only waiting for Jerome Powell to be replaced in May 2026 by a successor subject to his political pressures).

Trump's trade policy will have other international consequences. Supply chains, already weakened by the pandemic and geopolitical tensions, could be seriously disrupted. Major exporting economies, such as Germany and Japan, will suffer massive losses, and the consequences in one country or another are likely to lead to overbidding. Massive, targeted subsidy plans will multiply around the world, while trade is being rapidly reorganized. During the trade war between the USA and China in 2018, an IMF study estimated the indirect effects of this conflict at over $700 billion to the global economy. Given current circumstances, this figure can be revised upwards by at least 30%... A duel has once again been launched with the world's second-largest economy. And in the face of this threat, China already intends to use powerful levers. The Xi Jinping government could use its dominant position on rare earths, essential to the manufacture of many technological products, or orchestrate a controlled depreciation of the yuan, to exert pressure in the face of the impact of American taxes. 

These trade tensions will accelerate the creation of rival economic blocs, as well as the weakening of institutions such as the WTO, the IMF and the World Bank. At the same time, the BRICS and other allied countries will continue to set up new international institutions and infrastructures to establish themselves as leaders. In this new order, a number of countries will emerge as powers, notably the new Asian dragons, while the losers will be those without a long-term program (as in Europe) in a world where pragmatism is the order of the day.

The Trump administration also intends to support the country's extremely powerful financial industry. The 2017 tax cuts, which had already benefited large corporations and wealthier households, will be extended, according to his recent statements. He wants to reduce corporate taxes to 20%, or even 15% for companies that produce in the United States. This type of measure will benefit very large players, but above all the banking sector and small/mid-caps. Especially as financial conditions are improving: the Fed is easing monetary policy, the Trump administration plans to ease antitrust regulations (favorable to mergers and acquisitions), and savings remain very strong in the country. In the short term, the dollar should also strengthen thanks to fiscal and tariff policies, but nothing can change the long-term downward trend, which is subject to historical and temporal constraints.

All in all, investment will be stimulated, and the competitiveness of American industries will be strengthened in the months ahead. However, these measures are accompanied by contradictions, such as the fact that the migration policy, which is set to be much more restrictive (with the aim of reducing the flow of immigrants to 750,000 a year, and the possible deportation of 11 million undocumented migrants), will lead to a sharp reduction in the workforce. They may also have a costly financial impact. Faced with an already fragile economy, the new American president plans to cut federal spending by $2 trillion. But the American financial situation remains very fragile: the deficit is abysmal and the public debt massive. In just four years, the latter has increased by $12 trillion, equivalent to the entire debt accumulated over the first two centuries of American history. Let's not forget that debt has no party, because capital has no morals. Under Trump's first term, the debt had continued to grow at a rate similar to that of his predecessors. Today, it exceeds 120% of GDP, and interest payments alone are already costing more than $1 trillion per quarter. This trajectory is jeopardizing US financial stability, just as it is eroding confidence in the dollar. Given the accelerating de-dollarization of the world, there is every reason to believe that Trump is likely to use new levers to pursue the hegemony of the American currency…

In the short term, Trumponomics promises economic recovery and renewed influence for the United States. But Trump cannot reverse the course of history. And this is happening without American power. Rising inflation and a Fed caught in a dilemma, unsustainable debt, increased economic polarization and geopolitical tensions will inevitably precipitate new shocks. The United States has declared its ambition to remain dominant, but the price to be paid for international stability is very high. The world has become a prison without guards, and we have to fight for the keys.