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Donald Trump. Picture: Mark Peterson/Pool via REUTERS
Donald Trump. Picture: Mark Peterson/Pool via REUTERS

It might be too early to know the precise details of US President Donald Trump’s economic plan now that he has assumed office after Monday’s inauguration. However, we do know enough about the general outlines of his economic thinking to know that it does not bode well for the SA economy.

This heightens the need for SA’s economic policymakers to be more disciplined in their budget policy management than they have been to date and to take measures that would increase the country’s productivity.

On the campaign trail Trump kept repeating three economic policy themes that would have an important bearing on the US and world economies.

First, he proposed to impose a 60% tariff on imports from China and 10%-20% tariffs on imports from the rest of the US’s trade partners. He also indicated that he would use tariff policy as a tool to achieve objectives not related to economics.

In that context, he threatened a 25% import tariff on Canada and Mexico if they did not adequately co-operate with the US to stop the flow of immigrants and drugs into America.

Second, he planned to cut taxes in a major way. Not only would he seek the extension of the 2017 Tax Cut & Jobs Act. He would also seek the elimination of income taxes on social security income and on tips.

Third, he planned to deport up to 10-million undocumented immigrants. He threatened to do so even though the agriculture and building industries were highly dependent on these immigrants for their labour supply. Such a move could mean higher food prices and building costs.

The last thing an export-intensive SA economy needs is an aggressive American First trade policy. Not only would that directly affect its exports and expose it to the weaponisation of US trade policy for non-economic related political objectives, but it would also indirectly affect SA by heightening the chances of a world economic recession.

One way a punitive US trade policy could cause a world economic recession is by inviting retaliation by its trade partners. That could take us down the economically damaging road of beggar-thy-neighbour polices that characterised the 1930s.

That would be the kiss of death for economic globalisation. Trump’s tariffs could also cause a world recession by seriously damaging the already struggling Chinese and German economies.

If fully implemented, Trump’s tax cut proposals would certainly not be good news for SA in that they would cause the US budget deficit to blow out. That deficit is already running at about 6.5% of GDP at a time when the country is close to full employment.

According to the Committee for a Responsible Federal Budget, over the next decade the Trump tax cuts would add about $7.75-trillion to the budget deficit. That in turn would raise America’s debt-to-GDP ratio to a record 140% by 2034.

The reason a further increase in the budget deficit is not good news is that it would cause world interest rates to rise. Not only would it force the US Federal Reserve to keep interest rates high for longer for fear of a return of inflation, but it would also invite the return of the bond vigilantes by raising questions about the sustainability of America’s public finances.

As a foretaste of what might be coming, over the past few months we have already seen 10-year US treasury yields rise from 3.6% to 4.8%. Such a rise in interest rates could reduce world investors’ risk appetite and make the financing of SA’s budget deficit all the more expensive.

We must hope that once in office Trump will dial back substantially when it comes to his import tariff and tax cut proposals. However, hope is not a strategy. Rather, SA’s economic policymakers should prepare the country for the risk that Trump’s economic policy bite will be as bad as his bark.

They should do so by getting the country’s public finances on a more solid footing and by undertaking serious supply side reforms that would make for a more productive economy.

• Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow at the American Enterprise Institute.

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