Following Labor Day on 5 September, the US presidential election campaign is increasing in intensity. This series of articles looks to analyse the policies of the major parties’ candidates in order to assess the potential impacts of their policies on the global economy. The aim is not to argue for a particular candidate or particular policies, only to consider their impact for investing. It should also be remembered that, even if elected, the candidates will not necessarily be able to implement their policies as they would still have to win sufficient support in Congress.
In Part 1 we considered the policies of Hillary Clinton. We will now consider those of Donald Trump.
Global Trade
Trump has repeatedly stated his opposition to tariff-free global trade. He argues that it allows manufacturers to benefit from moving jobs to lower-wage countries, which puts US workers out of work. He has stated that he will impose tariffs to reduce such moves. He will also aim to renegotiate the North American Free Trade Agreement (NAFTA) and withdraw from Trans-Pacific Partnership (TPP) talks.
Trump argues that these policies will return jobs to the US and so improve the economy there. This strategy is disputed by the Economist, which argues that the main cause of the reduction in the number of manufacturing jobs is technological improvement rather than companies offshoring jobs. It has further been argued that, as the proposed tariffs would apply to parts being brought into the US for assembly, some companies may actually move jobs out of the US to avoid the tariffs.
Trump’s position is much more aggressive than Clinton’s. Whilst Clinton would withdraw from TPP and tackle offshoring in a company-specific way, Trump’s proposal introduces a blanket tariff and significantly reduces the scope of the existing NAFTA trade deal.
While it is not implausible that some jobs will return to the US if tariffs are imposed (although this has not been conclusively demonstrated), there would be more troubling effects of this policy for the global investor. It is widely accepted that free trade is good for the global economy. A reduction in global trade following the introduction of tariffs would likely harm the global economy. This would negatively affect companies around the world, particularly multinationals.
Fiscal Policy
Trump has stated that he would enact substantial tax cuts if elected. Initially, he advocated slashing the top rate of federal income tax to 25% (from 40%). More recently, he has argued for a simplification of the system (reducing the number of tax bands from 7 to 4) and cutting the top rate to 33%. He also plans to abolish the estate tax (the US equivalent of inheritance tax).
On corporate taxes, Trump would like to cut the rate from 35% to 15%.
In addition, Trump plans to increase government spending, particularly on infrastructure and the military. He has been vague about the details of his plans (although he did say he would spend “at least double” Clinton’s proposal for infrastructure spending).
However, Trump has not stated how these plans will be funded. Given the combination of increased spending and lower taxes, most commentators agree that the measures will have to be at least partly funded by borrowing.
Cuts to income tax and corporation tax are likely to lead to greater economic activity, with both individuals and corporations able to increase spending under Trump’s plan. Increased government spending would also stimulate growth; given Trump’s general political position it is highly likely that US companies would see almost all of the benefit of increased government spending. On the other hand, abolishing the estate tax might reduce consumer activity, as wealthy individuals may keep more of their wealth if they believe it will not attract taxes on their death.
Overall, Trump’s fiscal policy seems likely to benefit the US and global economies in the short term. However, a marked increase in government debt may leave US Treasuries vulnerable to changes in market sentiment or the global economic outlook. The dollar may also suffer weakness in this new environment, although its status as the primary global reserve currency may offer some protection.
We have only considered here Trump’s fiscal policies, rather than the fiscal impact of his other policies, for example on immigration (where we believe the detail and path of implementation of the policy is too vague to form a meaningful view).
Regulation
Trump is strongly in favour of deregulation. In particular, he has stated that he would reduce climate change regulation and repeal the Dodd-Frank Act (which significantly increased the regulatory burden on financial services firms). Companies producing fossil fuels (such as oil companies) and financial services companies would therefore likely see reduced legislation leading to increased profits if this policy is enacted.
Support for deregulation appears to be central to Trump’s political stance, and so a Trump presidency would probably see as-yet-unannounced deregulation, as well as the curtailing of the introduction of new regulations.
Conclusion
Trump’s proposed spending increases and tax cuts are likely to support the US economy, and reduced regulation could further enhance company profits. However, this must be balanced against a strong protectionist instinct which could have far-reaching implications for global trade. In both aspects his proposals are of a greater magnitude than those of Clinton: his higher fiscal stimulus would likely have greater positive effects on the domestic economy, but his greater protectionism would probably reduce global trade to a more significant extent. We would expect some dilution of Trump’s proposals should he take the White House. Our conclusion is that, overall, we will see some initial volatility as this result would be unexpected. A mildly positive investment response may follow a Republican win in the medium term.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
