The Effect of Donald Trump on the US Economy and its Trading Partners - Paper Example

Introduction

The recent election in America was one of the most interesting in recent times primarily due to the Republican candidate. Donald Trump is a billionaire investor who is best known for his interests in real estate and is the 45th president of America, as well as his brash demeanor. His election generated a lot of attention, especially with the claims of making America great again. There were sharp divisions between his supporters and critics, primarily in response to the claims he made on the campaign trail. Trump regularly cited various economic aspects that were in need of improvement. He singled out the high unemployment rates, the negative trade balance with other countries, and uncontrolled government spending terming them as unacceptable realities (Knowledge@Wharton, 2017). Trump is not fazed by controversy as evidenced by his numerous Twitter updates. His claims and utterances have at times raised concerns as to his suitability to hold the highest office in the land. The proposal of erecting a wall along the Mexican border, and his recent utterances referring to African countries in derogatory terms have exacerbated the condemnation from his critics. However, his economic policies have been even more worrisome with many experts' opinions suggesting that the president is going about things in the wrong way. Donald Trump is having a significant impact on international trade and macroeconomic policies as his reforms touch on these important indicators. Despite the stock market boom, the long-term ramifications of a Trump presidency will affect the local and international economy negatively.

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Theoretical Background

Trade deficit refers to the transactional imbalance between two trading countries. It is a negative trade balance that is experienced when a nation spends more on imports than it gains from exports. Globalization has led to the current situation where firms respond by shifting to areas with low labor costs and fewer regulations (Sloman and Garratt 2016, p. 332). More firms are producing their goods in China and exporting to the United States hence the latter is becoming a significant importer than an exporter. The high cost of labor in America means that manufacturing operations are not economically viable since it increases the cost of doing business ((Knowledge@Wharton, 2017)).

A protectionist approach is taken by some countries to protect domestic industries. It shields the locally produced goods from the external competition by heavily taxing the imports to make them less competitive deliberately. The law of demand and supply takes effect after protectionism has been put into effect. The increased taxes will force the importers to raise the prices of their products to maintain their profit margins. The higher rates will decrease the demand for these products while stimulating that for locally produced goods.

Immigration reforms were a key campaign point for Donald Trump. The objective is to make it difficult for illegal immigrants to come to America, which will ensure only natives gain access to jobs. Okun's law implies that a percentage reduction in a country's employment rate will result in a double decrease in the potential GDP earnings (Kennedy 2011, p. 299). Attempting to ban Mexican, Africans, and Muslims will affect America negatively in the end by reducing the workforce that contributes significantly to various sectors of the economy.

Government spending refers to all transfer payments, consumption, and investment made by the state to grow the economy. However, Trump has opted for tax cuts as the best way to go about boosting domestic production and growth. Tax cuts have the potential of inspiring investor confidence, but the long-term effects are not favorable to the economy. The tax cut is an ideology of supply-side economics that opine that increased production will automatically result in increased growth (Kennedy 2011, p.353). The revenues lost through reduced taxation can be recouped, and bettered, by generating sufficient growth.

International Trade

The US enjoys an unfavorable balance of payment by buying more than it sells (Sloman and Garratt 2016, p. 368). The president has opted for imposing trade barriers to correct the trade deficit in America. The US imports far more than it exports since the products produced domestically cannot compete in global markets with others made at significantly lower costs. Trade wars with Mexico are an example since the latter has historically enjoyed the upper hand in the inter-country balance of trade. A 20% tariff on imports will make Mexican goods more expensive despite their high demand in America, and Mexico is a member of NAFTA (Knowledge@Wharton, 2017). This restriction might encourage cases of smuggling and fraud, which creates a black market.

China is another significant trade partner and the highest importer of goods in the US. If the same tariffs proposed for Mexico were placed on China and other major trade partners, it would lead to trade wars. These tariffs would affect these countries profoundly leaving no room for anything but retaliation. These countries will also raise the taxes on US imports, which will lead to low demand for these goods. Protectionism will end up hurting the consumer who has to buy products at a higher price. The withdrawal of America from various trade bodies such as the Trans-Pacific Partnership (TPP) negotiations are aimed at acquiring economic independence, but it only alienates America further since Japan and the EU formed their trade agreement. The North America Free Trade Agreement is the largest of its kind in the world, but Donald Trump is seeking a renegotiation of terms. There was the decision to withdraw from bilateral trade agreements with Korea to push for more exports to the Asian country (Knowledge@Wharton, 2017).

