Considering Trump's new term, the impact of the United States on the world economy is nothing more than four dimensions: global inflation, global industry, global economic growth and US dollar liquidity.
Article author: Zhou Junzhi
Source: Caixin
Trump issued an executive order after taking office. What new information is there?
Trump issued a series of executive orders in his inaugural address. In general, the ideas of the executive orders continued Trump's previous campaign policy ideas. In terms of economic issues, Trump focused on immigration, inflation, energy, tariffs, etc., but did not mention the specific policy of tariffs.
We believe that the three important executive orders in this inaugural address are key to our glimpse into the Trump administration’s policy priorities:
1. Trump declared a national emergency at the southern border and strengthened immigration control.
2. Trump declares a national energy emergency. Vigorously develops oil drilling technology. Ends the Green New Deal and revokes the electric vehicle mandate.
3. Trump completely reformed the trade system and imposed tariffs on foreign countries. A foreign tax bureau was established to collect all tariffs, taxes and revenues.
After Trump won the election, the market expected that his tariffs would be strong and was pessimistic about Trump's tariff policy. Recently, the tone of the tariff increase reported by the US media has softened. Trump did not announce the details of the radical tariff increase on the day of his inauguration, and the market's tariff concerns have decreased. The US stock market was closed that day, but the foreign exchange market reacted violently, with the US dollar plummeting and other non-US currencies rising sharply . Among them, the US dollar index fell 1.19% to close at 108 points. The onshore RMB exchange rate once rose by 0.17, and the US dollar against the RMB once reached 7.25. The Japanese yen rose by 0.45%, and the US dollar against the Japanese yen rose to the important mark of 155.6. The euro rose by 1.39%, and the euro against the US dollar once rose to 1.04.
Looking back at Trump's first term inauguration in 2017, in his inaugural speech, Trump focused on promoting his governing philosophy and did not mention any specific executive orders. In his speech, Trump mentioned the idea of "America First" and that policies on trade, taxation, immigration and diplomacy should implement this idea, but he did not mention specific measures. The market did not fully anticipate Trump's policies, so on the day of the 2017 inauguration, the U.S. stock index fluctuated slightly and closed up, the U.S. dollar index closed down slightly, and the 10-year U.S. Treasury yield fell slightly.
It is worth noting that the tariff statement in this executive order is lower than market expectations.
As early as November 26, Trump posted on social media that he would impose an additional 10% tariff on all imports from China and a 25% tariff on all imports from Mexico and Canada in the first batch of executive orders on his first day in office. However, this executive order did not mention this.
Trump's tariff statement was lower than market expectations, so we saw the RMB exchange rate rise. Will Trump not impose additional tariffs? In fact, no, taking a tougher stance against China is the underlying consensus of the Trump administration. In order to impose tariffs, Trump also set up a foreign tax bureau.
There is a high probability that the tariff game will continue in the future, and we should continue to track the details and implementation rhythm of Trump’s tariffs.
When considering the impact of the United States on the world economy, there are four dimensions: global inflation, global industry, global economic growth and US dollar liquidity.
Considering that Trump has just taken office, the market needs to be more patient to wait for the details of the policy. Based on the two main lines of the United States' domestic and foreign policies in the past decade, and taking into full consideration Trump's governance philosophy, we consider the impact that Trump will have on the world economy in the next four years from four dimensions: global inflation, international industrial chain layout, global growth, and US dollar liquidity.
Trump will lead to a divergence of the global price system
Trump was re-elected as president, and the core agenda of the new US government has entered the stage of centralized implementation. To deduce the potential impact of his policy proposals on global inflation, we need to focus on five aspects: immigration policy, trade policy, tax reduction policy, monetary policy independence, and energy policy.
Immigration policies may push up the prices of services in the United States.
Trump's new policy will restore Trump 1.0 border policy and deport existing immigrants. Border control will be implemented immediately from January 2025, and the scale of deportation remains to be seen. The main illegal immigrants in the United States are concentrated in agriculture, manufacturing and service industries. The reduction in labor supply in various industries will directly affect the production capacity and cost structure of related industries.
