With the confirmation of Donald Trump’s election win, the world is assessing what a second Trump administration will bring. In this week’s newsletter, we take a look at what economists and foreign policy analysts believe the future holds for both the US and the world if Trump makes good on the promises he made during his campaign. We also assess the outlook in the context of European instability and China’s continued financial and economic struggles.

Trump’s US & Foreign Policy

Francis Fukuyama: what Trump unleashed means for America

Francis Fukuyama, Financial Times

Trump’s Return Looks to Upend US Foreign Policy Once Again

Daniel Flatley, Bloomberg

What a Trump Presidency Means for the World

New York Times

World Leaders: Who Wins and Who Loses From Trump’s Return

Henry Meyer, Christoph Rauwald, Simone Iglesias, and Sudhi Ranjan Sen, Bloomberg

The reelection of Donald Trump marks a significant shift in American politics and global dynamics. His victory signals a rejection of both neoliberalism and “woke liberalism,” with voters opting for a more protectionist and nationalist approach. This shift is reflected in Trump’s proposed policies, including imposing a 10% to 20% tariff on all imported goods. Such protectionist measures could trigger economic upheaval, potentially leading to inflation, decreased productivity, disrupted supply chains, and retaliatory tariffs from other countries. Trump also plans to drastically alter immigration policy, aiming to deport as many of the 11 million undocumented immigrants in the US as possible. This policy, which would necessitate significant investment in detention centers and immigration control, could devastate industries reliant on immigrant labor and spark civil conflict.

On the global stage, Trump’s victory has elicited a range of reactions, from cautious optimism to outright anxiety. Key allies like Ukraine and Japan face uncertainty regarding the continuation of US support, while leaders like Israel’s Benjamin Netanyahu and Hungary’s Viktor Orbán welcome the return of a political ally. Trump’s foreign policy, characterized by “unpredictability” and a preference for bilateral agreements over multilateral alliances, has raised concerns about potential trade wars and a weakening of NATO. His stated intention to force a settlement in the Ukraine war, potentially leaving Russia in control of occupied territories, has been met with criticism. This, coupled with his admiration for authoritarian leaders like Vladimir Putin and Xi Jinping, highlights a potential shift in the global power balance. Ultimately, the impacts of a second Trump presidency will depend on the extent to which he can implement his agenda and navigate the complex web of global relationships.

Economic Uncertainty & A Strong US Dollar

Another Jolt of Uncertainty for a Global Economy Mired in It

Patricia Cohen, New York Times

Where the Trump Trades Still Aren’t Priced In

John Authers, Bloomberg

America’s strengthening dollar will rattle the rest of the world

The Economist

Trump’s reelection has introduced significant uncertainty into the world economy. Investors believe that his policies, including tax cuts and deregulation, will promote growth in the US. This expectation, combined with the prospect of higher interest rates in the US, has driven a surge in the value of the dollar. A stronger dollar makes US goods more expensive for buyers in other countries, potentially dampening demand for US exports. It also makes it more expensive for countries and firms with dollar-denominated debt to service their obligations. Additionally, a strengthening dollar can make investing in other countries less appealing, as returns on investments in those countries will be worth less in dollar terms. This can lead to capital outflows from emerging markets, putting downward pressure on their currencies and forcing them to raise interest rates to stabilize their economies.

Geopolitical tensions are further complicating the economic outlook. The ongoing war in Ukraine and escalating conflict in the Middle East are creating instability and contributing to higher food and energy prices. As discussed above, Trump’s foreign policy, characterized by his “America First” agenda and a preference for bilateral agreements over multilateral institutions, raises concerns about potential trade wars and a weakening of alliances like NATO. His economic policies, particularly his potential use of tariffs, could also lead to retaliation from other countries, further disrupting global trade and investment. The USMCA, a trade agreement between the US, Mexico, and Canada, is scheduled for review on July 1, 2026. Trump may seek to renegotiate this agreement, potentially introducing further uncertainty into North American trade relations. The impact of Trump’s policies on the Federal Reserve and US monetary policy is another source of uncertainty for the world economy. His potential appointment of a new Fed Chair in 2026 could signal a shift in US monetary policy, with implications for interest rates, inflation, and the value of the dollar.

