The first week of the new administration has seen a flurry of presidential activity, but most of Donald Trump’s economic announcements have been vague and lacking details.
Also, Congress will have a say in the process, and Republican lawmakers are not always on the same page with Trump over issues ranging from health care, tax reform, infrastructure spending and, of course, funding the border wall with Mexico.
There have been very cautious reactions to Trump’s initiatives from the business community, big and small, as many economic players simply do not yet know what to make of it. “It remains to be seen how all this will come together”, says Mohamed El-Erian, chief economic advisor of insurance giant Allianz.
Right now Trump seems to be focusing on an interventionist economic policy on the micro as well as the macro level, El-Erian says. On the macro level, Trump is looking at four strains: deregulation, tax reform, infrastructure and changing incentives to favor domestic production and the consumption of US-made goods and services.
“The micro combines sectoral emphasis with the selective application of moral suasion to individual companies and even specific projects”, El-Erian says. In other words: Trump uses carrots and sticks to whip the car industry, for example, into manufacturing in the US or else.
Wall Street has been moving quickly to price in investors’ assumptions about the likely impact of Trump’s announcements across different sectors of the economy. This week, infrastructure has been in focus, with Trump signing executive orders to advance the stalled Keystone and Dakota pipelines, “expedite” environmental review, streamline the permitting process—all while using American steel.
In addition, Senate Democrats have proposed their own $1 trillion plan for infrastructure (federally funded, while the Trump plan envisages significant private sector participation)—but Congressional Republicans remain opposed. Consequently, construction and engineering stocks have soared, notes the Institute of International Finance in its weekly insight.
On the trade front, Trump lost no time living up to one of his major campaign promises and pivoted away from current international free trade deals – the withdrawal from the Trans-Pacific Partnership (TPP) and the renegotiation of the North American Free Trade Agreement (NAFTA).
Depending on where businesses stand on the issue, even geographically, Trump’s move was either applauded or deplored. For the northern state of Minnesota, for example, Trump blew up arrangements with its three top foreign trading partners — Canada, Mexico and Japan.
TPP included a dozen Pacific Rim countries and was expected to help some of the state’s major corporate residents and sectors, including agriculture, medical technology and retail. Things are now pretty much in doubt.
“We supported TPP strongly and wish [the president] would have embraced it,” said Charlie Weaver, who heads the Minnesota Business Partnership, a group that includes dozens of CEOs of the state’s biggest companies. “Protectionism isn’t good for U.S. workers, consumers or the economy. That’s the fear of changing NAFTA and walking away from TPP.”
Republican congressman Erik Paulsen, a longstanding free trade advocate, offered a warning after Trump dumped the deal. “The bottom line is for the economy to continue to grow, we can’t simply just buy American — we have to sell American goods and services in growing markets to new customers,” Paulsen said.
Another state, the same opinion. Agricultural groups in Michigan say trade deals like the TPP (and NAFTA) are actually good for farmers. When foreign markets are making money, they can buy more of our Michigan and American-made food, the thinking goes.
“We were really hoping for TPP to go through,” said Mary Kelpinski, CEO of the Michigan Pork Producers Association. “We’re really hoping to work with this new administration and really are hopeful they will support an open trade market.”
For instance, the demand for pork is really high at the moment, especially in Asian countries, Kelpinski says. And the lower tariffs that come with trade deals like the TPP, the better price Michigan farmers and agriculture businesses can get for their products.
Kelpinski says that really adds up, especially now, when foreign countries make up a crucial percentage of the market.
“If it wasn’t for the exports that we have currently, the pork producers would probably be hurting quite a bit,” she says. “Because the [domestic] market is so saturated right now that they wouldn’t be getting a very good price for their product.”
As far as Trump’s announcement to cut regulations – by 75 percent or “maybe more” – is concerned, many small business owners across the country are delighted. “The small business barely survives because there are a lot of regulations,” says Sameh Abdel-Masih who runs a bakery near San Diego, California.
The last six months have been hard on him. He used to have three employees. Now, it’s just him and his wife. “We pay a lot of money here and there and it’s just a small business,” he says.
Finally the border wall with Mexico, probably Trump’s most famous (or infamous) campaign commitment. Will the southern neighbor pay for it, as Trump keeps insisting? Under no circumstances, says the government in Mexico City.
It appears that Trump would slap a 20 percent tax on all imported goods from Mexico, even if there was some confusion among Republican lawmakers and Trump’s own advisors as to the feasibility of such a tax.
The taxes would be paid by companies selling Mexican goods in the United States. Some would raise prices, others would absorb the taxes and see their profits reduced.
Retailers, automakers, chemical companies and energy companies would all be hit hard with tax bills. Few consumers would be unaffected, and it could hit Trump’s supporters the hardest.