Kaushik Basu: What if Trump actually keeps his campaign promises?

As the dust settles after one of the most turbulent presidential elections in American history, many are asking whether US president-elect Donald Trump will deliver on his economic agenda and—assuming he follows through on his campaign promises—what impact his policies will have on the United States and rest of the world.

On the campaign trail, Trump repeatedly pledged to create manufacturing jobs by imposing a 10% tariff on all imports and up to 60% on Chinese goods. He also vowed to punish American companies that produce goods overseas, deport millions of undocumented immigrants and make it harder for migrants to enter the country and compete with American workers.

At first glance, Donald Trump’s vision of a “manufacturing renaissance” may seem appealing. Given the election’s outcome, it has clearly resonated with voters. Financial markets also reacted positively: after the election was called, the dollar rose against most major currencies and the S&P 500 recorded its largest weekly gain in a year.

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But the reality is not as rosy as it may seem. The stock-market rally is primarily driven by expectations of significant tax cuts and deregulation. Plans to raise taxes on the super-rich and large corporations, a centrepiece of Vice President Kamala Harris’s campaign, will be shelved, at least for now.

When it comes to Trump’s plans to restrict the flow of goods and people, experts remain far less optimistic. A recent Peterson Institute paper by Kimberly Clausing and Mary Lovely examines the potential consequences of Trump’s proposed trade barriers, warning that his import tariffs will lead to higher prices, with the burden falling disproportionately on low- and middle-income households.

To be sure, some may argue that Trump’s tariffs will not result in sustained inflation, just a one-time price spike. According to this view, the long-term benefits of the policy would outweigh the short-term costs.

But there is reason to believe that instead of delivering lasting economic gains, the trade policies Trump favours would cause serious damage. This is because, although consumers would undoubtedly shoulder much of the burden, they are only part of the story.

A tariff wall around the US would raise costs for domestic producers, an outcome that would hardly come as a shock to anyone but Trump.

The fundamental flaw in Trump’s tariff plan is that domestic producers rely heavily on imported inputs. Consider steel: the US, the world’s largest steel importer, sources its supplies from 80 countries, including Brazil, Canada, Mexico and China.

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A sharp increase in steel tariffs would thus drive up the cost of American-made products, erode the country’s economic competitiveness, and ultimately undermine Trump’s stated goal of bringing back manufacturing jobs.

Trump’s plan to limit the use of foreign labour would exacerbate the problem. India, for example, has been one of the largest providers of labour to the US since India’s 1991 economic reforms.

Over the past three decades, outsourcing has been a boon for both India and the US, as the digital revolution enabled American companies to take advantage of India’s lower labour costs.

Restrictions on outsourcing in the name of protecting American workers will not only hurt India’s economy, but also increase production costs in the US. In addition to reduced competitiveness, Trump’s proposed restrictions could have far-reaching geopolitical consequences, potentially undermining three decades of US diplomatic efforts to forge closer security ties with India.

Moreover, restricting access to cheap foreign labour would enable other countries, especially China, to outcompete American firms in the product market. As the US increasingly isolates itself, China is busy expanding its foothold in Africa, Asia and Latin America.

Its growing presence in these regions could open new avenues for production and sourcing, boosting Chinese productivity and enhancing its geopolitical clout.

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While the debate about outsourcing in the US is often framed as a simple conflict between American and foreign workers, what is often overlooked is that outsourcing pushes up corporate profits.

The solution lies not in restricting access to lower-cost overseas labour but in using taxation to redistribute some of the gains from the rich to the poor, ensuring that the benefits of global trade are shared more equitably.

In most democracies, the primary concern following an election is that the winners will fail to deliver on their campaign promises. The 2024 US presidential election is one of those rare instances where there is palpable fear—in America and around the world—that the winner will actually follow through. ©2024/Project Syndicate

The author is a professor of economics at Cornell University and a former chief economic adviser to the Government of India.