Last night Donald Trump last night was elected as the 45th President of the United States. What will happen now that the billionaire real estate mogul actually won the race for the White House?

As of July 2016, it was still hard to determine precisely what Trump's economic, social and foreign policies were. The candidate was big on broad ideas and generic solutions, but his speeches and writings were short on details. Besides the statements he has made in his 2016 presidential campaign, which started in June, 2015, there are some older proposals available from his Reform Party nomination campaign in 2000. These have not been considered due to inconsistencies and the changes in Trump's stance since he joined the Republican party.

International Trade

Generally, Trump doesn't consider international trade to be beneficial as most modern economists do. He has repeatedly bashed free-trade agreements such as the North Atlantic Free Trade Agreement (NAFTA) and Trans-Pacific Partnership Agreement (TPP) and has on many occasions pledged to "rip them up" if he is unable to negotiate new terms. The intention is to bring outsourced jobs back to America, and to negotiate new and fair trade agreements, and by that get a surplus.

His strategy to bring jobs back to the U.S. is to put a 20% tariff on all imported goods, though that number fluctuates from speech to speech. He has also said he would single out individual companies that move manufacturing abroad. For example, after Ford Motor Co. announced that it would build a $2.5 billion plant in Mexico, Trump vowed to put a 35% tariff on any Ford brand car made in Mexico. He has also said that he would impose a Chinese-specific tariff to offset the effects of Chinese currency manipulation.

Trump's philosophy on trade can be compared with the Smoot-Hawley Tariff Act of 1930, which imposed high tariffs on a significant number of goods in an effort to boost the profits of American companies and protect American jobs. Unfortunately, the tariff was widely reciprocated and international trade slowed considerably, which only worsened the Great Depression which started a year earlier. It also had a devastating affect on the political relations with other countries.

If the U.S. were to impose a country-specific tariff, the target country has no reason not to retaliate. Furthermore, if the U.S. were to go back to producing the majority of its own goods, not all of the jobs lost would come back. Many outsourced jobs have now been replaced by technology. Prices on goods would almost certainly go up unless manufactures cut their profits because both U.S. production and imports would be more expensive. The loser in this scenario, is the consumer. (Read more about tariffs and trade barriers here.)

The Simplified Tax Plan

The objectives of the simplified tax plan are clear: simplify the tax code, provide tax relief to the middle class, and grow the economy. Trump's tax plan has four main points:

  • No tax for individuals who make less than $25,000, or married couples who make less than $50,000
  • Implement four tax brackets; 0%, 10%, 20% and 25%
  • Corporate tax of 15% 
  • Remove the "death-tax," or what the IRS refers to as the estate tax, Alternative Minimum Tax, and Gift Tax

Trump describes the plan as a pro-growth tax reform. The lower corporate tax rate is meant to discourage corporate inversions and contribute to keeping jobs in America. He also wants a repeal of the "death tax" (also known as estate tax), a tax that applies to wealth transfers of estates larger than $5.45 million.

The tax cuts will be financed by reducing or eliminating tax loopholes for "the very rich" and for "corporations catering to special interests" according to Trump's plan. The latter likely refers to the carried interest loophole, which he has referred to in several speeches and interviews. He also would place a 10% one-time tax on repatriated profits earned by American companies, and put and end to the deferral of taxes on income earned overseas.

Tax experts have generally agreed Trump's plan is unsustainable. An analysis performed by the Tax Policy Center, a non-partisan research center, said it would improve people's incentive to work, save and invest. However, it would also increase the national debt by 80% of GDP by 2036, unless it is accompanied by significant spending cuts. According to the report, the latter would offest the former, leaving the U.S. with a lot more debt and unaffected growth. The plan would be most beneficial to high-income taxpayers, not the middle class. 

Foreign Policy, Immigration and The Wall

Trump generally projects a hard-line stance on immigration, the Middle East and terrorism. Throughout the campaign, he has created headlines by making rather unconventional remarks on the issues, such as calling for a muslim-ban to counter terrorism, or building a wall to shield the southern border from illegal immigration.

In his announcement speech, Trump said he would build a physical wall on the border between Mexico and the U.S., then have Mexico pay for it. His belief is that this wall would stop illegal immigration. His plan is to force Mexico to finance the wall by seizing all remittance payments derived from illegal wages sent to Mexico, as well as increase fees on all types of visas, border-crossing cards and fees on ports of entry to the U.S.

However research shows that over 40% of illegal immigrants enter the country legally and overstay their visas, meaning that they don't illegally cross the U.S.-Mexican border. The total unauthorized Mexican population in the U.S. is also declining and has been since 2007. 

Trump also wants to halt legal immigration by ending birthright citizenship and increasing the wage requirement for H-1B visas. Leaders in the tech industry – 140 to be exact – signed an open letter condemning Trump's stance on immigration. They said it would be disasterous for innovation and growth, citing dependence on immigration in the tech industry.

ISIS and the terror threat has been hotly debated during the election, and Trump has suggested direct confrontation, including bombing and the use of ground troops. This is in direct contradiction to isolationist statements he has made and his condemnation of Hillary Clinton's support of the second Iraq war in 2002. The only consistency is the goal to defeat ISIS, which both sides of the aisle would probably agree with. 

