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Following Donald Trump's 2024 election victory and Republican congressional control, several key policy areas could impact markets and economies, including inflation risks, trade relations, immigration, and fiscal spending.
To date, the U.S. equity markets have responded positively to Trump's victory and the Republican sweep of Congress, driven by expectations of business-friendly policies including lower corporate taxes and deregulation. Despite this enthusiasm, several key policy uncertainties remain that could impact both markets and the broader economy. Let’s look at the potential implications of some of those.
Inflation concerns and economic pressure
While Trump campaigned on fighting inflation, his proposed policies around fiscal spending and tariffs might actually increase inflationary pressures. Though Republicans control both chambers of Congress, their slim majority could limit the implementation of aggressive policies. The appointment of Wall Street veterans to cabinet positions suggests a more measured approach, as these officials are expected to understand the risks of reigniting inflation when the federal deficit and national debt are already stretched.
Tariffs, tariffs, tariffs: Retaliation and remediation
During his campaign trail, Trump was a steadfast proponent of erecting more trade barriers to protect and rebuild the U.S. manufacturing base. He proposed a tariff of 60 percent or higher on Chinese goods,1 alongside a 10-20 percent blanket tariff on other global trading partners. He has also pledged to renegotiate the U.S.-Mexico-Canada Agreement (USMCA), which is due to be renegotiated in 2026. However, more recently, Trump threatened to tear up the USMCA on day one of his administration (which would be a violation of the agreement), indicating that he would impose a 25 percent tariff on all imports into the U.S. from Canada and Mexico,2 and an additional 10 percent on goods coming from China.3
Our base case is that even if tariffs are put in place, they likely will not be of the magnitude that Trump has proposed. Rather, we believe such tariffs will be used as bargaining chips to extract concessions from trading partners.
Trump’s recent appointments suggest a more moderate stance on tariffs. Howard Lutnick, tapped to lead the Department of Commerce, has indicated tariffs would be used selectively as negotiating tools rather than being broadly implemented. Treasury Secretary appointee Scott Bessent has characterized the tariff threats as a "maximalist negotiating position" and advocated for a gradual implementation.4
Canada-U.S. relations
For Canada, with over 75% of its exports going to the U.S., the tariff situation is particularly critical.5 Perhaps in recognition of this dynamic, government representatives from Canada had already begun to lean into such negotiations well ahead of the election, engaging with Trump’s team and leveraging existing relationships within his inner circle. The Canadian government has also implemented matching tariffs on Chinese electric vehicles and metals and has expressed readiness to cooperate on border security.
Immigration, mass deportations and the labour market
Trump has consistently vowed to carry out the “largest deportation in American history.” This ambitious deportation plan faces some significant hurdles. For one, Trump’s proposed deportation of 15-20 million people exceeds current estimates of 11 million undocumented imigrants.6 Regardless of the total numbers, details on how Trump will carry out his deportation plan are generally sparse and are likely to be limited by legal and logistical challenges.
A recent report from the American Immigration Council, an immigration rights research and policy firm, estimates that deporting one million undocumented immigrants a year would cost more than US$88 billion annually.7 The report also estimates a cost of roughly $315 billion for a one-time effort to deport even more people in one year, including $167 billion to detain immigrants en masse.
Trump’s first term in 2016 appears to bear out these challenges. His previous efforts, amassing to 1.5 million people deported over four years,8 came up short to the deportations undertaken in each of President Barack Obama’s terms. Trump’s first term numbers are on par with President Joe Biden’s 1.49 million deportations under his most recent administration.
Trump’s blue skies scenario could also create greater tightness in the labour market in the short-to-medium term at a time when unemployment levels are hovering close to four percent, which is already low. Such tightness could create greater upward pressures on wages, and subsequently augment inflation.
All told, we believe that the implementation of deportations at such a great scale are likely to be limited by a lack of infrastructure, limitations on personnel, pushback by the Democrats and logistics related to timing given the due process afforded to such individuals.
