Dean’s Comment on the US Election by Ambassador (ret.) Dr. Peter Ammon
Expect an unprecedented takeover of the U.S. administration
The unpredicted clarity of Donald Trump’s win including the Republican retaking of the Senate will make him an extremely powerful president. Moreover, he will enter office much better prepared than in 2017. A huge number of official positions will be cleared and filled with Trump followers. Especially if Republicans end the Senate filibuster, Trump will be able to put thousands of high-level nominees – and multiple judges over time – into office quickly. Should the party manage the “trifecta” by also winning the House (as is likely as of now), Republicans would have overall control of the legislative and executive branches. Given the existing conservative majority in the Supreme Court, America’s system of “checks and balances” would be greatly impaired.
Trump 2.0 is a major political challenge with significant risks for business
Domestic politics, especially the fight against his perceived “enemies”, will be at the forefront of President Trump’s agenda. Having survived not just actual assassination attempts but “political persecution” as he put it and emboldened by the Supreme Court’s decision on presidential immunity, he will feel vindicated to implement his promises. Moreover, his touted campaign against “wokeism” in the education system and media will add to the already existing division of the country in “Blue” and “Red” States.
Foreign policy will become much more transactional than before, with Trump using America’s might to extract financial and strategic benefits from friends and foes alike. There will be no appetite to bear the burden for the upkeep of the international order. While he is unlikely to ultimately withdraw from NATO, the president will use the threat of doing so to force allies to shoulder a wider share of the cost. At the same time, there will be fewer US military interventions around the globe than under previous presidents.
President Trump’s international instrument of choice are economic and financial sanctions, under the assumption that the cost is borne by others. The self-styled “tariff man” may use executive orders or invoke the International Emergency Economic Powers Act to quickly adopt high tariffs on China (at anything between 60 and 100%) and universal tariffs of possibly 10% on all imports. Even though the latter would likely be challenged in courts, Trump's actions alone would cause havoc on the international markets while legal action would take months to proceed.
By and large, President Trump will remain unpredictable, which in itself will intimidate his partners. The world order, already heavily fragmented, will become more volatile and dangerous.
In particular, major changes can be expected in the following policy areas:
Taxes and Budget
A further reduction of corporate tax from 21% to 15%, while Trump also promised to make the 2017 income tax reductions permanent.
An end to some of Biden's tax credits (green energy), while allowing the deduction of local taxes from federal tax bills.
$7.5 trillion added to the US deficit, which could rise from almost 6% to 8% of GDP under Trump, creating a risk for fiscal and financial stability in the long term.
Immigration
A much more rigorous turn in immigration policies, even if the promised mass deportation (of up to 15 million undocumented foreigners) is not likely to succeed.
Further restrictions of legal pathways to enter the United States, such as bringing back family separation policies, forcing asylum seekers to remain in Mexico during their process, and slowing down visa application procedures.
Climate and Energy
Another withdrawal from the Paris Climate Convention, giving international efforts to fight climate change a huge blow.
Complete termination of all Biden policies (e.g. the CHIPS Act, the Inflation Reduction Act (IRA), the Infrastructure Law) is unlikely, as these over proportionally benefit Republican states and districts. However, specific subsidies such as tax credits for EVs could be revoked and he could make it harder to spend money in Blue States.
A slowing down of decarbonization efforts with fresh investment in fossil fuels and reduced support for green energy, even though investments in the energy transition that are already underway cannot realistically be revoked overnight.
National Defense
Higher defense expenditures with bipartisan support in Congress. Republican leaders have already called for a spending increase to 5% of GDP (today: $874 billion, or 3% of GDP).
The cost of modernizing the nuclear forces alone is estimated at $750 billion over the next decades. More funds are needed and will likely be approved to secure supply chains, increase munition production, strengthen the industrial base and rebuild deterrence against China's rising capabilities.
The Wars in the Middle East
Despite Trump’s repeated criticism of President Biden’s efforts to restrain Israel's military actions, he is unlikely to authorize US involvement in military engagement against nuclear facilities in Iran.
Yet dimmer prospects for a two-state solution, as Trump and his advisors have been outspoken supporters of the current Israeli government in general and the settler movement in particular.
Russia’s War against Ukraine
While Trump's rhetoric on Ukraine has been inconsistent, he will try to force an end to the war early on, not least to gain him the laurels of the peace maker. This will most likely mean forcing Ukraine to accept territorial concessions.
US lawmakers generally are increasingly opposed to aid Ukraine, so US action will heavily depend on whether Trump will empower internationalists like his former secretary of state Mike Pompeo or ideological isolationists like Vice President-elect J.D. Vance.
In any case, the Europeans will have to bear a larger share of the cost of war.
China
Strong bipartisan support for hawkish action vis-à-vis China, the three top issues being the deterrence of conflict with the US or in the South China Sea, the protection of US critical infrastructure and shunning cheap exports from industrial overcapacity in China.
An actual decoupling of the US economy from China is in the offing, as Trump supports high tariffs and export restrictions that could easily trigger a trade war.
China, already plagued by deflation, will find its export-led growth business model in dire straits, with two potential remedies: stimulating domestic consumption (good for European exporters) and re-directing surplus exports towards other parts of the world (bad for production in Europe).
The Consequences from a European Business Perspective
One of the lessons from Trump’s first term in office was to not be too afraid of his words, but to carefully watch what he does. European governments will have to adjust to the returning president’s transactional style, which only respects strength and tries to exploit (perceived) weaknesses.
The dream of unfettered global trade and free movement of people as part of a just global order built on Western values and defended by US military might has ended. A second Trump presidency “on steroids” could therefore produce a much-needed push to re-invigorate the process of European integration. Given that the deepening of the EU has mostly been possible only in times of crisis, prepare for fresh moves in this field.
Companies depending on the US market will come under fresh pressure to substitute their exports to America with local production there. New immigration policies will make it harder to find the human resources needed, and proper due diligence may be advised in which state (red or blue) the FDI might find its best location.
For traders and investors, it will become more difficult to predict future US dollar exchange rates. With the US fiscal deficit heading for the sky, inflation may come back, and the Fed could be forced to increase interest rates and/or return to buying government papers (known as quantitative easing). With America sucking in global savings, interest rates all over the world may rise. Trump, however, has made it clear that he wants low interest rates and a weak dollar. Companies, trading with and investing in the US, may wish to internally hedge their trade and financial flows.