The consequences of Trump's economic policy in the US and the Arab world

Let us summarize, from a macroeconomic perspective, the expected effects of President-elect Donald Trump’s policies on the US economy. Then, we will seek to read the effects of these American effects on the global economy and some Arab economies.

According to what economic experts say, whether they are professors at major universities or consultants at major global economic institutions, and according to what President Trump himself announced during his election campaign, let us see what conclusion we will come up with. First: Trump's policy calls for getting rid of illegal workers who have infiltrated the United States, and for the idea of limiting this immigration. The goal of this is to provide job opportunities for Americans.

One of the reasons for the success of President Biden’s policy to reduce inflation rates in the labor market was opening the door to immigration, which put a ceiling on wage increases at a time when labor unions called for raising them, because the cost of living that rose during the Covid-19 period and then the Ukraine war, harmed workers.

Therefore, Trump’s policy of banning immigration will inevitably lead to higher wages and increased production costs for the American economy. This will put deliberate pressure on the price level. Second: As for the budget, the US president-elect wants to stimulate the economy through an extensive program to reduce corporate profits taxes by up to 10 percentage points. And to give companies that decide to move their factories back to the United States a reduction of up to 15%.

He also wants to eliminate taxes on non-essential sources of income such as overtime, tips, etc. To make up for some of these losses, he will raise customs duties on imports from China by rates that may reach 60%, from Europe by rates between 10% and 20%, and from Mexico, if it does not respond to his demands and cooperate with him in preventing illegal immigration, by a rate that he threatens to reach 100%.

If we estimate the amount of revenue the government will lose from his tax exemptions (on income and profits), it will be much greater than the amount of revenue it will gain from raising tariffs on imports. More importantly, the rich will receive the lion’s share of the exemptions, compared to the exemptions on overtime and tips, most of whose owners are not subject to direct tax in the first place, or pay low rates, which makes them benefit little from the proposed cuts.

Economists say these policies may help increase jobs in the United States, but they all rely on a policy of “deficit financing,” which in the short term benefits a country that prints currency whenever it wants. But in the long term, this policy is inflationary.

Thus, the benefits that productive companies will gain from these policies will dictate in the future that the Federal Reserve raise interest rates, causing losses for investors in financial markets and stock exchanges, such as banks, financial companies, and hedge funds, or so-called Hedge Funds. Therefore, inflation and its pressures will increase.

Third: In order to control oil prices, the US President-elect will allow the extension of pipelines and the expansion of oil exploration and extraction, which is considered inconsistent with environmental and climate agreements that the President has not participated in or withdrawn from.

Will he simultaneously reduce imports or become an oil exporter? But in return, he wants to impose additional economic sanctions on Iran, Venezuela and their oil exports, and perhaps on Russia, which could have an impact on raising the price of oil on the one hand, and increasing oil smuggling from these countries. If the OPEC+ group holds together and reduces its production, this will lead to an increase in oil prices inside and outside the United States.

Fourth: If the pressures resulting from the budget deficit, the labor market, and the financial markets are pulling things towards more inflation resulting from increased costs and higher demand in the short term in the real market (goods and services), the American citizen will feel these inflationary effects, but in the first year he may not find them high unless they cause some disruption in economic performance. Some economists monitor the possible disruption in the following matters:

First: Rising wages may make producers more willing to use artificial intelligence, which will create demand for some real, high-level professions, but it will displace human labor (Automation), or replace humans with robots. Second: The success of the new American policy, especially the financial one, depends to a large extent on the success of monetary policy in keeping the dollar exchange rate strong due to the strong demand for it, either for exchange, or as a safe store of value.

But if some countries gradually start to fear that Trump’s policies may lead to higher inflation rates. And some economists even fear the return of stagflation, as happened after the rise in oil prices in the 1970s. I say that some countries, in this case, will focus more on searching for safe investment havens such as gold.

Some countries have begun to abandon the use of the dollar as a measure of value, or a means of exchange and payment of obligations in their dealings. If doubts begin to creep into the resilience of the dollar, this will lead to a major disruption in the ability of the United States to adopt a policy of expanding public debt, and to the effectiveness of its policies in using deficit financing to correct or restructure the economy.

Third, the possibility that the incoming Trump administration will clash with its desire to keep interest rates low may clash with the Federal Reserve’s insistence on using interest rates as an effective means of curbing inflation.

In this case, such a conflict and contradiction between fiscal and monetary policy will intensify and may cause panic among investors, especially pension funds, which are one of the main sources of investment in financial markets. The situation presented by British economist Paul Ormerod in his book The Death of Economics published in 1994 describes the situation that will lead to if President Trump’s policies are implemented in full and without opposition, namely that the capitalist model copied from the ideas of the conservative (neoclassical) economist, Milton Friedman, and the Chicago School of Economics, which President Trump adopts, will cause a major imbalance in the distribution of wealth and income in the world and will lead to a decline in the middle class, and an increase in crime, poverty and unemployment rates.

But there are those who say that the man is compromising, and that some conservative economists close to him will not let him exercise his full freedom to implement his policies to the letter, as he promised in his election campaign. The reason is that his program to restore America's greatness, or what is called the (MAGA) movement, wants to increase production, self-reliance, build strength, outperform enemies, and tend toward isolationism, and this will lead to a decline in financial markets, investment in stocks and technology exchanges. The interests of both sides (stocks, stock exchanges and the financial sector on the one hand and industrial, oil and defense companies on the other hand) may clash, knowing that both supported President Trump, which will force him to reduce his drive to implement the policies he called for, and put him in a compromising position in an attempt to reconcile the two parties.

The Arab Gulf states have contradictions with President Trump in terms of his oil policies, which may pressure them to keep oil prices low, which will affect their programs for economic diversification and moving towards a post-oil era. The second is his desire and perhaps his pressure on the Gulf states to reduce their dealings and coordination with both Russia, a main member of the OPEC+ alliance, and China, the largest trading partner of these countries, and therefore the matter requires attention.

As for the countries that are allies of America, export to it, and benefit from its foreign aid and free trade agreements with it, they will remain prepared to cooperate with the United States, provided that it does not reduce aid or raise customs tariffs on their exports to America.

The most important of these countries are Jordan, Morocco and to a lesser extent Egypt. But the question that must be asked is: Will President Trump, his economists and his ministers pressure international economic and financial institutions, such as the International Monetary Fund and the World Bank, to change the current economic model, which is closer to the Keynesian model, and replace it with Milton Friedman’s model, which calls for reducing the role and size of governments, lowering taxes and reducing interference in the functioning of markets? These are some of the challenges. Time will reveal where things will lead. The important thing is: Can Trump end the wars as he promised, at what cost, and by pressuring whom?