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President Elect Donald J Trump – What Does It Mean? (Extended Article)

President Elect Donald J Trump – What Does It Mean? (Extended Article)

The American people have elected Donald J Trump to become the 45th President of the United States (POTUS). Mr. Trump, now President Elect Trump, will take over from current President Barrack Obama on the 20th January 2017, known as Inauguration Day. From that day and the four years that follow President Trump will have the full authority of the White House including Commander-and-Chief of the United States Military.

The election of President Elect Trump is another BREXIT (Britain Existing from the European Union) – like event, both representing a movement for change that is sweeping the world. Rasmussen Reports 2017, notes that 70% of Americans have believed for some time that their country has been heading in the wrong direction; exit polling suggesting that voters wanted change. No doubt this is one of the main reasons why the people of America have chosen to elect an ‘outsider’; a businessman who has never held elected office as their ‘change candidate’. Whilst the result was unexpected to many, and several commentators predicted doomsday results, since the election both the Australian and US share and commodity markets have in fact rallied upon the news with the ASX up 3.7 percent since election day.

President Obama’s Legacy

The United States (US) economy is going to present several key challenges for the 45th President and the American people. The US economy is still in a difficult position after the GFC (Global Financial Crisis) with high national debt, high unemployment and low economic growth. Working and middle class Americans are suffering.

During the Obama years:

  • The number of Americans below the poverty line has increased by 3.5 percent.
  • Real median household income has dropped 2.3 percent.
    The number of Americans on Food Stamps has increased from 33 million to 46 million – up 39.5 percent, and
  • American home ownership is down 5.6 percent*.

*data extrapolated from the US department of Agriculture and US Census Bureau Americans voted for the ‘change candidate’ because they want to see change, President Elect Trump will face some hefty economically challenges ahead.

National Debt

According to the Washington Times over the last eight years under President Obama the national debt blew out from ten trillion dollars ($10,000,000,000) to twenty trillion dollars ($20,000,000,000). To put this in perspective this is more debt than all former Presidents combined. At some point the accumulation of the national debt must be stopped and eventually repaid. If the Government defaults it will have several negative effects on the country including its credit rating.

Unemployment

The unemployment rate has improved, from 7.8 percent at Obama’s January 20, 2009 inauguration, to 5.0 percent in April 2016. However, the overall Labor Force Participation Rate has dropped from 65.7 to 62.8 on Obama’s watch. This is a level not seen since 1978 and indicates disillusion amongst the American people.

Economic Growth

Economic growth under President Barack Obama has been historically low. Adjusted for inflation, average yearly GDP growth has been less than 1.5%. President Obama will be the only U.S. president in recent history to not deliver a single year of economic growth at 3.0% or higher.

annual-gdp-graph

The US has several key economic challenges, President Elect Trump has pledged to focus on improving free trade agreements, job creation, infrastructure spending and policies that stimulate economic growth.

President Trump’s Economic Policies

President Elect Trump believes that the way ‘to make America great again’ is to grow the economy. For that reason, he has proposed the following main economic policies:

  • Tax Reform – reducing the top tax bracket from 36% to 33%, cutting the corporate tax rate from 35% to 15% and introducing “massive tax cuts” for working and middle income Americans. These will be the biggest tax cuts in the USA since President Reagan and it is hoped that they will stimulate the economy through increased spending and investment. It is also anticipated that several large corporations who have ‘parked’ their capital (money) overseas due to better tax environments will be encouraged to bring their money back to the US.
  • Regulatory Reform – Since 2009, federal regulators have issued 20,642 regulations which have increased regulatory compliance costs by more than $100 billion annually.  Independent advisers estimate total regulatory costs as exceeding $2 trillion annually and small businesses, the driver of job creation, disproportionally face higher annual regulatory costs of $10,585 per employee per year ­which is 36 percent above the regulatory cost facing large firms. For this reason, President Elect Trump has called for the review and removal of unnecessary regulations to help reduce the compliance burden on business and stimulate growth.

