With the inauguration clock ticking toward the inauguration date, people are eager to see whether President-elect Donald Trump can realize his promises. Trump has sent out his new economic vision. He repeated that he is confident in using tax cuts, public spending and infrastructure investing to stimulate the U.S. economy. Trump’s threats to impose big tariffs on Chinese products evokes concerns of a trade war between the two major powers.
Whether his bold economic plan could be implemented is still a big question mark, and there are doubts about how effective it would be. Simultaneously cutting taxes and increasing public spending will risk transforming annual deficits during the next decade into a debt load the scale of which the federal government has never seen. The Committee for a Responsible Federal Budget, which is based in Washington, calculates that Trump’s economic plans would pile on $6 trillion in debt and beyond that $9 trillion more during the next decade. In terms of percentage of gross domestic product, that would rival the record debt load in the aftermath of the Second World War.
Now the Senate, the House, and the executive headquarters are all controlled by Republicans. But Congressional Republicans don’t belong to the same school as Trump, they have their own priorities. Tea party Republicans insist on repealing the Patient Protection and Affordable Care Act, or Obamacare, immediately. They set immigration reform and campaign finance transparency as their legislative priorities. Trump’s relationship with House Speaker Paul D. Ryan, a Republican from Wisconsin, has not been not smooth from the start. Ryan set the debt ceiling as one of his top priorities. Other Republicans in the Congress want reforms on federal spending on Social Security and debt-interest payment. The Committee for a Responsible Federal Budget said the government spends more today on interest payments than on education, housing, and transportation combined, and by 2023, interest payments will exceed the federal cost of Medicaid, which provides health coverage for the poor.
Trump has promised to reach Republican goals with his own aims at the same time. But it is an impossible mission to achieve so many policy goals with very limited policy tools. As of now, there is no evidence that doing something meaningful on interest payments, as some Republicans demand, has been put on the priority list of Trump’s economic plan. On the contrary, his bold or ignorant behavior indicates he not only wants to be an executive-order president, but also to be a legislative president. Since Nov 8, more and more sounds of disharmony are heard. The secretaries Trump has nominated have frustrated Republican leaders. After Trump comes into the Oval Office, when the executive branch and Congress both become involved in concrete routine work, more and more disputes will arise, and constraint from the legislative branches will be more obvious.
Pushback from the 115th Congress inevitably will compromise Trump’s ambitious economic plan, and his conservative policy agenda. The Congress could use the fiscal budget and the issue of raising the national-debt ceiling as an elbow against the Trump administration. In this scenario, whether Trump could really raise the high-tariffs stick on China is not certain. There are divided opinions in the Congress on whether Trump should or could sacrifice U.S. interests to launch a trade war with China.
In the short term, Trump’s plan would stimulate the economy, because he would use the visible hand of government to increase public spending and reduce the tax burden. According to estimations, Trump’s plan would cut taxes by an average of $2,940 in 2017 for households. The average family in America would see its effective or overall tax rate reduced by about 2 percent. The 2017 GDP growth will be boosted by 0.6 percentage points, from 2.4 percent under the pre-election forecast to 3.0 percent. For 2018, the new policies can increase GDP growth to 3.9 percent, up from 2.7 percent under the pre-election forecast. That short-term prosperity would bring pressure on China’s economy, because more and more international capital would flood to the land of opportunity. Trump’s protectionism trade policies would tend to reduce the U.S. economy’s spillover effect, which will reduce U.S. import demand for China’s goods.
But considering China and U.S. are now so interconnected that the behavior of either side has become very consequential, neither could afford the cost of bad relations, so it’s irrational to expect American and Chinese leaders to intentionally undermine the most important bilateral relationship. If both sides could find more cooperation, enhancing mutual understanding as they go, the relations between the U.S. and China would be less bumpy.
President-elect Trump has put up an ambitious infrastructure investment plan. Luckily China has skills and capital in this area. Trump announced plans to develop the traditional oil industry. There is big space for US exports to China, a big net oil importer. During the election campaign, Trump complained that the RMB exchange rate is influenced by the government, not the market. When the Chinese government lets RMB exchange rate be determined more by the market, the rapid devaluation makes the dollar more expensive, which actually hurts U.S. exports, so this would be a potential cooperation area for two sides under Trump administration. What’s more, there are negative forecasts for both the Chinese and U.S. economies. On this issue, the two governments have common interests to that shape expectations for the two economies’ prospects. Guiding public opinion to form positive and objective views of each other would foster good business surroundings.
If the Chinese and U.S. governments could reveal their official evaluations of each other's economies, it would help to inject positive energy and guide public opinion. Furthermore, enhancing cooperation in the service sector could form an important part of a new type of economic and trade relations. China has recently recognized that its service economy benefits the whole economy. Opening up the service sector has been listed as a top priority in China's domestic economic reforms. The U.S. is generally recognized as having the bigger and stronger service sector. There is sure to be enormous potential for cooperation.
