The economy is the top issue for voters in November’s presidential election, and the outcome of the election will alter the course of the US economy. That’s because former President Donald Trump and Vice President Kamala Harris are running on two distinct policy agendas that, if implemented, would significantly differ in their macroeconomic consequences.
Harris would largely represent a continuation of President Joe Biden’s center-left policies. Trump 2.0 would plot a different path, with higher tariffs, immigration restrictions, and tax cuts akin to his first-term policies but in a much more challenging economic environment.
Although the race for the White House is too close to call and will likely remain so until Election Day, what policies ultimately get enacted depends not just on the occupant of the Oval Office but on the makeup of Congress. Polls show that Republicans are heavy favorites to flip the Senate, while control of the House will probably go to the party that wins the White House.
The upshot: If Trump wins, he is likely to come into office with a unified Republican government and a clear path to implementing his key policies (many of which – especially on trade and immigration – could be enacted through executive action, anyway). But if Harris wins, she will likely preside over a divided government with a Republican Senate that would force her to water down much of her agenda.
Let’s dive into how Trump and Harris might govern under these two most likely scenarios and compare the economic implications.
Probably the most disruptive leg of the Trump 2.0 agenda is its trade policy. Trump has promised to levy a dramatic 60% tariff on China and a 10% tariff on all imports. This is in addition to the tariffs he’d likely impose on key allied trading partners in Europe, Southeast Asia, and Latin America, especially those with large bilateral trade surpluses with the US. Tariffs are a tax on foreign-made goods: They raise prices and costs for American consumers and businesses.
While it would probably under-deliver on the headline 60% number, the Trump administration is determined to accelerate the pace of economic decoupling with China and would likely double the average tariff rate on all Chinese imports, with larger increases on intermediate goods (like semiconductors and auto parts) critical for US and global supply chains. China could either reciprocate Trump’s escalation, leading to a sharp worsening of the relationship and a new Cold War that would raise the risk of direct military confrontation. Or it could decide that its weakening economy demands a more conciliatory response, swallow the tariffs, and offer Trump a “grand bargain” that he could sell at home as a win. Either way, with baseline protectionism already higher than in 2017, Trump’s tariff increases would add to US inflation, reduce US GDP growth, and potentially disrupt supply chains. These impacts would be magnified by any in-kind retaliation from China or other targeted trading partners.
By contrast, Harris’ trade policy would extend the status quo under Biden. Tariffs would not come down from current levels, and they may even be expanded incrementally on specific sectors of concern as part of the “small yard, high fence” approach to de-risking from and tech competition with China. But by and large, Harris would lean more heavily on targeted export controls and domestic industrial policy than on tariff hikes. The US-China relationship would stay on the current path of “managed decline.”
A key campaign issue where Trump’s agenda would also have drastic and underrated economic implications is immigration. The former president has vowed to take executive actions to meaningfully crack down on migration flows at the southern border, restrict economic immigration, and deport millions of immigrants already in the US workforce. While the actual policy changes are likely to be smaller and more gradual than threatened, Trump 2.0 would deliver a material negative shock to the US labor supply that would increase the price level, fuel inflation, reduce GDP growth, depress the US economy’s productive capacity, and widen the federal deficit.
For her part, Harris would stick to the more restrictive stance Biden embraced this year barring migrants who cross the southern border illegally from applying for asylum. She would also continue her work with Latin American countries to reduce migration by addressing its “root causes” in the region, albeit mostly without success. Harris would face slim odds of passing comprehensive immigration reform through a Republican Senate. But if illegal immigration continues its current pace of decline and the issue becomes less salient over time, she could have the political space to loosen some restrictions, which would provide a disinflationary impulse and a boost for the US economy.
Where the differences between the two candidates are less stark than they seem is energy policy. Trump has a clear preference for maximizing domestic fossil fuel production, while Harris once opposed fracking and would continue implementation of the Inflation Reduction Act to spur the growth of renewables. A second Trump term would streamline permitting regulation, expand offshore and Arctic federal lease sales, speed up approval of new LNG export facilities, and loosen climate and emissions regulations. But with the Biden administration already supportive of the oil and gas industry, domestic output at record levels, and production determined as much by market conditions as by government policy, there’s only so much that Trump’s “drill, baby, drill” approach could realistically achieve. At the same time, while Trump 2.0 would curtail some of the renewable subsidies in the IRA such as the EV tax credit, a wholesale reversal of Biden’s signature legislation is unlikely because it was designed to generate vested interests in many red states and within industry.
Similarly, while a Harris administration would stick to the Democratic Party consensus on advancing the green energy transition through existing IRA subsidies and industrial policy, it wouldn’t take any meaningful actions to constrain domestic energy production in a way that could be seen as leading to higher gas prices at the pump. This is aligned with President Biden’s “all of the above” approach to energy sourcing to ensure the green transition is economically and, therefore, politically sustainable – the same approach that has been partly responsible for record-high domestic energy production levels.
Finally, we have fiscalpolicy, where neither candidate has a plan to fix the debt. Despite Trump and Harris offering radically different visions for taxation and spending, deficits are set to increase over the next decade regardless of who wins the election. Indeed, with general government debt at over 120% of GDP, federal budget deficits at 6+% of GDP at a time of peace and relative prosperity, and no prospect of entitlement reform until the 2030s, the mythical DC deficit hawk looks all but extinct.
Harris and Trump are both likely to extend the 2017 Trump tax cuts when the Tax Cuts and Jobs Act expires in December 2025. The main difference is that Trump with a unified government would substantially increase overall spending – particularly defense spending – without offsetting tax hikes, leading the deficit to balloon (possibly to 8-10%) over the next 10 years and putting the US on an even more unsustainable fiscal trajectory than it is already on. Harris, on the other hand, would also extend most of the expiring tax cuts but offset some with higher top marginal rates on high-income individuals. A Republican-controlled Senate would limit the scope for both tax hikes and non-defense spending increases, meaning her administration would increase deficits and debt less than Trump 2.0 would by 2035. Higher interest rates under Trump with a unified government would further widen the gap between the two scenarios.
What does it all add up to? Putting together the effects of higher tariffs, immigration restrictions, and wider deficits, a second Trump presidency is likely to result in higher inflation and lower GDP than a Harris administration. The combination of Trump’s stagflationary policies might prompt the Federal Reserve to end its rate-cutting cycle earlier, leading to higher-for-longer interest rates and slowing the US economy. Trump might then try to jawbone the Fed into lowering rates and weakening the dollar, undermining its independence and causing higher risk premia.
Some of you may dismiss this as alarmist or, worse, partisan. After all, there was plenty of handwringing from experts before Trump’s first term, too, and the US economy ended up doing pretty well until the COVID-19 pandemic hit. (Even if that performance was arguably an extension of the long and robust economic expansion that preceded it, juiced by Trump’s pro-cyclical, deficit-financed corporate tax cuts, and enabled by the Fed’s easy monetary policy.)
But the initial conditions really are very different now than in 2017. Growth is slowing. Interest rates are higher. Higher deficits and debt reduce fiscal space for further tax cuts. Inflation has only just normalized after several years above target. Domestic energy production is at record levels. And a lot of the policy low-hanging fruits that markets cheered in Trump 1.0 have already been picked.
Trump and Harris offer distinct visions for the economy. There are plenty of legitimate – even compelling – reasons for voters to prefer what the former president is selling. But anyone who expects Trump to snap his fingers and deliver 2019-level prices will be sorely disappointed – unless, of course, his policies cause a massive deflationary recession. Be careful what you wish for.