Most recently Trump casted doubt over the U.S.' committment to NATO when he told the New York Times that he would consider a member nation's financial contributions to the organization before coming to anyone's defense. The reason is that the U.S. contributes far more than many of its European allies. Collective defense, or Article 5 in the founding treaty, is a key value for NATO, which says that an attack on one ally is an attack on all allies. It also commits member nations to come to each other's defense in the event that a member is attacked. Abandoning this principle discredits the entire objective of the organization. Atricle 5 has only been invoked once, and it was honored by all members – that was after the 9/11 attacks on the United States.

Pundits on both sides of the aisle condemned Trump's comment on NATO, saying it was highly inappropriate coming from a Presidential candidate because they show a complete disregard of the nation's most important allies.

Healthcare

Trump's top personal priority is to repeal Obamacare and replace with something "terrific." 

The healthcare reform Trump has laid out largely depends on free market principles which supposedly will lead to broadened access to healthcare, lower prices and higher quality. This would be done by removing barriers in the current market that would increase competition between insurance and drug companies. Examples of such barriers are laws that inhibit cross-state insurance sales, price transparency from healthcare institutions and lower barriers of entry for new drug companies. Theoretically, if companies face increased competition and established price-transparency, market forces – in this case the increased supply – will push prices down.

Trump wants to turn Medicaid into a block-grant program in which states will receive a set sum of funding from the federal government it can administer itself. Proponents say the program will be cheaper and more effective under the states, while opponents argue that it essentially moves fiscal responsibilty from the federal to state governments, which may result in lose of coverage for people if states can't finance it. 

Trump also plans to make health insurance premium payments tax deductible and allow everyone to have health savings accounts. The accounts would be classified as an asset and thus be transferable between family members. Because the estate tax will be removed, the accounts can be passed on to heirs. 

Many of these things would lower prices; however, feasibility and effectiveness in coverage expansion is debatable. 

First, the prospect of repealing Obamacare is getting increasingly smaller. Report after report confirms that any repeal would result in lost coverage for at least 22 million people, and no plan presented by anyone is believed to add coverage on the same scale..  

Second, any repeal effort will require congress to be cooperative and pass legislation. If control of the Senate goes back to the Democrats during Trump's presidency, the likelihood any of his policy agenda will be passed is small. 

Trump on Debt

The national debt is on an unsustainable path with domestic debt projected to reach 155% of GDP by 2046 (this number is based on current budgets). The next president will be under pressure to find a tenable solution to the problem. Trump has not officially presented a plan regarding the debt, but has done several interviews where he has given the voters a taste of what he's thinking. 

Trump created headlines in the spring of 2016 when he said he wanted to renegotiate the national debt in an interview with CNBC. To renegotiate, or restructure, the debt essentially means that he would come to an agreement with creditors to pay less than 100 cents on the dollar. This is common in the corporate world of bankruptcies; however, in terms of U.S. Treasury bonds it could do irreparable damage to the economy. 

Shortly after Trump was called to task for implying he would default on government debt, he talked to the Wall Street Journal to straighten out what he had meant: buying the debt at a discount. His logic is that if the interest rate goes up, the price will go down, and that would be the time to buy the debt back. The problem is that the U.S. does not have the cash to buy the debt back. Even at a discount, it would have to take on new debt to finance the old debt, and because the price is low, the yield is high, which means the new debt would be more expensive.

Restructuring U.S. Treasury bonds wouldn't make much sense, and the repercussions would be vastly negative.  Any indication of default can cost taxpayers billions of dollars. The debt ceiling debate is estimated to cost taxpayers $18.9 billion, and a delayed interest payment in 1979 due to bookkeeping problems was estimated to have cost $12 billion, almost $40 billion in 2016 dollars. 

Buying back T-bonds trading below face value could make sense if the Treasury had the cash to do it, however, that is not the case. The government would have had to issue new debt to pay for the old debt. The new debt would now be more expensive – because of the inverse relationship between yields and price – and the U.S. is left with slightly less, but more expensive obligations.

Neither of these scenarios are likely to happen, it's too risky and extreme with an overwhelming probability of a negative result. The focus should be on fiscal policies and decreasing the deficit rather than debt management.

The Bottom Line

Donald Trump's plans for America are still missing a lot of details, and few presidential candidates – if anyone – have gotten away with such vague policies so close to the election. As a Moody's analysis point out, policies presented during elections are generally overstated, but it gives a glimpse of the candidate's values and philosophies. 

An America with Donald Trump as president will be a more enclosed America. International relations will likely deteriorate rather than strengthen, both because of trade and implied disloyalty to important deals and alliances. His policies have been found by researchers to be "fiscally unsound." Even when not fully implemented, deficits will rise and so will debt. 

Trump has expressed that the policies on his website are simply a negotiation startingpoint, however, even under a small degree of this policies would be diminishing to the economy. The Moody's report concludes that a full, or even partial implementation will cause a recession (read the full report here).

 

 

 

 

 

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