If the impact of immigration policies becomes apparent, the tight balance in the U.S. labor market may continue. If hourly wage levels rebound again, it will be necessary to re-examine the formation path of the U.S. wage-inflation spiral mechanism.
Trade policies may push up prices of common consumer goods in the United States and suppress global manufacturing sentiment.
During his campaign, Trump first proposed two major tariff policies: a 10% general tariff on imports from all countries and an additional 60% tariff on Chinese imports. The specific details of the policies will depend on how they are implemented.
Against the basic backdrop of a comprehensive escalation of tariffs, regional supply and demand imbalances may be difficult to avoid amid the reshaping of global economic and trade relations. This process may be accompanied by higher frictional costs, leading to a decline in global production sentiment.
For the United States, a large number of ordinary consumer goods need to be imported. If Trump's tariff slogan during the campaign is fulfilled, the price of US imports will be artificially raised by tariffs, leading to an upward inflation of ordinary consumer goods in the United States.
Tax cuts may boost US domestic demand and further push up US inflation.
Comprehensive tax cuts for corporate and personal income taxes, extension of Trump’s 1.0 tax cut policy, and further reduction of corporate income tax to 15%.
Fiscal expansion policies such as tax cuts may further strengthen the resilience of U.S. consumption and investment and further consolidate the strong dollar pattern.
Monetary policy increases the potential risk of reflation in the United States.
Trump's monetary policy has focused primarily on weakening the Federal Reserve's independence in order to achieve higher growth targets.
A risk scenario for intervention in monetary policy may emerge when expectations of rate cuts reverse in 2025, when reflation risks and expectations will rise significantly.
Energy policies may lead to an increase in global oil and gas supply, which may result in a reduction in energy prices.
Trump's energy policy advocates the vigorous exploitation of domestic fossil fuels and the withdrawal from the Paris Climate Agreement again. This means that the United States will increase domestic oil production, especially in the shale oil sector.
With the substantial increase in crude oil supply in the United States, the supply and demand pattern of the global crude oil market has changed significantly compared with the past four years, and energy has certainly ended the high price state of the past four years.
A comprehensive understanding of the "inflationary nature" of Trump's policies may lead to multi-dimensional differentiation in global inflation expectations.
1. Inflation differentiation between upstream and downstream in the United States.
There is a high probability that downstream residential inflation in the United States will deviate further from the long-term target set by the Federal Reserve.
On the one hand, Trump's new policy supports economic growth through monetary policy (weakening the independence of the Federal Reserve) and fiscal expansion (tax reduction policy), and on the other hand, it actively promotes supply changes (supply chain reshaping brought about by trade policies and labor market supply reshaping brought about by immigration policies). The inflation expectations of downstream residents in the United States are likely to be higher than the baseline level.
Upstream inflation may be constrained by the negative impact of the trade war on global production.
The tariff policy has led to supply chain disruptions and restructuring, resulting in reduced production efficiency, which will have a profound impact on global production, and the manufacturing industry may experience a significant setback. In addition, the trade war has also increased uncertainty in the global economy, causing companies to be more cautious in their investment and production decisions, and upstream physical production demand is facing more extensive downward pressure.
2. There is differentiation in commodity and service inflation within the United States.
In Trump's new policy, energy policy will further strengthen the pattern of falling commodity prices, represented by crude oil.
After reaching a peak in mid-2022, the inflation level in the United States gradually fell back, and the downward speed of inflation was relatively fast in 2023. The main reason is that the supply chain gradually returned to normal from 2022 to 2023, and the oil price continued to adjust. Driven by commodity prices, the inflation in the United States fell rapidly.
If the United States further strengthens its fossil energy supply in 2025 and the central price of crude oil moves downward, commodity prices may still serve as an inflation "stabilizer".
Under the policy combination of immigration and tax cuts, it may be difficult to cool down the labor market, and the stickiness of service inflation may still be a problem of the "last mile".
