

Trump's impact on the rest of the world, and Australia in particular
November 11, 2024
Somewhat surprisingly, careful analysis and modelling show that Trumps crude attempt to Make America Great Again, mainly damages the American economy. The rest of the world, and Australia in particular, should proceed with their own business as usual.
At this stage it is difficult to know how America under Trump will relate to the rest of the world in terms of foreign relations and defence. Indeed, it is doubtful if Trump knows exactly himself. He makes policy on the run and is reputedly heavily influenced by whoever he talked to last.
Trump has made claims during the election campaign that he would end the war in Ukraine in a day, but without saying how or on what terms. As Putin commented following Trumps re-election: I dont know what will happen now. I have no idea.
Nevertheless, Australia can be reasonably confident that AUKUS will be maintained. The Americans know that AUKUS is such a good deal for them, giving them the bases in Australia that they will need in the event of a war with China, and largely paid for by us.
Similarly, as they see it the submarines that they are selling Australia will still be integrated with the American fleet. In effect the US is getting a free ride Australia pays for these submarines and crews them.
But apart from this exception in relation to AUKUS, we will just have to wait to find out more about Trumps foreign and defence policies, before we can begin to judge them properly.
On the other hand, turning to Trumps economic policies, Trump has been much more specific about the key economic elements of his strategy to Make America Great Again. Specifically, Trump has promised that this strategy will involve:
- Mass deportation of unauthorised migrants
- A 10 percentage point increase in additional tariff on all trading partners and a 60 percentage point additional tariff on China
- Reducing the independence of the Federal Reserve Bank
- A reduction in the company tax rate from 21% to perhaps 15%, and an array of other possible tax cuts, including ending taxes on tips.
Not surprisingly, now that Trump has won the election, people everywhere are asking how Trumps MAGA program will affect their countrys economy, and therefore their own livelihood.
The best such assessment which is readily available was published recently in September by the highly regarded Petersen Institute for International Economics in Washington. This assessment covered the first three elements of Trumps MAGA policies listed above, but not the tax changes, and used an economic model that is also widely used by central banks, government agencies and international institutions.
Based on the findings of this Petersen Institute study this article summarises the likely impact of Trumps MAGA policies on first, the US economy, and second, the rest of the world and the Australian economy.
The US economy
The most surprising finding from this study is that ironically, despite his [Trumps] make the foreigners pay rhetoric, this package does more damage to the US economy than any other in the world.
In sum, in a worst-case scenario, where the US manages to expel as many as 8.3 million unauthorised migrant workers in the next two years and other countries retaliate against the increase in US tariffs on their exports, the study found that the US economy would be more than 1 per cent smaller in 2028 at the end of Trumps second term than in 2024. Furthermore, in this scenario, by 2028 most prices in the US will be 28% higher than projected with a continuation of present policies.
The main reasons why the US will be so savaged by Trumps MAGA policies are as follows.
First, if Trump succeeds in removing as many as 8.3 million unauthorised migrant workers over the next two years that will reduce the potential labour supply by nearly 7% and potential GDP by 7% in 2028. The main industries that will be negatively affected are agriculture and manufacturing industries where Trumps supporters are concentrated.
Even if only 1.3 million of these unauthorised workers are expelled that will reduce the potential labour supply by 0.8% and potential GDP by 1.2% in 2028.
Apart from having less labour supply, the economy will be smaller if Trump expels unauthorised migrants because:
- The loss of labour is mildly inflationary, and the Federal Reserve will raise interest rates
- There is a fall in the return to investment causing increased capital outflows overseas and less investment in the US.
Second, the 10 percentage point increase in tariffs leads to real US GDP falling by a net 0.36 percentage points. This is caused by an appreciation of the US dollar in response and a consequent slowdown in exports.
The impact of the 60 percentage point increase in US tariffs on goods imported from China is naturally in many ways similar to the impact of the general increase in US tariffs except that it has a more significant impact on China as the US switches its demand to other countries and away from China. Initially in 2025 US production strengthens but then the consequent appreciation of the US dollar means that the US potential GDP is slightly lower in the following three years. However, if China retaliates the negative impact on the US economy would be more than twice as big.
Finally, if Trump succeeds in pressing the central bank to rev up US economic growth, although the economy surges initially, inflation is also higher by around 2 percentage points and the risk premium on holding US assets relative to holding other countries assets rises by a conservative estimate of 2 percentage points. Not surprisingly, the modelling shows that from 2026 capital flows out of the US and into other countries, capital investment is lower, leading to potential GDP and employment each being about 1% lower in 2028, and inflation would be higher by as much as 3% in 2027. Furthermore, the industries most damaged by Trumps intervention into monetary policy would be durable manufacturing where so many of Trumps supporters are employed.
In sum, Trumps policies to Make America Great Again, are certain to damage the American economy. That of itself will damage the economies of other countries, including Australia, but now we consider the impact on China, which is what will matter most for Australia, as China takes far more of Australian exports ($228.8 bn in 2023) compared to the US (only $33.6 bn last year). Also, the likely increase in US inflation and interest rates under Trump will flow on to some extent to the rest of the world, but probably less than in the past, as the influence of US capital markets and the US$ is already declining, and Trump will accelerate this decline.
Trumps MAGA policies and the rest of the world
For obvious reasons the main impact of Trumps MAGA policies on the rest of the world comes from the proposed increase in tariffs.
With a 60% increase in its tariffs, China is the most affected US trading partner with its potential GDP projected to be reduced by almost 1% in 2026 and 2027. Although over the following decade that initial impact is almost halved as no doubt, China is able to divert its exports elsewhere. If China retaliates and there is a trade war, the net impact is worse for everyone, including China.
In addition, because of the importance of their trade with the US, Canada and Mexico are also significantly damaged by the proposed 10% tariff increase on their exports.
However, as might be expected, the modelling shows that most countries are not much affected by Trumps other proposed policies to expel large numbers of unauthorised migrant workers and pushing the Federal Reserve to adopt a looser monetary policy.
The expulsion of unauthorised migrant workers from the US to Mexico, at least initially, would have a very small negative impact on Mexicos economy.
Somewhat more significantly, other countries will tend to benefit over time from any excessive loosening of monetary policy in the US. Inflation will then be higher in the US and it will be seen as a more risky economy. As already noted above, capital outflows would consequently be higher and investment in the US lower with other countries gaining instead.
Turning to Australia, like most other countries, the overall net impact of Trumps MAGA policies is actually positive. The peak addition comes in 2028, when the model shows a 1% addition to Australias GDP.
Australia would, however, be negatively impacted by Trumps tariff policies, but somewhat surprisingly not much by the 60% tariff on Chinese exports to the US. A plausible explanation is that the food and raw materials that Australia exports to China, do not figure much in the products that China exports to the US. Nor will Chinese demand for these Australian products be much impacted by the US measures to limit Chinese exports because even in the worst year, Chinese economic growth is only reduced by 1%.
Conclusion
Trumps nationalistic economic policies sound very dangerous to the rest of the world and that was their intention. But the irony is that they do more damage to the US economy than to any other country.
The lesson for Australia is that it should continue to pursue its present course, taking advantage of the opportunities presented by a switch to renewable energy, and ignore Trumps pathetic attempts to return to the past.