Trump Agenda Won’t Hurt Global Economy As Much Next Year As In 2026

Donald Trump won a second term in the White House by promising a bonfire of the verities—the truths that wonks in economic and foreign policy circles hold sacred. Free trade is out, protectionism is in. Worrying about the debt is out, tax cuts are in. The US security guarantee is out, do-it-yourself defense is in.The established order Trump wants to overturn hasn’t covered itself in glory. Under President Joe Biden, inflation in the US soared close to 10%, partly as a result of overdone fiscal stimulus. Decades of free-trade orthodoxy have frayed the blue collars of US factory workers. Wars in Ukraine and Gaza have called into question Washington’s continued leadership in world affairs..The blaze will take a while to get going, for the simple reason that any administration—even one with a working knowledge of Washington—can only move so quickly to implement its to-do list. For the year ahead, Bloomberg Economics forecasts global growth at an unremarkable 3.1%, unchanged from 2024. Inflation is set to slow to 3.4% from 6%, with readings in the US and other advanced economies drifting back to the 2% central banks have long targeted.Still, the global economy—along with the financial markets—is going to feel some heat..There aren’t a lot of things economists agree on. One is that trade is good. By sharpening competition and encouraging specialization, it drives productivity higher, boosting growth and lifting incomes. As a bonus: Trade helps keep a lid on inflation in developed countries by giving their consumers access to lower-priced goods made by workers in China, Mexico and other places.Yet to quote from the title of a 2023 book by Robert Lighthizer, the architect of tariffs in Trump’s first term, no trade is free. Lighthizer writes evocatively about how offshoring hollowed out the Ohio steel town where he grew up. The exodus of manufacturing jobs has been a major drag on working-class incomes. China, meanwhile, leveraged access to global markets to transform itself into the world’s No. 1 exporter and a geopolitical rival to the US.Dashing to the free-trade barricades (now made in China), economists—including those at Bloomberg Economics—have fired their modeling artillery at Trump’s pledges of 60% tariffs on China and 20% on the rest of the world. Tariffs at those levels would be historically elevated, and so, unsurprisingly, our models predict a major blow to US gross domestic product and jump in inflation.In reality, and drawing on the experience of Trump’s first term, tariffs are likely to stop short of his campaign-trail pledges. They’ll likely be targeted, not across-the-board, and delivered in stages instead of all at once. For 2025 that means a modest impact on the US and China, building to a more significant hit to growth—spilling over to Mexico, Canada and other key trade partners—in 2026..Nevertheless, something important has changed. Even in the best-case scenario, the swing from free trade to protectionism is bad news for the global economy. If Trump goes full throttle on tariffs, everything from Apple Inc.’s Asia supply chain to General Motors Co.’s made-in-Mexico autos are at risk.Another idea most economists agree on: Big deficits are bad news. Sure, in a downturn, opening the public spending taps to pump up demand is a good idea. But in normal times, outside war or recession, borrowing should be kept under control.The Biden administration is already playing fast and loose with fiscal policy. The deficit for 2024 is projected to come in close to a nosebleed-inducing 7% of GDP, a consequence of pumping out too much stimulus during the pandemic and failing to rein in spending fast enough after the emergency was over.Trump is promising to play faster and looser. He and his advisers are touting a classic supply-side recipe, with a dash of protectionism thrown in. First, cut taxes—stoking animal spirits. Second, raise tariffs—offsetting some of the lost tax revenue. Finally, slash public spending—closing the remainder of the gap.The trouble is, tax cuts are easy to deliver; raising tariff revenue and cutting public spending are much harder. Hiking duties enough to raise significant sums risks a bigger blow to growth and hike to inflation—as well as discouraging imports and so actually reducing revenue. Elon Musk and Vivek Ramaswamy have been charged with finding $2 trillion in savings in the federal budget. It’s a tall order: The lion’s share of spending goes to defense, Social Security and Medicare, sacred cows that even Trump won’t turn into a red-meat sacrifice.US public debt is already rising fast, climbing from 79% of GDP in 2019 to close to 100% in 2024. With Trump promising to extend tax cuts from his first term—currently set to expire in 2025—there’s a real risk it continues to race higher.Bond vigilantes are already punishing Washington for its borrowing excesses. The yield on 10-year US Treasuries almost touched 4.5% in November, up from 3.6% in September. And with Treasury borrowing costs the global benchmark, a slew of other countries, including Chile, Egypt and South Africa, will have a harder time managing deficits and debts.On security, allies in Europe and Asia count on the US as a guarantor of peace and stability. Pax Americana, paid for with US blood and treasure, has been a defining feature of the post-World War II global order.Trump’s “America First” instincts mean it can no longer be taken for granted. In Ukraine, his pledge to end the war within 24 hours of taking office threatens to force Kyiv into an unequal negotiation with Moscow. In Taiwan, his transactional approach raises new questions about the security of a crucial node in the semiconductor supply chain. For NATO allies, his threat to withhold support to any country not increasing its defense spending is set to add to the already considerable debt stress of some European nations..There is, to be sure, an internal logic and an intuitive appeal to Trump’s proposals. Considered as a package aimed at reshoring the benefits of US economic dynamism (and ignoring for a moment the costs), raising tariffs, cutting taxes and forcing other countries to pay for their own defense makes sense..There’s also the hope that voices of reason in the administration—with Treasury Secretary nominee Scott Bessent the current vessel for investors’ hopes—and the daily reality check from the markets will prevent policy going too far off the rails. Trump might be pitching a 60% tariff on China and massive unfunded tax cuts. Will he deliver them if the S&P 500 tanks and Treasury yields spike in anticipation? Presumably not.Still, most people in economics and diplomacy would agree that free trade, fiscal responsibility and the US security guarantee have delivered significant benefits for America and the world. Trump disagrees and promises to forge a new path. In the year ahead, we’ll find out who’s right.

Trump Agenda Won’t Hurt Global Economy As Much Next Year As In 2026

Trump is promising to play faster and looser. He and his advisers are touting a classic supply-side recipe, with a dash of protectionism thrown in.

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Trump Agenda Won’t Hurt Global Economy As Much Next Year As In 2026

Trump is promising to play faster and looser. He and his advisers are touting a classic supply-side recipe, with a dash of protectionism thrown in.

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