Tariffs, tax cuts, and immigration reform: Trump's blueprint for second term

File photo of Donald Trump. Photo: Reuters

On 2 November, a poster at a Trump rally in Gastonia, North Carolina, conveyed a clear, succinct message: Trump Low Prices, Kamala High Prices.

And if statements by political and economic pundits are taken into account, it is, above all, inflation — and by extension, the state of the US economy — that handed Donald Trump his victory. 

Multiple pre-election polls and focus group discussions had shown that Americans felt the economy was in poor shape, largely because prices were too high. Though inflation has since dropped significantly, this issue posed a significant challenge for Vice President Kamala Harris. 

Throughout his campaign, President-elect Trump had pledged to end the "inflation nightmare" and bring prices down "very quickly." He also promised tax cuts, new tariffs on imports, and the deportation of millions of undocumented immigrants.

On paper, these are sound policies, but some experts are sceptical that these might end up doing the very thing Trump promised to rid the country of — raise inflation.

"The devil will be in the details," Ed Mills, Washington policy analyst at investment bank Raymond James, told CBS MoneyWatch. "The Trump tax, trade, tariff and immigration agenda could have significant economic impacts and raise concerns about a second wave of inflation."

However, Mills added, compromises or alterations to his plans "could mitigate the impact".

Nevertheless, this trifecta forms the core of Donald Trump's economic policies for the next four years. Here is what they could mean for both the US and global economies.

Extension of 2017 tax cuts — and more

Just a day after the election, Trump's victory saw the S&P 500 rise by 2.2% as investors expect a more business-friendly administration, particularly tax cuts.

The former president wants to extend portions of the 2017 tax cut that are set to expire in 2025, and he has called for additional cuts in corporate tax, from 21% to 15% for companies that make their products in the US.

He has also said he will seek legislation to end the taxation of tips and overtime wages to aid waiters and other service workers. He has pledged not to tax or cut social security benefits.

But budget analysts warn that multiple tax cuts will balloon the federal debt. The ultimate size and shape of any tax cut may hinge on whether Republicans retain control of the House of Representatives. 

Tariffs and a renewed trade war with China 

Trump has proposed adding 10% to 20% tariffs on all imports, with significantly higher ones on imports from China.

Though tax cuts have won big with the voters, the economic stimulus from it would be partially offset by these proposed tariffs as these would raise costs for US businesses and consumers alike. Forecasters at Pantheon Macroeconomics project that a 10% tariff alone would increase US inflation by about 0.8 percentage points next year.

International governments are also likely to retaliate against any US import duty, inhibiting global trade and cutting deeper into global growth.

Moreover, the same forces that could push up US inflation could weigh on prices elsewhere, especially if Trump slaps oversized duties on China as he has promised.

Apart from China, Europe is also at risk, even if tariffs are not directly aimed at European goods. "European companies could still suffer if the US decides to apply sanctions on products using Chinese parts or technology, or pressures Europe to decouple from China," Mike Rosenberg, professor at IESE Business School, Universidad de Navarra, wrote in an article for The Conversation.

He added that the European economy is profoundly integrated into global value chains, and China is its second-largest trading partner for goods after the US. According to analysts, the already struggling German economy, which heavily relies on trade with the US, would be particularly hard hit by tariffs on European automobiles.

According to investment bank ING, uncertainty about Trump's stance on Ukraine and Nato could undermine the recently stabilised economic confidence indicators across the eurozone. A new trade war could also push the eurozone economy from sluggish growth into "a full-blown recession." 

For emerging markets relying on dollar funding, such a policy mix will make borrowing more expensive, dealing a double blow on top of the lost exports, Reuters reports.

Crackdown on immigration might backfire

Trump has called for mass deportation of illegal immigrants, and during his first term, he also took steps to curtail legal immigration.

Analysts at the Brookings Institution, the American Enterprise Institute and the Niskanen Center project that net migration to the US could be sharply lower — even negative — during a second Trump administration, with unfortunate consequences for the US economy.

Strict limits on immigration could choke off the supply of foreign-born workers who have been propping up the US job market at a time when many baby boomers are retiring.

US neighbour Mexico is going to bear the brunt of this policy, TS Lombard's Jon Harrison told Reuters as the Mexican peso fell 3% against the dollar.

It is especially vulnerable because trade tensions and threats of deportations could exacerbate domestic problems like cartel activity and the government's failure to curb violence, Harrison added.

Government debt and the Fed

Despite the proposed tariffs generating additional revenue, Trump's overall economic policies are expected to widen the federal deficit, adding to the government's borrowing costs.

Trump's fiscal policies would add an extra $7.75 trillion in government debt over the next decade, according to an estimate by the Committee for a Responsible Federal Budget.

The prospect of so much additional debt has already spooked bond investors, sending bond yields sharply higher the day after the election. Mortgage rates, which tend to follow the yield on 10-year Treasuries, are expected to climb as well.

Meanwhile, inflation has cooled substantially, allowing the Federal Reserve to start cutting interest rates. But the central bank may proceed more cautiously if Trump's policies put more upward pressure on prices. The central bank is expected to lower its benchmark rate by a quarter percentage point. But experts expect fewer rate cuts next year, as a result of Trump's election.