Among many policies that Trump talked about during the election campaign, tax reform, trade protection and increasing infrastructure investment are the three that are certain. But such policies may also trigger a financial deficit which can further lead to current account deficit.
Trump has said he would cut the corporate tax to 15% from 30%. Although many of Trump’s economic policies are not known yet, it would be reasonable for him to cut corporate tax which, globally, has been increasing since the 1990s, and the US corporate tax is higher than that of Canada and the UK. In addition, the Republican Party has always stood for lower taxes. Setting aside other unpredictable policies that he has talked about, it is very possible that he would cut taxes.
The second policy is trade protection, as he has promised that the US should always be in the first place. America has seen a trade deficit in the past few years with its imports larger than exports and its domestic job opportunities shared by employees from other countries. To save jobs for American people, he said America would withdraw from the TPP.
Trump has said that he would cancel the North American Free Trade Agreement, but since the NAFTA has already been incorporated into law, he would eventually choose a renegotiation.
The third policy will be to increase the investment in infrastructure construction. Although the specific investment amount is unclear, it would be very large. The quality of the US infrastructure has significantly declined compared with that before the 2008 economic crisis. Globally, the quality of US infrastructure is lower than that of Germany and Japan.
The US government’s investment in infrastructure has decreased by 50% since the 1990s, which is a huge change. Increasing infrastructure investment, creating more employment, and promoting GDP growth are the current priorities of the US, and so for Trump.
People are happy that Trump would cut taxes and increase infrastructure investment, but the problem is how it will be financed. One probable answer is that he would increase the financial deficit. While the US budget deficit may reach 3.3% this year, it might be around 4.4% next year. The budget deficit can increase infrastructure investment which may lead to an increase in imports, and import increase could cause deficit in the current account.
How would the US dollar exchange rate be affected once there are two deficits? Whether the value of the US dollar would drop or not is another uncertainty for 2017.
March 15, 2017 would be Trump’s first challenge, as it is the due date for the US to pay back debt, and he has to persuade the Congress to raise the debt ceiling, in order to avoid a debt-ceiling crisis like the one in 2011.
Zhu Min is a Chinese economist and former deputy managing director of the International Monetary Fund (IMF).
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