Since 2023, investment in technology and high-end manufacturing industries has driven the growth of R&D investment. At the same time, the U.S. labor market has been relatively strong. Therefore, service industry inflation represented by rent has remained high.
Trump's tax cuts and immigration policies have added fuel to the U.S. labor market on both the demand and supply sides. If the wage-inflation spiral starts again, service industry inflation may exceed expectations again on a month-on-month basis, and the "last mile" of the U.S. fight against inflation will still be full of difficulties.
3. Inflation diverges between the United States and other non-US regions.
With the restart of Trump 2.0, other non-US economies are under greater pressure to “shrink” than to “expand”.
The upward trend in inflation expectations for U.S. consumer spending is likely to lead to the continuation of a strong dollar pattern. The monetary policies of other non-U.S. economies (not individual economies) may be further constrained by external monetary pressure, and domestic demand expansion will face constraints.
The escalation of tariff policies has directly dampened the global manufacturing boom, and external demand in other non-US economies (not individual economies) faces new challenges.
Under the baseline scenario, with upstream PPI prices generally under pressure, the pressure on corporate profit expectations further affects residents' employment and income, and other non-US economies are under greater pressure to "shrink" than to "expand."
Trump will reshape the global industrial chain system
America First is the main policy line throughout the development of the Trump administration. Its economic policies have three core objectives: to guide the return of high-end manufacturing, to strengthen the United States' technological dominance, and to promote the global re-deployment of mid- and low-end supply chains.
Under Trump 2.0's America First policy framework, the global industrial chain system will be reshaped through three clues:
The first clue is that energy supply may increase under weak demand, and new energy will be rebalanced to old energy.
Trump prefers traditional energy. During the Trump 1.0 era, the United States promoted energy independence by relaxing regulations on the traditional energy industry (such as abolishing the Clean Power Plan and lifting restrictions on the shale oil and gas industry), aiming to make the United States a net energy exporter.
Trump's new policy further expands support for traditional energy, which has the following four main impacts on the energy market:
First, the capital expenditure of the traditional energy industry in the United States will accelerate, and the domestic oil supply will increase significantly. Trump has accelerated the pace of oil and gas extraction and relaxed restrictions on oil and gas extraction on federal lands, encouraging the production and export of fossil fuels.
Second, energy prices can be lowered by reducing geopolitical tensions. Trump has proposed a policy of reducing foreign aid and returning to "isolationism", which will reduce global geopolitical risks and help stabilize energy prices.
Third, oil demand may slow down. The current high interest rates in the United States are exerting certain pressure on consumption and investment in other non-US economies, and Trump’s high tariff policy may trigger a round of global tariff games, which will suppress global demand.
Fourth, the development of the new energy industry will face challenges. The executive order issued by Trump upon his inauguration emphasized the need to end the Green New Deal and revoke the electric vehicle mandate.
The second clue is that potential tariffs will break the original trade chain and further fragment trade.
Although Trump's inauguration executive order has not yet announced the details of future tariffs and the pace of implementation, taking a tougher stance against China is the underlying consensus of the Trump administration. Trump specifically established the Foreign Tax Service, one of the purposes of which is to impose tariffs.
Trump may start a new round of tariff game in the future while maintaining the existing tariffs.
Next, tariffs will be a sensitive variable in the reshaping of the global manufacturing landscape. The lower the tariffs faced by countries, the higher their manufacturing competitiveness will be, and these countries will also get more manufacturing production and export shares under Trump's 2.0 trade policy.
First, sanctions and export bans on key areas will force countries to pay more attention to supply chain security, which will cause supply contraction in key bottleneck areas such as chips.
Second, imposing high tariffs on China will force low- and medium-end manufacturing industries concentrated in China to continue to migrate to countries such as Mexico, Vietnam, and India. The global share of these countries' manufacturing will continue to rise, causing the global industrial chain to become more fragmented.
Third, the imposition of tariffs globally will of course result in different tax rates for different economies, which may trigger a new round of tariff games, making the global industrial chain more fragile. For example, industries such as consumer electronics, which have more complex industrial chains and rely on global production layouts, will see their supply damaged due to tariff games among countries.
