Over the past decade, the United States has navigated a complex landscape of economic policies, oscillating between protectionist stances, significant fiscal expansion, and policy shifts that have reshaped both domestic and global markets. In an analysis from six years ago, the potential impact of then-President Donald Trump’s economic policies was examined—focusing on increased protectionism and tax cuts funded by expanded budget deficits. It was contended that such policies would likely fail to meet their objectives of reducing the US trade deficit and boosting manufacturing employment. The subsequent years bore out these predictions, as Trump’s policies instead fostered economic imbalances, increased the trade deficit, and had minimal impact on manufacturing growth.
The Trump Administration’s Economic Legacy: Protectionism and Fiscal Policy
President Trump’s tenure was marked by substantial protectionist measures, particularly targeting China. His administration implemented significant tax cuts and boosted government spending, creating substantial budget deficits. As predicted, these policies had ripple effects across various economic sectors. The US dollar appreciated, reducing the competitiveness of American industries in global markets, and by 2019, the US trade deficit had grown noticeably. While manufacturing employment increased, the growth rate was slower than under the more open trade policies of the Obama administration.
The Biden Administration’s Policy Continuity and Expansion
Upon taking office, President Biden maintained many of Trump’s protectionist measures. By 2022, the Biden administration’s macroeconomic approach was defined by policies that retained Trump-era trade protections while intensifying fiscal expansion. This culminated in the introduction of the Inflation Reduction Act (IRA) of 2022—a landmark policy aimed at supporting the transition to a zero-carbon economy. The IRA, however, was heavily protectionist, providing substantial tax rebates and subsidies that were often tied to US-made goods. This policy direction mirrored, and in some cases expanded upon, Trump’s protectionist agenda.
The fiscal stimulus accompanying the IRA exerted significant upward pressure on interest rates globally, with ramifications for zero-carbon industries. The capital-intensive nature of zero-carbon production, compared to traditional industries, meant that the rising costs of borrowing became a burden on clean energy investments, particularly in countries outside the US where subsidies were unavailable.
Global Ramifications: A Shift in Economic Landscape
The fiscal expansion in the US, coupled with a protectionist stance, has had far-reaching consequences. With the US now representing over a quarter of global economic output, its budget deficit—projected to reach 2% of global income—has been a major driver of upward pressure on global interest rates. Real interest rates on long-term sovereign bonds have risen above 2%, dampening global investment and slowing economic growth across various sectors.
Furthermore, the IRA’s protectionist framework has influenced other developed economies, including Canada, the European Union, the United Kingdom, Japan, and South Korea, to enact similar measures. Though these countries adopted less protectionist versions, they too experienced increased budget deficits, reinforcing global upward pressure on interest rates. This shift represents a fundamental challenge to the principles of open international trade and cooperation, which underpinned much of the economic success observed in Australia and other developed nations during the late 20th century.
Challenges to Multilateral Trade and International Cooperation
The weakening of international support for open markets has been exacerbated by a deteriorating relationship between China and Western economies, especially the United States. Increased geopolitical tensions have raised transaction costs, risks, and regulatory barriers to international trade. This shift away from open, multilateral trade has been evident in recent years: the US has pursued a more isolationist trade stance, while the UK has exited the European Union, and other developed economies have reevaluated their commitment to open-market principles.
Implications of the 2024 US Election for Global Economics
As the US prepares for the November 5 presidential election, the world’s eyes are on the two leading candidates: Donald Trump and Kamala Harris. Their respective economic platforms are likely to influence global markets in vastly different ways. Trump has pledged to heighten protectionist policies, enact further tax cuts likely to increase the budget deficit, and pursue a more aggressive stance in trade disputes. Such policies would intensify economic imbalances, potentially sparking instability in international markets and even raising the risk of a financial crisis.
In contrast, Kamala Harris is expected to maintain high levels of protection but might adopt policies that align more closely with international efforts to address climate change. Harris’s policies would likely include higher taxes to rein in the budget deficit, aiming for a more balanced fiscal approach. While her administration may also increase protectionism, it would likely prioritize stability in international finance and support for zero-carbon policies that are less likely to trigger inflationary pressures and market volatility.
Australia’s Strategic Response in a New Economic Era
For Australia, these evolving global dynamics pose significant challenges. The US’s inward economic stance and protectionism will affect Australia indirectly through trade disruptions and altered demand for zero-carbon exports. While the US’s policy shifts may temporarily slow global climate efforts, Australia’s commitments to open markets and robust public finances are essential for its economic resilience. In this context, Australia’s continued support for multilateral trade and international cooperation will be critical to its future economic stability and growth.
Australia’s priorities should include developing a zero-carbon export industry that aligns with the environmental policies of other key trading partners, particularly in Europe and Northeast Asia. By fostering open trade and stable institutions, Australia can position itself as a reliable global partner. This approach will allow Australia to benefit from an eventual return to more open economic policies in the US should political priorities shift in the coming years.
In conclusion, the trajectory of US economic policy has reshaped global market dynamics, impacting fiscal policy, interest rates, and international cooperation. As Australia navigates these challenges, a steadfast commitment to open markets and sustainable development will be its best defense against economic volatility and a pathway to resilient growth in an increasingly inward-looking world economy.