Source:

  1. James L. Gattuso and Diane Katz, Red Tape Rising 2016: Obama Regs Top $100 Billion Annually, The Heritage Foundation Backgrounder No. 3127, May 23, 2016, http://thf-reports.s3.amazonaws.com/2016/BG3127.pdf
  2. Mark Crain and Nicole V. Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” a report for the National Association of Manufacturers, September 10, 2014. http://www.nam.org/Data-and-Reports/Cost-of-Federal-Regulations/Federal-Regulation-Full-Study.pdf
  3. Letter from Todd McCracken, President & CEO of the National Small Business Association, to Chairman Steve Chabot, House Small Business Committee, and Ranking Member Nydia Velázquez, House Small Business Committee, April 14, 2016, http://www.nsba.biz/wp-content/uploads/2016/04/NSBA_Comments_HSBC-Hearing_Regulations_The-Hidden-Small-Business-Tax.pdf
  • Investment in Infrastructure – President Elect Trump plans to spend an estimated $1 trillion on energy and infrastructure. He wants to “transform America’s crumbling infrastructure into an opportunity for accelerated economic growth”. This policy will provide jobs and improve the economy’s productivity (as they can move resources around more efficiently).
  • Energy Independence – President Elect Trump wants to make American energy independent by fully utilising all domestic energy sources. This will include a combination of fossil fuels and renewable energy. This will be done by reviewing and repealing complex green tape and regulations by the executive (President Obama) and the regulator EPA (Environment al Protection Agency). The intention of this policy is to make America an energy exporter rather than an importer. Lower energy costs are a vital ingredient in competing in a globalised world. This policy will help create jobs.
  • Free Trade Agreements – One of President Elect Trump’s biggest pledges was to ‘negotiate new trade agreements and renegotiate exiting free trade agreements so that they are fair for the American people and create American jobs rather than send them offshore to overseas countries’. This includes withdrawing from the Trans-Pacific Partnership (TPP), renegotiating the North American Free Trade Agreement (NAFTA), bringing trade cases against China in America and at the World Trade Organisation (WTO), applying tariffs on Chinese imports and instructing the Treasury Secretary to label China as a currency manipulator.

President Elect Trump also campaigned on the back of the following policies:

  • The repeal of the Affordable Care Act (also known as ObamaCare) returning to free markets and open competition. Action is required soon as companies like UnitedHealth recently announced that it would bail out of all but ‘a handful’ of its 34 state markets as the current ObamaCare arrangements have led to losses of around $650 million.
  • Stronger border control including the construction of a wall between the USA and Mexico border and deportation of illegal aliens specifically criminal aliens. The intention is to stop the importation of drugs and the return of national sovereignty. These policies will help reduce crime, drug importation and therefore drug use and reduce some of the pressures on the education and healthcare system.

Opportunity for the Republican Party

For the first time since the 1930’s the Republican party has control of the Senate, the House of Representatives and the White House. This is a once in a lifetime opportunity for the Republican Party to make real change for the USA. Already key members have indicated their willingness and enthusiasm for President Elect Trump’s policies and to make an impact in 2017. However, there are some areas that differ between the Republican Party and the new President Elect.

Challenges for President Elect Trump

Congress

Even though Mr. Trump has been successful in winning the election, when he becomes President his legislation will have to be passed by the House of Representative and the Senate. President Elect Trump and his team will need to be able to negotiate effectively with the House and may have to, on occasion, compromise to get deals done and his policies implemented.

Cleaning Up Congress (also known as #DraintheSwamp)

President Elect Trump wants to clear Congress of career politicians and special interest groups. ‘Drain the swamp’ was a key theme in the final few weeks of the campaign.  He has proposed instituting term limits on members of Congress as part of a multi-pronged plan he says will ‘clean up’ American politics. Whilst there is a two-term limit for Presidents, no such limit exists for members of Congress and many members continue for multiple terms. These reforms will be difficult to get through as those who agree to pass the legislation will also be agreeing to their political careers coming to an end much quicker than originally anticipated. This change means that citizens who enter politics can be focused on why they ran for office and creating the change that inspired them in the first place rather than be worried and focused on what the polls are saying and what they need to do to be re-elected.

What Does President Trump mean for the World?

