...this being the sentiment of a European economist on the US.
...do you see how much Trump has changed European sentiments on the US?
...I think Trump 2.0 won't raise much from the tariffs (in tens of billions) let alone fund Trump's rich tax cuts, which means any such tax cut proposal would have to further deepen the US budget deficit, becoming an eventual icing in the cake for the bond vigilantes waiting to pounce on a US misstep. This is possibly reserved for 2026 or late 2025.
...you see, Trump's tariff policy is incoherent, unclear as to objectives and contradictory. Clearly it wasn't about lower other nation's tariffs on US to a level playing field. It was about weaponsing tariffs to coerce other countries especially major ones to buy more from US to close the trade gap (and closing the trade gap is different from closing the relative tariff levels) and to encourage more FDI into US to revitalise a new manufacturing renaissance that would provide the jobs. And the third objective was to raise tariff revenues to offset or fund a large tax cut and even more audaciously replace the US tax system. And none of that would happen or be successful.
First, On the trade gap, do you see China and EU buying more from US after the tariff/trade war?
NO, EU is engaging with China as is Canada (Carney just won election), China has boycotted many American products, and other than India (who is seeking US military support) and Vietnam and maybe Japan, there have been no notable major countries stepping up US purchases. And purchases have largely centred around defence purchases.
Second, On stimulating more FDI into US to create jobs, I have already posted last week a fellow American's view providing 14 reasons why that won't happen. Manufacturing is not returning to the US. They won't be able to compete on costs, supply chain, skills, logistics.
Third, On using tariff revenues to fund a large tax cut or replace the US tax system, Trump 2.0 is dreaming. The only way they could do so to generate the trillions they need would be to keep or uplift tariff rates at very elevated levels. As time progressed, Trump had been the one reducing his tariff rates, it wouldn't surprise me that it ends up at 10-20% for most and 45-50% for China, none of which would be sufficient to even fund a large tax cut let alone replace US tax system. And even at elevated US tariff rates, the resultant tariff revenues would end up being negligible because it would kill trade altogether -e.g if US/China tariff levels remain at 145%, it won't be long that China would cease trading with US altogether, because Americans would no longer be prepared to pay for Chinese goods at much higher prices and even boycott them as would the Chinese on American products. And if there is no trade or minimal, there would be barely any tariff revenues to gain from (it may well be less than before Liberation day).
Fourth, if the US tariffs are not high enough at the end of the day, it would not be enticing enough for any foreign company to consider making DFI in US nor raise enough tariff revenues to fund the large tax cut.
It is not hard to think them logically, yet Wall St and US market participants remain cautiously optimistic about trade deals and prospect of tax cuts ahead.
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Rarely has a financial crisis been so easy to predict, because it is caused by the US president: 1. Tariffs drastically reduce shipping to the US. 2. Complete uncertainty minimizes investment in the US. 3. The world seeing US madness sells $, 4. & sells US treasuries. /1
This scenario is obvious to anybody who has dealt with emerging economies crisis. The US economic problems are political, an almighty president, who is as aggressive as ignorant, & his insistence of being surrounded by obedient servants who dare not tell him the truth. /2
The natural outcome of this standard emerging economies crisis is: 1. The demand for US treasuries will dry up (=higher market rates). 2. The US government will be forced to slash its budget deficit from 6.5% of GDP ($2 trillion) to zero. /3
3. Since the US public expenditures are minimal, the US will be forced to raise taxes. Who can pay? The very rich. The US had a maximum federal income tax from World War II to 1962 of 91%. It might not rise that high, but rise it will.
4. Meanwhile stock prices will collapse. My guess is that the current market capitalization will halve (no confidence in US economic policy and very high valuation). Trump has killed US exceptionalism with his blatant hate of foreigners who have kept US $ & stocks overvalued. /5
5. The consequences are likely to be radical. The billionaires will probably lose. Bradford Delong wrote a wonderful article pointing out that the US hardly bred any billionaires from 1930-1980 because of high income taxes & strict regulations. We are likely to return to that. /6