This move towards protectionism will make a bad situation worse for the US. Other countries will retaliate by making American exports expensive thus they will suffer decreased demand. It is a counterproductive move toward improving the negative trade balance in the long run. Almost a quarter of all US exports goes to China and Mexico, and hence a trade war is unfeasible. The best approach is to expand these trade agreements since international trade is yet to rebound since the recession. Protectionism is politically instigated and appears to offer short-term results, but it has displayed fundamental weaknesses over the long haul (Knowledge@Wharton, 2017).

Immigration Policy

Another central talking point for Trump during the campaign trail was his stance on immigration. He promised to deport up to three million immigrants with a criminal history. The president also proposed to build a wall along the Mexican border to stop the illegal immigrants who have been trooping into the US illegally. Undocumented workers from Mexico number around 12 million and the president wants to deport them back to their countries to free up opportunities for citizens (Zandi et al. 2016, p. 3). These Mexican workers primarily occupy low-paying jobs such as cleaning and landscaping services. Native Americans are more educated and have an advanced skillset hence these low-paying jobs do not appeal to their ambitions and status. Therefore, the undocumented workers perform a critical service that would otherwise not attract skilled people (Zandi et al. 2016, p. 6).

The undocumented immigrants occupy the minimum wage threshold in the US hence they make it possible for educated Americans to earn relatively higher wages. There are some educated immigrants from South America, the Middle East, and Africa who have contributed significantly to America's economic advancement. Immigrants have been responsible for up to 24% of the tech innovations in America, which shows that American innovation is boosted. Silicon Valley CEOs are worried by Trump's idea of restricting the H-1B visa program since it would deny them a talented pool of professional labor. Indian and the Middle East immigrants have populated Silicon Valley and contributed considerably to improving the American economy (Knowledge@Wharton, 2017). In 2014, a majority of these visas were granted for computer-related occupations. Undocumented workers contribute approximately $12 billion in taxes. It shows that immigrants are essential in furthering the American agenda and hence measures to improve their screening should be discussed instead of restricted.

National Debt

The skyrocketing national debt in America is another case of significant concern under Trump's administration. The figure sits at roughly $19.5 billion, and the president has promised to eliminate it by focusing on economic growth and drastic reductions in government expenditure. However, some of his proposed strategies will achieve the opposite of the intended effect in the long run.

The president plans to grow the economy by cutting individual and corporate taxes (Knowledge@Wharton, 2017). He hopes that the reduced tax burden will give corporations the incentive to produce locally thus creating increased job opportunities. This supply-side economics mechanism is not as straightforward as it seems, or was during the Reagan era since there are underlying ramifications at work. Reducing taxes will boost short-term growth because it will spur consumer and investor confidence. Reduced regulations and taxes will encourage firms to invest in the future, which includes creating more job opportunities. The increased consumer spending, on the other hand, will lead to more consumer spending.

Projections estimate that this increased domestic spending will grow the economy by 4%, which is unhealthy (Zandi et al. 2016, p. 6). Investors will develop irrational exuberance, and the underlying value will be disregarded for the expected financial gain, creating a recipe for inflation. The peak stage of a business cycle rises due to this exuberance. Boom and bust cycles will be the result. Growth is positive during the growth phase as the GDP hovers in the 2-3% range. It accompanies bull markets by recording wage increments and reducing unemployment. The resulting increase in money supply will bring liquidity problems and inflation (Zandi et al. 2016, p. 10). Rising prices will induce irrational exuberance causing the GDP to grow above 4% where there is too much money and no viable business projects. The long-run result is a recession and an increase in the national debt by up to $4.5 trillion over ten years.

Slashing government expenditure is another way of reducing the national debt. Trump plans to cut Medicaid, Obamacare, and any non-defense-related funding to the tune of $1.2 trillion in the next ten years. The broader economic impact of cutting Affordable Care will touch on companies, doctors, hospitals, insurers, and the millions who benefit from this program. Trump should instead seek to increase taxes on the high earners and increase federal spending to grow the economy and regulate the national debt.

Conclusion

Just as his campaign period was shrouded in controversy, Donald Trump has had an equally similar effect on the economy. His policies are aimed at improving America's standing both domestically and globally, but some of them are having the opposite effect. The planned imposing of tariffs on imports from Mexico and China might save the local industries by increasing demand for their products in the short run. The long-term picture, however, is grim since it will ignite trade wars with these two major foreign exchange partners. Tariffs on US exports will make them uncompetitive, and thus the move is counterproductive. Slashing taxes and reduction of federal spending will also lead to increase...