After the US election: tariffs and taxes: Trump’s promises could take revenge

Donald Trump has promised to end the “inflation nightmare”. The frustration of people in the USA over high prices is likely to be a main reason why the Republican won the presidential election and will move back into the White House in January. But his full-bodied promise could become a big problem for the 78-year-old. Because his plans could drive prices up further. What does Trump have in mind in terms of economic policy?

During the election campaign, Trump announced far-reaching tariffs – at least 60 percent on goods from China and up to 20 percent on goods from other countries. Tariffs are a type of surcharge on imported goods. They are due at the border when a company or consumer in the US purchases the product from abroad. Trump argues that his tariff policy will lead to US companies producing more in the US again. That creates jobs. It is the classic “America First” policy that Trump pursued during his first term in office.

Democratic US President Joe Biden has also relied on protectionism. He not only largely retained Trump’s China tariffs, but also imposed new tariffs – for example on electric cars. While Biden has been relatively targeted at specific industries, the tariffs announced by Trump are more far-reaching.

Many experts fear that this isolation policy will lead to higher prices. Because many goods from abroad cannot be produced in the USA overnight. Companies are therefore still dependent on imports from abroad for production – import tariffs then increase the costs for these goods. Companies are expected to simply pass these costs on to consumers. In addition, China and Europe are likely to respond with counter tariffs – which in turn is bad for US companies that export a lot.

Numerous tax breaks that Trump passed during his first term in office will not expire until next year. Trump wants to extend these reliefs – for example with income tax. He has also promised to further reduce corporate taxes. One of his most famous campaign promises is tax exemption for tips and overtime. Salaries for employees in the service industry are often so low that tips make up the majority of their pay. The Republican has also promised that seniors will no longer have to pay taxes on their monthly retirement benefits.

Trump and the Republicans argue that the tax cuts will be counter-financed by the resulting economic stimulus. Others fear that national debt will increase. The US national debt currently stands at almost 36 trillion US dollars (around 34 trillion euros). An analysis by the nonpartisan tax organization Committee for a Responsible Federal Budget finds that Trump’s tax plans could increase US debt by $7.5 trillion over the next decade.

During the election campaign, the Republican repeatedly announced mass deportations of illegal immigrants. This, according to Trump, combats the housing shortage and high rents. However, the reality in the US is that many migrants – even undocumented people – work in construction, hospitality and agriculture. Entire industries rely on the cheap labor of immigrants. If these suddenly disappear, there is a risk of a labor shortage, as unemployment in the USA is currently low.

It would be difficult to find people who would take on vacant jobs under similarly poor conditions. Companies would therefore have to pay higher salaries – and the costs would be passed on to consumers.

The US Federal Reserve Bank operates independently of the US government. But that didn’t stop Trump from publicly putting pressure on the Federal Reserve during his first term in office. The Republican wants low interest rates to stimulate the economy. The Fed has just started cutting interest rates again after a period of high interest rate policy. She had previously raised the key interest rate in order to get high inflation under control – because high interest rates slow down demand – and ideally the inflation rate falls.

The inflation rate – at more than 9 percent in the summer of 2022, the highest in around four decades – has fallen significantly since the interest rate increases, and prices are now rising more slowly. Experts assume that Trump’s policies could also have an indirect impact on interest rates. The question arises as to whether the Fed could be more cautious in cutting interest rates in view of Trump’s plans – in order to prevent inflation from rising again. The central bank will publish new forecasts in December.

The US economy under President Biden is relatively strong: despite the high interest rate policy, there was no recession in the US, the labor market is robust and the economy is growing at a stable level. But in the end, what mattered to citizens in the election was how much money they had in their wallets. The high consumer prices in the USA are primarily a consequence of the corona pandemic, the resulting delivery bottlenecks and probably also the massive economic aid from the US government.

The inflation rate has now fallen again – but that does not mean that prices are falling. They simply rise less quickly. The Biden government blames its election defeat primarily on the consequences of the pandemic. These have had a “political price for many established office holders” worldwide, said Biden’s spokeswoman Karine Jean-Pierre after the election defeat last week, with a view to the voting out of many governments.

The falling inflation rate plays into Trump’s hands. But if prices rise rapidly again due to his protectionist economic policies, the mood in the country could change. More than 20 Nobel Prize winners in economics warned last month that Trump’s policies, “including high tariffs even on goods from our friends and allies” and tax cuts, “will lead to higher prices, larger deficits and greater inequality.” If that happens, things could get difficult for Trump and the Republicans.