The third clue is that Trump 2.0’s tax reduction policy and relaxed attitude towards technology regulation are expected to accelerate the development of the AI industry.
First, Trump 2.0 is expected to promote more radical tax cuts to stimulate private sector investment, such as further reducing corporate tax rates and even expanding tax breaks for small and medium-sized enterprises.
Second, Trump is likely to move in the direction of reducing technology regulation, and artificial intelligence will not only continue to develop, but is expected to accelerate. One clue is that the technology elites who support Trump, including a16z founder Andreessen, are members of the AI "accelerationist" faction, who oppose anything that may slow down the development of the industry.
The AI industry will change the way traditional industries operate through efficient, precise and intelligent technical means. This round of technology first emerged in the United States, and international capital poured into the United States to pursue high returns on technology investment and the stock market, resulting in weak manufacturing and domestic demand in other non-US countries (not individual countries), and their economic performance was weaker than that of the United States.
Trump will reshape global country growth differences
This round of economic recovery has seen a divergence in growth, with the US economy growing faster and leading developed economies, while other non-US economies are experiencing a slowdown. The difference between the US and other non-US economic growth lies in technology.
On the one hand, the development of the US AI technology industry has reached a certain stage, and it will usher in a large-scale explosion around 2022. This is the development law of the US technology industry itself. On the other hand, the US industrial policy represented by the "Chips and Science Act" directly promotes high-end manufacturing investment and repatriation, which has played a role in fueling the trend.
Trump's second term is expected to emphasize national security, international economic competition, and promoting innovation in key technology areas, while reducing regulation of industries such as artificial intelligence and telecommunications to promote technological innovation and corporate mergers and acquisitions. Out of consideration for the United States' international competition, Trump may still restrict the transfer of high-tech technology to what he considers to be competitors. Therefore, the United States will still maintain a relative technological advantage for a certain period of time, and this advantage will continue to drive U.S. economic growth.
Trump may further relax regulations on financial companies. Relaxation of regulations is not only good for financial companies themselves, but also can further promote investment and financing of American technology companies, thereby boosting the technology wave and the stock market feast.
The main line of economic growth in the United States is technology, while there are still three clues for global economic growth:
1. The US service industry is relatively strong, the global traditional manufacturing industry is relatively weak, and other non-US external demand is relatively weak. Potential trade barriers will further suppress global external demand.
The main reasons for this round of US economic growth are: (1) The wave of science and technology has driven the growth of private investment. (2) R&D investment has driven the growth of private consumption. (3) The continuous rise in asset prices such as the stock market has brought about the wealth effect on residents.
AI technology directly drives private investment. Behind the growth of private investment in the technology sector is a large amount of R&D investment, such as R&D design. The commercial application of technology and the hot financial market have also driven the growth of professional services, which corresponds to the strong service industry in the United States.
The strength of the U.S. service sector does not directly affect global trade. The global trade volume brought about by U.S. growth depends more on traditional manufacturing and commodity consumption.
The growth of traditional U.S. manufacturing and commodity consumption is closely related to U.S. interest rate restrictions. In addition, Trump’s potential tariff policy may increase global trade costs and shrink global trade volume.
If there is a lack of support from the technology industry for a certain period of time, trade frictions may lead to weak external demand, and economic growth in other non-US economies may still face certain pressures.
2. External demand is weak and a strong dollar increases pressure on debtor countries.
The potential consequences of Trump's second-term policies are a strong dollar and high interest rates, which will pose a comprehensive challenge to global economic growth. Emerging market countries will bear the brunt, facing multiple difficulties in debt, capital and growth. Once these problems evolve into regional or systemic crises, they may spread to the world through financial markets and trade chains, further exacerbating the instability of the global economy.
(1) The debt burden of emerging markets has increased. Under the combined effects of a strong dollar and high interest rates, the debt repayment costs of emerging market countries denominated in dollars have risen significantly. The appreciation of the dollar has led to the depreciation of their local currencies, increasing the amount of local currency required to repay foreign debts, while high interest rates have raised financing costs, causing these countries to face greater pressure when refinancing. This debt pressure not only squeezes the government's fiscal space, but may also trigger the risk of debt default.