Fiscal policy and economic impact
During his campaign, Trump proposed a number of fiscal policies. These include modifying and extending the Tax Cuts and Jobs Act (TCJA), further corporate and small business tax cuts, increased military spending, enhanced border security, and expanded healthcare support.
Even if all of this were possible in his four-year term, these spending plans raise several concerns – including how such programs are ultimately going to be paid for.
If the Trump administration is able to follow through on its ambitious spending plans (and that’s a big "if" in our minds), such policies may drive inflation incrementally higher, which could complicate the path for the Federal Reserve going forward. According to the Committee for a Responsible Federal Budget (CRFB), Trump’s tax and spending plans risk increasing debt levels by $7.75 trillion between 2026 and 2035.9
Ever in search of silver linings, our base case is that Trump won’t follow through on all his fiscal spending plans, though we do suspect he will be able to implement them in part. Such spending is likely to widen the already high fiscal deficit and invite the ire of fiscal deficit hawks – many of which belong to his party.
Investment implications
While the Republican sweep suggests a favourable outlook for risk assets, particularly in economically sensitive sectors, uncertainty over policy implementation emphasizes the benefit of well-diversified portfolios across asset classes, (e.g., equities, fixed income and alternative investments), geographies and style (e.g., growth versus value). Investors should continue to consider maintaining balance across asset classes, geographic diversification beyond U.S. markets, a mix of growth and value strategies, fixed income and alternative investments for portfolio stability, and dividend growth strategies for steady returns.
Sources
- 1. Pitas, Costas. “Trump Vows New Canada, Mexico, China Tariffs That Threaten Global Trade | Reuters.” Reuters, www.reuters.com/world/us/trump-promises-25-tariff-products-mexico-canada-2024-11-25/. Accessed 5 Dec. 2024.
- 2. Benchetrit, Jenna. “Trump’s Tariffs Would Crush Canada’s Economy. Why Some Industry Leaders Are Calling His Bluff | CBC News.” CBC News, CBC/Radio Canada, 28 Nov. 2024, www.cbc.ca/news/business/canadian-impacts-trump-tariff-proposal-1.7393493.
- 3. Swanson, Ana, et al. “Trump Plans 25% Tariff on Canada and Mexico, Potentially Crippling Trade.” The New York Times, The New York Times, 26 Nov. 2024, www.nytimes.com/2024/11/25/business/economy/trump-tariffs-canada-mexico-china.html.
- 4. Mills, Madison. “Trump Tariffs Inspire ‘Maximalist Negotiating’: Scott Bessent.” Yahoo! Finance, Yahoo!, finance.yahoo.com/video/trump-tariffs-inspire-maximalist-negotiating-155940040.html. Accessed 6 Dec. 2024.
- 5. Lord, Craig. “Canada Failed to Diversify Trade Ahead of Trump Tariff Threats: Experts - National.” Global News, Global News, 29 Nov. 2024, globalnews.ca/news/10892822/trump-tariffs-canada-trade-diversity/.
- 6. Passel, Jeffrey S. “What We Know about Unauthorized Immigrants Living in the U.S.” Pew Research Center, Pew Research Center, 22 July 2024, www.pewresearch.org/short-reads/2024/07/22/what-we-know-about-unauthorized-immigrants-living-in-the-us/.
- 7. “Mass Deportation: Devastating Costs to America, Its Budget and Economy.” American Immigration Council, 11 Nov. 2024, www.americanimmigrationcouncil.org/research/mass-deportation.
- 8. Bush-Joseph, Kathleen, and Muzaffar Chishti. “The Biden Administration Is on Pace to Match Trump Deportation Numbers-Focusing on the Border, Not the U.S. Interior.” Migration Policy Institute, 27 June 2024, www.migrationpolicy.org/article/biden-deportation-record.
- 9. “The Fiscal Impact of the Harris and Trump Campaign Plans.” Committee for a Responsible Federal Budget, www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans. Accessed 6 Dec. 2024.
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