2024 was one of the most politically driven years in recent memory. We saw a new government win emphatically in the UK, and we came extremely close to a far-right French government. Perhaps the most dramatic political story, however, was the race for the presidency in the United States of America.
After numerous faux pas, Joe Biden dropped out and endorsed Kamala Harris, setting up a race for the White House between Harris and Donald Trump. It was an election which Trump won fairly comfortably and with him recently taking office, all eyes will now be on his controversial proposed tariffs, and whether the Trump Administration goes ahead with their proposals.
Trump’s policies on trade and taxation were the talk of the campaign and they are certainly giving the markets plenty of cause for concern. So, how could Donald Trump’s return to the presidency reshape economic dynamics in the U.S and globally, particularly regarding trade policy and taxation?
Trump’s Trade Tariffs
Much of Donald Trump’s campaign centered heavily on the trade tariffs his administration wanted to impose. Considering his trade tariffs resulted in a trade war with China during his first term as president, markets and global economies are anxious to see whether he makes good on his promises.
A tariff is basically a form of tax imposed by one country upon any goods and services imported into the country from another country. There are a number of reasons for trade tariffs, though primarily they are designed to help increase revenue, influence the price of the goods or services being imported, or simply to flex metaphorical muscles and enjoy competitive advantages.
Trade with other countries is an essential part of everyday life. Without it, many of the goods and services we rely upon today simply wouldn’t be possible.
As part of his Presidential campaign, Donald Trump’s administration spoke of implementing additional trade tariffs of 10% – 20% upon all goods and services coming into the United States from other countries. As for China however, this number was said to be rising to 60%.
Should the Trump Administration implement these tariffs, it will influence the markets and economies, though whether these influences are positive or negative remains to be seen.
Possible Trade Tariff Implications
As mentioned, with global tariffs of at least 10%, possibly 20% on all goods and services imported into the U.S from other countries, and 60% on goods and services coming from China, there are concerns that this will negatively impact growth.
The concerns are that these tariffs will place upward pressure upon inflation, and drive inflation up once more. As we’ve been finding out since 2022, high inflation is not conducive when it comes to the economy, or the markets in general.
Some analysts predict that, should these tariffs come to fruition, inflation could be increased by 2.5%, whereas GDP could decline by 0.5% over the course of the next two years. This could be detrimental as increases in inflation will likely cause the FED to put the brakes on any interest rate cuts. Considering they are already predicted to cut rates just twice in 2025, as opposed to four times like previously expected, this is far from ideal.
If inflation creeps dangerously high, we can’t rule out the prospect of yet another interest rate hike either. Markets will likely respond negatively to this news, and this could trigger a sell-off.
One major downside is the fact that consumer prices will surely increase, as import costs and manufacturing costs will have to increase. Not only that, but countries that trade with the U.S will also likely impose trade tariffs of their own. If inflation increases, the cost of living in the U.S will almost certainly increase as well.
There are, however, some pros to the imposed tariffs as well, particularly in the States, which reflects his ‘America First’ stance. They could boost federal revenue and provide a short-term boost to finances within the U.S.
There will also likely be financial implications further afield, particularly in countries such as Mexico, Canada, EU countries, and of course, China.
Taxation
As far as taxation is concerned, all eyes will be on the 2017 TJCA (Tax Cuts and Jobs Act) provisions, relating to things such as corporate gains tax, capital gains tax rates, and individual tax rates. This could have a number of impacts on the U.S economy in particular.
If the $10,000 cap which limits the SALT (State and Local Tax) deduction is removed for example, this could add as much as $200 billion to the federal deficit. There are also whispers of corporate income tax rates being reduced from 21% to just 15%, which would likely further add to the deficit.
On a more positive note, corporate earnings may increase, resulting in the markets rallying.
In order for these changes to be made permanent, they must first be approved by Congress.
Short and Long-Term Market Inferences
Following the results of the Presidential race, markets rallied and despite a blip in December, finished the year strong. So, what may we expect from 2025?
Well, to begin with, market prospects for 2025 look to be very up and down, as investors will enjoy plenty of opportunity for growth, as well a number of risks along the way. Short-term for example, will likely see economies continue to grow at a steady pace, and assuming inflation ticks down, rate cuts should trigger plenty of opportunity for growth.
Tech stocks, which performed very well last year, will likely continue to rally as investor sentiment should remain positive, even with talk of AI stocks being overvalued. Energy and materials sectors, however, could be more volatile.
Looking further ahead, should inflation increase, or remain stubbornly high, investors will likely turn to assets that historically perform well during periods of higher inflation. Gold, commodities, international equities, value stocks, and stocks which tend to perform well during volatile periods could yield impressive results and are looking increasingly bullish.
Growth stocks could be more subdued as they are historically more sensitive to high inflation. Again, inflation is the key word here. If inflation falls to the FED’s target of 2% (as of this writing, the current rate is 2.75%), and holds steady, the markets in general should look decidedly more stable and yield moderate returns.