(2) Capital outflow and financial market turmoil. High interest rates attract international capital to the US market, leading to capital outflows from emerging markets. Capital outflows will weaken these countries' foreign exchange reserves, increase pressure on currency depreciation, and may trigger currency crises and financial market turmoil. At the same time, capital outflows also weaken the investment capacity of emerging markets, further dragging down economic growth.
(3) International trade and growth slowdown. The strong dollar has weakened the export competitiveness of emerging market countries, leading to a widening trade deficit. At the same time, high interest rates have suppressed consumption and investment worldwide. For emerging markets that rely on foreign trade to drive growth, this double blow will further slow their economic expansion and hinder the global economic recovery.
3. Global manufacturing demand is weak, supply is expected to increase, and the economies of resource-rich countries are weak.
If Trump pushes for the implementation of energy production policies in his second term, it may have a profound impact on the global energy market and resource-based countries. These policies, including further deregulation of the US energy industry and expansion of shale oil and gas production and export, will directly impact the balance of supply and demand in the global energy market, leading to a decline in energy prices and posing a significant threat to the economies of countries that rely on energy exports.
(1) The global energy market is oversupplied, and downward pressure on prices is increasing. If Trump continues to promote the expansion of US energy production, especially the exploitation and export of shale oil and gas, global energy supply will be further increased. At the same time, considering that global economic growth may slow down due to high interest rate policies, the growth rate of energy demand will be suppressed, and the imbalance between supply and demand will lead to continued low energy prices.
(2) Resource-based countries face fiscal pressure. The decline in energy prices will directly weaken the fiscal revenue of resource-based countries (such as Saudi Arabia, Russia, Nigeria, etc.). Since the economies of these countries are highly dependent on energy exports, the fiscal budgets are often based on a specific oil price level. When oil prices fall below this equilibrium point, the government will face pressure to expand the budget deficit and cut public spending, and may even be forced to use foreign exchange reserves to make up for the shortfall. This fiscal pressure not only limits the economic resilience of resource-based countries, but may also weaken their ability to invest in international markets.
(3) Risks of currency depreciation and capital outflow. Falling energy prices will lead to a sharp drop in export revenues and deteriorating trade conditions in resource-based countries, which will in turn put downward pressure on the exchange rates of these countries' currencies. Currency depreciation may trigger rising inflation, further weakening residents' purchasing power. At the same time, international capital will flow out of these countries due to concerns about the deterioration of their economic fundamentals, resulting in a reduction in foreign exchange reserves and increased risks of financial market volatility. If the strong dollar and high interest rate environment are combined, emerging resource-based countries will face greater pressure from capital outflows and rising financing costs.
Trump may strengthen the current round of dollar tide flow
The United States' "big cycle" has reappeared, and the United States has become the world's high-yield destination. Low-cost overseas funds continue to flow into the United States. On the one hand, it has pushed up U.S. financial assets and increased the wealth effect of residents; on the other hand, it has promoted U.S. real investment and helped complete the investment boom in the AI industry.
The United States is a leader in AI technology, with technology investment growing rapidly and international funds flowing into the United States in pursuit of technology industry investment.
The United States' leading edge in high-tech fields such as AI and its rapidly developing industrial base will attract global capital to pursue technology investment opportunities. Especially under the tax cuts and loose industry regulatory environment that the Trump administration may continue, the profitability and market valuation of American technology companies will be further improved, making them the preferred investment target of international capital.
According to foreign direct investment (FDI) data from the United Nations Conference on Trade and Development (UNCTAD), the United States has been the world's largest recipient of FDI for many years, attracting more than $310.9 billion in FDI in 2023, accounting for 23% of the world's total. If Trump continues his technology-first strategy in his second term, this trend will be further strengthened.
Driven by the technology sector, risky assets represented by US stocks performed well, and international risk funds continued to flow in.
