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Donald Trump

Why Donald Trump’s economic plan is a non-starter

Feng Da Hsuan and Liang Haiming say when studied in detail, the US leader’s push to launch a major infrastructure plan, introduce big tax cuts, revitalise US manufacturing and adopt a protectionist stance will fall far short of actually helping the economy

PUBLISHED : Sunday, 25 June, 2017, 11:33am
UPDATED : Sunday, 25 June, 2017, 5:27pm

Ever since Donald Trump was sworn in as US president on January 20, he has pushed forward a series of economic policies, including a massive infrastructure programme, significant tax reductions to induce the return of manufacturing industries, and trade protectionism. The initiatives were hailed by the financial markets and business communities. As a result, both the stock market and commercial confidence index catapulted to unprecedented heights.

However, the market is more likely shaped by invisible hands, while Trump’s economics seems to be the intrusive hands which serve only to disturb it. Thus, the lingering question is whether his plan can truly revitalise the US economy. Indeed, it is difficult to be too optimistic about its sustainability.

First, while a proposal to massively increase the nation’s infrastructure is to be welcomed, as the old saying goes, “vision without execution is hallucination”. To prevent such hallucinations, Trump has proposed to throw in US$1 trillion to get the projects up and running. Yet, even if the US technological prowess, industrial foundations and population structure could do their part to spur growth, where exactly can this money be found in the current US financial landscape?

US debt currently stands at US$20 trillion, approximately 106 per cent of national gross domestic product. By 2027, it is expected to reach US$30 trillion. Amid such warning signs, to further burden the US national debt with the infrastructure plan appears ill-advised. With this in mind, we believe that the project will either be shrunk significantly or abandoned altogether. In either case, it may well cause the market bubble to collapse.

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Second, it is doubtful that a massive tax cut is as attractive as it might appear. Trump wants to cut commercial taxation from 35 per cent to 15 per cent, encouraging foreign corporations to invest in the United States. Unfortunately, even a 15 per cent rate is unlikely to be competitive, especially considering that many corporations prefer to register in overseas tax havens, such as the Cayman Islands, British Virgin Islands, Bermuda and the like. In addition, these tax havens have simple and loose corporate legal requirements regarding how dividends are distributed, in contrast with the stringent tax avoidance laws in the US. For any global corporation, the US is clearly not an attractive option.

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Third, the idea of luring manufacturing business back to the US to add jobs as well as stimulate the economy is not as rosy as it appears. According to statistics, the current hourly wage in the US for the manufacturing business is around US$20.70, while China’s is US$3.60 and in Mexico, it’s US$2.50. This relatively high US wage will cut profit margins significantly. It is worth noting that, currently, foreign profits of US companies stand in access of US$25 trillion. Indeed, many US-based corporations now generate more profit abroad than at home. Clearly, this makes returning to the US a hard if not impossible choice. In reality, the manufacturing sector now hires only 8.5 per cent of the workforce. So, even if these businesses did relocate back to the US, it is unlikely that it would significantly boost the job market.

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Fourth, Trump’s protectionism cannot protect the US; worse, it could hurl the world into chaos. Modern international commerce is complex and convoluted, with each nation competing in the global marketplace. Hence, a protectionist US trade policy would only induce countries like China and Japan, plus the European Union, to retaliate, causing large-scale commercial warfare. In such a scenario, no nation would be shielded from this chaotic landscape.

Trump’s style is a complete reversal of the traditional ‘carrot and stick’ approach of past US leaders

Of course, manufacturing has changed dramatically over the years. Today the entire global supply chain can be thought of as a vertical integration system. Nations’ percentage of imports is rising rapidly, with no sign of abatement. In a sense, every country is like a “middle ground” for manufacturing goods, and the products bring those involved in the process closer together. In reality, Trump’s protectionism would not benefit the US and would cause harm to all.

Last but not least, Trump’s style of presidency may be an issue, too. His style is a complete reversal of the traditional “carrot and stick” approach of past US leaders in handling external affairs. His business modus operandi has been simply to “take all”. Thus, without the slightest consideration for the consequences, we have seen him rip up international agreements, and refuse to accept international responsibilities. He simply wants to take advantage of what the world has to offer. This, of course, has raised eyebrows internationally.

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It appears that, for those close to him, Trump essentially practises the dictum of “don’t turn against me”. As a result, even though there are many people with depth and wisdom within the US, the Trump White House is filled with “yes men”. It’s a place where no one will raise opposing views even though it is obvious there are loopholes in Trump’s economic policies.

Thus far, his policies appear to be more rhetoric than action, or details for that matter, and he faces significant challenges to succeed. Furthermore, both domestically and internationally, Trump appears isolated. So, unless it is aborted, Trump’s economic approach may prove not just devastating to the US, but also to the world in general.

Feng Da Hsuan is special adviser to the rector and director of global affairs at the University of Macau. Liang Haiming is chairman and chief economist of the China Silk Road iValley Research Institute