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Trump’s New Deal and Its Impacts on Hong Kong’s Trade and Investment

Though Trump’s victory in the presidential election was regarded as the greatest black swan event in the recent years,  the result reflected the deep-rooted dilemmas that have long existed in the US after years of globalization, such as losing payrolls, unfair income distribution, increasing illegal immigration, etc. Americans sent a ‘NO’ vote to the traditional economic and political model. Thus, Trump’s ‘surprising’ victory was indeed inevitable and rational. Trump’s isolationism policy framework may greatly change the existing system of global trade and geopolitical landscape, which was formed since the World War II. It may have significant impacts to the economies of China and Hong Kong.

I. The major contents of Trump’s new deal

Given the tepid recovery of the US economy since the global financial crisis in eight years ago, different types of conflicts have exploded together, resulting Trump’s entry to the White House with new policy advocates. There are many similarities between now and the time when Roosevelt rolled out new measures in the 1930s. Following the outbreak of economic crisis in 1929, the US economy underwent a long period of great depression. Unemployment rate was high with social unrest. People were demanding for change. Roosevelt introduced a series of measures, which were later referred as the “New Deal”, after he took office as the 32nd President. The core framework of his policies consisted of three Rs, namely Reform, Recovery and Relief. Judging from the policies that Trump advocated during the election, they were not only different from most of Obama’s measures, but also different from those already in place for decades. To summarize, Trump’s policies also include three core principles, namely protection, reform, and stimulation.

First is protection. Trade protection is a major feature of Trump’s new deal. During the election, Trump put the protection of domestic interests and implementation of trade protectionism as his first campaign rhetoric. Concrete measures included renegotiation or withdrawal from the North American Free Trade Agreement (NAFTA), withdrawal from the Trans-Pacific Partnership (TPP), labeling China as a currency manipulator, imposing 45% tariffs on Chinese goods, with an aim to protect the domestic manufacturing sector and to create more jobs for low and middle class. These claims helped Trump to win all the electoral votes from several traditional manufacturing hubs in the north eastern region, directly sending him into the White House. As his idea of trade protectionism deviates from the trend of globalization which has persisted over half of the century, it gives rise to escalating concerns and worries across the globe.

Second is reform, which refers to implementing supply-side structural reforms and returning to the doctrine of free market. This is another feature of Trump’s new deal. The first measure is to cut the tax rates and simplify the tax regime. In response to the overcomplicated tax regime in the US, Trump pushed for eliminating the number of income tax brackets from seven to three, reducing the maximum tax rate from 39.6% to 33%, and cutting the corporate income tax rate considerably from 35% to 15%. Meanwhile, corporates would be able to enjoy a one-time tax holiday with tax rate cut from 35% to 10% if they repatriate capital back to the US. This measure would give large corporates, such as technology and pharmaceutical firms, a greater incentive to repatriate trillions of funds back to the US. The second measure is to abolish the ObamaCare and simplifying the government regulations. Because of ObamaCare proposal, the premium for most people soared, which also led to rising expenses for corporates. Therefore, abolishing ObamaCare would help release the burdens for consumers and corporates. At the same time, Trump proposed to accelerate the drug approval process. He also proposed to simplify government regulations. If one new regulation is enacted, two existing regulations must be eliminated. Monitoring on legislation requirement will be stepped up to avoid overcomplicated rules, which would bar the proper functioning of market economy. Furthermore, the market expects that after Trump taking the office, tight regulations in the financial market may be relaxed somewhat. Third measure is rigid restriction on the expansion of government headcount and executive power. He proposed to reduce the federal government scale gradually and lower the government expenditures by reducing federal workforce through attrition and a hiring freeze on federal employees.

Third is stimulation. It means stimulating economy through investment in infrastructure and energy exploration facilities. In view of the obsolete transportation network in the US and abundant energy resources pending for exploration, Trump proposed to enhance infrastructure investments, in which USD 1 trillion will be spent on transportation infrastructure; energy projects for domestic oil, natural gas and shale gas, which were valued at over USD 50 trillion; and resumption of the Keystone pipeline project between the US and Canada. The source of funding will come from Public-Private-Partnership projects and repatriating funds but not relying on additional the government expenditures. As a result, such measures will not have significant impacts on the US government fiscal conditions. This will be obviously different from Roosevelt’s practice, which mainly rely on expanding government expenditures.

The aforementioned shows Trump will implement isolationism economic stimulation. On one hand, he will strongly protect the domestic market by implementing “America First” policies. On the other hand, he will simplify tax regime and regulations. He will also invest in infrastructure, attract cash repatriation and encourage corporate investments. He aims to double economic growth through implementing those measures. However, can Trump’s proposal be realized?

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Content provided by Bank of China (Hong Kong)
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