Possibly the biggest impact a Trump Administration could have is the way it treats the different hot spots around the world. President Elect Trump has been calling for a redefinition of NATO’s (North Atlantic Treaty Organisation) purpose and has described it as “obsolete and expensive”. NATO was originally set up to defend Europe against the threat of communist states (East Germany and Soviet Union) however, since the end of the Cold war (1947-1991) there has been no major review of the organisation to address the new and emerging threats of the modern world specifically the rise or terrorist organisations such as ISIS (Islamic State in Iraq and Syria).

The US is involved in several conflicts around the world and how President Elect Trump deals with these and NATO could impact world economics, especially if they escalate. Defeating ISIS, the conflict in Syria, Israel and the South China Sea are all areas that require the attention of the President and ideally peaceful resolution.

President Elect Trump has made a point of referencing President Putin throughout his campaign and has indicated that improving relations between the US and Russia, which have been damaged in recent years, is a priority for him. What this means is not yet clear as President Elect Trump has not clearly laid out his foreign policy, but what it could mean is sanctions between the two countries are lifted in exchange for President Putin’s cooperation in Syria.

What Does President Trump mean for Australia?

The main areas of interest for Australia under a President Trump Administration are:

  • ANZUS (Australian, New Zealand, United States) Alliance

Australia’s military alliance with the US is vital to our national security. The ANZUS Alliance has been a provider of great stability in the Pacific region for many years and according to Prime Minister Malcolm Turnbull will continue for many more. “I have… absolutely no doubt the commitment of the United States to the alliance, the presence in the region, its commitment to its allies and our neighbours will continue” he said.

  • Commodity Prices and the Federal Budget

One of President Elect Trump’s main policies is to spend $1 trillion on infrastructure to rebuild America, this increase in expenditure should generate an increase in demand for commodities like iron ore and coal, both of which Australia produces. Whilst Australia does not directly supply America with these commodities, as global demand grows the overall price will grow. According to the Australian government’s budget papers, the effect in 2017/18 of a change in iron ore price alone is massive; every US$10 a ton change in iron ore price impacts tax receipts by $3.9 billion. The ‘rebuilding’ of America could see a reinvigoration of our commodity markets and a significant improvement to the Australian Federal Budget.

  • Trade

President Elects Trump’s pledge to abandon the Trans-Pacific Partnership (TPP), from an economic perspective, is potentially a negative for Australia as over time this agreement could have developed new markets for export for our producers of beef, dairy and wheat. However, these losses could be outweighed by gains in commodity prices, as we are already seeing. Additionally, President Elect Trump indicated that he wants fairer trade agreements with specific nations rather than groups or blocks of nations i.e. one on one. This provides an opportunity for Australia to develop specific trade deals with the US. “We will see opportunities to advance our interests and we will certainly do so,” said Foreign Minister Julie Bishop. “This is an opportunity to refresh, renew, reinvigorate the alliance.” This represents a great opportunity for Australia.

  • AUD /USD (Australian Dollar against the United States Dollar)

Under a Trump administration, it is predicted that capital inflow into the USA will increase, spurred on by a cut in company tax. This should bolster the US equity market and in turn drive the US dollar higher. For Australia, this has the potential to put pressure on our commodity sensitive dollar, but it is now expected the downside will be lower than first thought. It was previously predicted that the AUD would fall by 10 percent, it is now expected to ‘fall by roughly 5 percent because it is likely to receive support from higher commodity prices, an improvement in Australia’s terms of trade and a narrower current account deficit,’ Richard Grace, CBA’s chief currency strategist said.

Conclusion

President Elect Trump may not have been what the world expected but it is a revolution that holds great opportunity for America and the world. President Elect Trump’s focus on policies that will stimulate the American economy and create jobs; such as rebuilding infrastructure, renegotiating trade agreements and tax cuts, have the potential to do the same for other nations. In Australia, the increase in demand for commodities and the potential to renegotiate our trade agreements with the US should see a reciprocal improvement in our economy; signs of which we are already seeing with our share and commodity markets rallying after the news of Trump winning. The next four years are going to be interesting and time will tell what a President who owes no favours to any special interest groups will do. It is indeed an exciting time.

President Trump’s first 100 days

To find out more what President Elect Trump plans to do when inaugurated, check out these articles. https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf
https://www.greatagain.gov/index.html

The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.

Elliot Watson Financial Planning Pty Ltd and its advisers are Authorise Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429. The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.

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