If you listen to Wall Street and corporate America, Donald Trump’s second term will usher in a new golden age for the US economy. After all, what’s not to love about the return of a business-friendly president advised by a cabinet of self-made billionaires all promising deregulation and tax cuts?
Markets and CEOs have reasons to cheer. Trump inherits a strong US economy from former President Joe Biden. Output is running above pre-pandemic trends, far outperforming other major economies. Unemployment is hovering around 4%, inflation is slowly heading back to the Fed’s 2% target, and interest rates are coming down from their peak. It’s no wonder stocks are partying like it's 1995. But two of Trump’s core campaign promises are set to spoil the party.
First, there’s his plan to jack up tariffs (aka “the greatest thing ever invented”) to correct “unfair practices,” reduce America’s trade deficit, and extract concessions from other countries. While the president didn’t slap any new tariffs on “day one,” as some feared, he did launch investigations that will provide legal cover for significant tariff hikes sooner rather than later.
China will be the primary target as Trump imposes 50-60% levies on some goods and roughly doubles the average tariff rate on all Chinese imports by year’s end, aiming to force a deal from Beijing. But though China’s economy is in shambles and President Xi Jinping would much prefer to avoid a trade war with the US, he’s unlikely to offer concessions generous enough to satisfy Trump and the hawks in his cabinet. Combined with other US moves the Chinese will see as hostile, tariffs will cause Beijing to retaliate and the US-China relationship to break down, hurting American consumers and businesses through higher prices for imported goods and inputs.
Of course, China’s not the only trading partner in “tariff man’s” crosshairs. Trump’s offhand threats on Monday to impose 25% tariffs on Mexico and Canada by Feb. 1 may be bluster, but they confirm his determination to target any country he believes is taking America for a ride. That could include having a large bilateral trade surplus with the US, enabling Chinese circumvention of US tariffs, “free riding” off US protection, “over-taxing” US companies, and anything else Trump sees as adversarial to US interests.
Some countries will cave to Trump’s demands. Mexican President Claudia Sheinbaum, for instance, will likely offer up enough concessions to avoid 25% tariffs. But others will lack the policy and political space to placate Trump. Some, like Canada, will feel compelled to hit back with their own measures, raising the risk of an escalatory cycle and a broader trade war that could tip the US – and the world – into recession.
Even if we avoid that worst-case scenario (as is likely), Trump’s initial tariffs will still disrupt supply chains, distort trade flows, and raise costs for US businesses and consumers – with lower-income Americans taking the biggest hit. And here’s the kicker: Not only will tariffs fail to “enrich our citizens” – Trump’s purported goal – they also won’t meaningfully reduce America’s overall trade deficit or bring back manufacturing jobs.
Then there’s immigration, the second key plank of the president’s agenda. Trump wasted no time showing he means business, on Monday declaring a “national emergency” at the southern border, announcing immediate deportation raids, reinstating his "Remain in Mexico" policy, and designating drug cartels as foreign terrorist organizations. His unexpected (and probably illegal) order to deny birthright citizenship to the children of noncitizens signals just how far he’s willing to go to deliver on this campaign promise. While we won’t see the 15 million deportations Trump threatened on the campaign trail (there may not even be that many undocumented immigrants in the US), with committed immigration hawks like Stephen Miller and Tom Homan running the show, the administration could remove up to 1 million people this year and perhaps 5 million over his term.
That’s a problem for the economy because the labor market is operating at full employment. Removing millions of existing workers (who are also consumers and taxpayers) while curtailing immigration will shrink the US workforce, driving up wages, business costs, and consumer prices, reducing the economy’s productive capacity, and widening the deficit.
The combined effect of Trump’s trade and immigration policies will be slower growth and higher inflation. And the two pro-growth policies that investors and business leaders are banking on – deregulation and tax cuts – won’t deliver enough juice to offset the damage.
Yes, the financial sector, Silicon Valley, the crypto industry, and fossil-fuel producers will benefit from lighter regulation. But the macro impact will be limited: The US economy is already among the most loosely regulated in the developed world, and Trump already picked much of the low-hanging fruit in his first term. Domestic energy production reached record highs during the Biden administration, and low oil prices will discourage much additional output and investment this year.
As for tax cuts, Republicans will make permanent Trump’s 2017 cuts for corporations and the wealthy at a cost of over $4.5 trillion over 10 years. But with the fiscal deficit already at 6.5% of GDP and only a razor-thin House majority, Trump won’t be able to slash taxes much (or any) further without offsetting spending cuts. Even if Elon Musk’s now-official Department of Government Efficiency (whose constitutionality is already being challenged in court) manages to find some cost savings and efficiencies in the federal budget, meaningful spending cuts will be hard to come by – especially as entitlements remain untouchable and Trump boosts defense spending.
The result? Trump’s promises to lower the corporate income tax rate to 15% and eliminate taxes on tips, Social Security, and overtime pay are likely to go unmet. Yet deficits and debt-to-GDP will grow faster over the next four years, putting upward pressure on America’s long-term borrowing costs.
All this – higher inflationary pressures from tariffs and deportations, bigger deficits – will force the Fed to keep interest rates higher for longer to fight inflation, raising your mortgage payments, strengthening the dollar, and further dampening growth. Cue angry tweets from Trump demanding rate cuts, which will spook markets and lead Jerome Powell to double down on demonstrating the Fed’s independence.
Many business leaders and investors are shrugging off these risks, remembering how well the economy performed in Trump’s first term and believing the president will back down or be constrained from following through on his most disruptive campaign promises.
But the starting conditions are very different than in 2017. Corporate valuations are much higher. Government debt has exploded since the pandemic, and deficits are structurally higher. Inflation is still above target, and interest rates remain elevated. The downside risks are significantly greater. More importantly, Trump 2.0 is not Trump 1.0. Not only does the president have unified government and an iron grip on his party, but he’s also consolidating executive power and assembling a more personally loyal team ready to implement rather than block his agenda.
To be sure, many of his tariff threats will prove to be bluster. Logistical and political roadblocks will limit the scale of deportations. Lobbying from CEOs and advisers like Musk might temper his most disruptive impulses. And a large enough market selloff or $15 eggs before the midterms could convince him to soften a long-held position.
But make no mistake: Trump will follow through on his agenda to a greater extent and with a steeper cost than most seem to realize. And the constant guessing game about what the president might do next will itself weigh on trade, investment, and growth.
Over time, this structural uncertainty and policy volatility – combined with the cronyism and pay-for-play that will flourish during Trump’s transactional presidency – risks eroding the foundations that have made America the world’s premier economy.