Instability in Europe

Missing in Europe: A Strong Leader for a New Trump Era

Jim Tankersley and Aurelien Breeden, New York Times

Europe’s Economy Faces Sink-or-Swim Moment as Trump Returns

Jon Sindreu, Wall Street Journal

Germany’s Coalition Collapses, Leaving the Government Teetering

Christopher F. Schuetze, New York Times

Europe faces a period of significant instability following the return of Donald Trump to the US presidency. Internal political turmoil, coupled with a stagnant economy, has left the continent ill-prepared for the challenges of a second Trump administration. Germany, Europe’s largest economy, is in political disarray following the collapse of Chancellor Olaf Scholz’s three-party coalition last week. The coalition, beset by disagreements over economic policy, fell apart after Scholz fired his finance minister, Christian Lindner. Scholz has committed to keep governing until the New Year and then will demand a confidence vote in Parliament, which would likely fail and lead to early elections, potentially to take place in March 2025. This potential chain of events could further destabilize the country and prolong its economic woes. The German economy is projected to contract by 0.2 percent in 2024, marking its second consecutive year of stagnation. This economic weakness, combined with the political uncertainty, undermines Germany’s ability to provide leadership in Europe, particularly in the face of renewed challenges from a Trump presidency.

France, Europe’s other leading power, is also grappling with political difficulties. President Emmanuel Macron’s power has diminished following a disastrous decision to call snap elections earlier in 2024. The resulting parliament is nearly deadlocked, with a fragile coalition clinging to power against far-right and left-wing opposition. This political gridlock has hampered Macron’s ability to enact his agenda, including his ambitious plans for a more integrated and independent Europe. The uncertainty in both Paris and Berlin has created a power vacuum at the heart of Europe, leaving the continent vulnerable to external pressures, including a more assertive Russia and a potentially unfriendly US under Trump. This lack of strong leadership in Europe raises concerns about its ability to respond effectively to Trump’s protectionist trade policies, his potential withdrawal from NATO, and his unpredictable approach to foreign policy.

Trump vs. China

Trump vs. China, Round Two

Angela Huyue Zhang, Project Syndicate

China Unveils $1.4 Trillion Debt Swap, Saves Stimulus for Trump

Bloomberg

The Futile Search for a Dollar Rival

Andrés Velasco, Project Syndicate

China is taking a measured approach to the return of Donald Trump to the White House, opting for a cautious fiscal strategy as it awaits greater clarity on Trump’s trade policies, particularly the threat of tariffs. While China’s economic recovery has boosted onshore shares by about 30% since September, concerns remain about domestic demand and the looming risk of a trade war. Instead of immediate stimulus measures, Beijing has unveiled a $1.4 trillion debt swap program for indebted local governments, providing a lifeline through 2028. This program, authorized by China’s top legislative body, aims to refinance “hidden” local debt onto public balance sheets.

Although markets have largely shrugged off the measures, Finance Minister Lan Fo’an has emphasized the significance of the package, highlighting its consideration of both international and domestic economic landscapes. Lan also indicated that the program could save around 600 billion yuan in interest payments over five years, freeing up resources for potential investment and consumption boosts. However, some analysts believe that direct fiscal stimulus targeting consumption would have a more immediate and significant impact on economic growth. The debt swap, while seen as a positive step by some, is expected to have a more gradual and indirect effect, spread over several years. China’s participation in BRICS is seen as part of a broader strategy to diminish the dominance of the US dollar in global trade and finance. However, the feasibility of replacing the dollar with a BRICS-backed currency remains highly uncertain.