Trump will continue his policy of supporting technological development in his second term, and further promote the growth of the US technology sector through tax cuts and loosening regulations. Risk assets represented by US stocks may continue to perform strongly. This trend will attract international risk funds to continue to flow into the US market, which will have an important impact on the liquidity of the US dollar and the global capital flow pattern.
As an important driving force of the US stock market, the technology sector will continue to grow with the support of the Trump administration's policies, further increasing the preference of international funds for US stocks. Taking the third quarter of 2024 as an example, the technology sector in the S&P 500 index contributed more than 30% of the increase, and the high-tech stocks in the Nasdaq index performed particularly well.
If Trump continues to promote the development of the US technology industry, international capital will flow more to US technology companies, driving the overall performance of risky assets. Further driving factors for the rise of US stocks include: the innovation capabilities and profit growth potential of US technology companies, as well as policy support (such as tax incentives and R&D subsidies) will enhance their attractiveness.
How to evaluate the global changes brought about by the Trump 2.0 era?
During Biden's term, we witnessed another cycle similar to Reagan's cycle. This cycle is reflected in asset prices: strong US stocks, a strong dollar, and high interest rates. Behind this set of asset prices is a new trend led by technology in the US economy. Biden was unable to continue his term because of inflation, and Trump made a comeback.
We have come to three conclusions about the direction of US policies, economy, and assets during Trump 2.0:
1. How to deal with the inflation problem is not only an important focus of Trump’s domestic affairs, but also an important determinant of the global energy industry and upstream bulk commodities.
The US economy has experienced healthy growth during Biden's term. However, the Democratic Party represented by Biden still lost. The key reason is that inflation soared during Biden's term, reaching a new high since the US stagflation era. Trump's key policies have an inflationary effect. If Trump's policies are fully implemented and significantly push up inflation, Trump will be "bitten back" by inflation.
In his inaugural address, Trump clearly stated that he instructed cabinet members to continue to fight inflation to lower prices, with the key being to control overspending and energy. Trump is well aware of the significance of inflation to his political life. Therefore, the implementation of policies related to strong inflation may be more cautious from Trump's policy perspective. This means that the tariff increase itself may not be simple and crude, and the possibility of gradual implementation is increased. This also means that the probability of increased energy supply pushing down oil prices is increased.
2. The trend of global manufacturing reshaping may continue, and China will face both challenges and opportunities in the process.
Trump intends to promote the return of American manufacturing and prioritize the protection of American interests. Biden's policy ideas during his tenure are still mainly a continuation of Trump's 1.0 policy, and have achieved some results in the return of manufacturing. Biden proposed the "Chips and Science Act", "Infrastructure Investment and Jobs Act" and "Inflation Reduction Act" to promote domestic manufacturing investment. For key industries, Biden still increases trade barriers and technological blockades.
As the political environment in the United States has changed, Trump 2.0's policy ideas are still largely continued. Compared with Biden, Trump's policy interpretation is more extreme, and the details are different. In terms of specific industries, Trump pays more attention to traditional energy, and the subsidy intensity of new energy is expected to decline. High-end manufacturing such as chips is still a key industry in Trump's framework.
3. The new round of technological revolution marked by AI has stimulated the potential growth of the United States, and is also the key to our understanding of the current global economy and even the liquidity of the US dollar. The main line of science and technology is not only the bright spot of the economy during the Biden period, but also an important yardstick for judging Trump 2.0.
The key to the resilience of the U.S. economy in the second half of Biden's term, despite high interest rates, lies in the progress of the technology industry. On the one hand, the technology industry has exploded under the influence of its own industrial laws; on the other hand, U.S. fiscal subsidies and industrial policy support have boosted the rapid growth of the U.S. technology industry. The rapid development of the U.S. economy after the war was basically inseparable from the progress of the technology industry.
During Biden's term, investment in high-end manufacturing plants in the United States has grown rapidly. In the future, if Trump's deregulation and tax cut policies are implemented as scheduled, then we need to track two factors: 1. Whether there will be another round of large-scale equipment investment to match plant investment; 2. Whether American technology investment can smoothly enter the application side to boost productivity.
