Trump’s 2025 agenda trades US global leadership for tariffs
Published: 10 December 2024-
Gary Hufbauer
Peterson Institute of International Economics
In Brief
The surprise was not so much Donald Trump’s election in the 2024 US presidential race as Republican victories in both the Senate and the House of Representatives. The resulting trifecta will enable Trump to reshape the US role on the world stage, making changes that ripple across the international order.
When he takes office on 20 January 2025, Trump can again deploy not only the extensive executive authority conferred on the president by past statutes. He can also pursue new legislation to further his radical economic agenda. Trump seems on course to dismantle four pillars of the Washington Consensus that guided US economic policy before his first election in 2017 — relatively free and non-discriminatory trade, open capital markets, modest budget deficits and an independent central bank.
Trump can impose tariffs of any measure, on any country or product through executive orders. During his campaign, Trump advocated a tariff wall of 10 or 20 per cent on all imports on top of existing bound tariffs against all US trade partners, including those with free trade agreements. He also proposed hiking 2019’s partial 19 per cent tariffs to 60 per cent on all imports from China. Shortly after the election, Trump threatened Mexico and Canada with 25 per cent tariffs on all US imports unless they stop fentanyl exports and illegal emigration. He also threatened BRICS with 100 per cent tariffs if they seek an alternative currency to the US dollar.
The practical limitation facing Trump is not the scope of executive power but rather the magnitude of domestic political pushback arising from three main sources. The President-elect’s trade policy will be constrained by foreign retaliation against US exports, higher prices on sensitive consumer goods and potential harm to US firms that rely on foreign components.
Yet pre-inauguration statements indicate that Trump may frequently use the threat of new tariffs as leverage to extract concessions from foreign partners.
The annual US National Trade Estimate Report on Foreign Trade Barriers — a document summarising trade concessions that Washington might seek — may foretell the details of Trump’s potential demands. He may allow exceptions for ‘essential’ or price-sensitive products and items dear to important corporate supporters. The tariff wall and its exceptions will create considerable drama, not least at the World Trade Organization. The outcome will be considerably less free trade and extensive discrimination between and against partners. Trump has discarded the notion of mutual gain from trade and instead views commerce as a tool of combat between nations.
Among Trump’s long-standing complaints about US economic governance is the size and persistence of US trade deficits — the current account deficit is approximately US$950 billion in 2024. Unlike economists, Trump does not see deficits as the outcome of the internal balance between savings, investment and government spending. He perceives the cause to be unfair foreign trade practices and industrial policies. If the US dollar appreciates due to tariffs and the trade deficit widens, the second Trump administration may seek to devalue the dollar as a remedy.
The federal budget deficit reached US$1.8 trillion in fiscal year 2024, almost 7 per cent of projected GDP at US$29 trillion. Legislation in 2025 will seek to extend and expand the 2017 Tax Cuts and Jobs Act. Trump wants to slash the corporate tax rate from 21 to 15 per cent and eliminate income tax on tips, overtime and Social Security benefits.
Macroeconomists suggest that Trump’s tax agenda could add US$800 billion to the annual federal deficit even allowing for higher tariff revenue. This stimulus could overheat the already robust US economy. Inflationary pressure and the impact of tariffs on the cost of living would prompt the Federal Reserve to raise interest rates — a manoeuvre that Trump rejects.
Scarred by its tepid response to incipient inflation in 2021 and 2022, the Federal Reserve will step on the monetary brakes if the economy overheats. Trump could then ask Congress to draft legislation giving the president sweeping powers over the Federal Reserve. These could include the ability to dismiss governors — or to be consulted on monetary policy — potentially eroding the dollar’s preeminent role in world trade and finance.
Trump’s aversion to foreign US military involvement may mean that Washington’s alliances no longer guarantee its support against Russian or Chinese aggression. In fact, Trump’s penchant for ‘big deals’ could lead to accommodations with Russia on Ukraine and potentially with China on Taiwan. All told, Trump’s economic and foreign policy playbooks could amount to US abdication of global leadership. Short of global war, a more disruptive outcome is hard to imagine.
Gary Clyde Hufbauer is non-resident Senior Fellow at the Peterson Institute of International Economics.
This article is part of an EAF special feature series on 2024 in review and the year ahead.
Donald Trump's 2025 presidential term could see him further erode the key principles of US economic policy pre-2017, such as free trade and modest budget deficits, as he looks to increase tariffs and slash the corporate tax rate. His proposed trade and tax policies could have an inflationary effect on the US economy, leading to a potential conflict with the Federal Reserve, while his lack of support for military alliances could raise the likelihood of Russian or Chinese aggression.