The biggest economic risk from Donald Trump’s presidency is a loss of confidence in US governance

Trump’s economic policies may prove surprisingly benign in the short term. But steps that undermine domestic US institutions and international alliances would do serious and lasting damage.

Expert comment Published 10 January 2025 4 minute READ

Creon Butler

Director, Global Economy and Finance Programme

President-elect Donald Trump’s radical economic policy platform has gathered huge attention. But the big long-term dangers to the US economy lie in other steps he has outlined that would undermine the quality of US policymaking and call into question America’s reliability as an ally.

Ahead of the election Trump promised action in five main economic policy areas. He pledged tax cuts resulting in a stimulus of up to $8–10 trillion, to impose 10–20 per cent tariffs against all US trading partners and 60 per cent against China, to deport up to 11 million undocumented migrants, to unleash a wave of economic deregulation and to reform radically the federal bureaucracy, improving efficiency and cutting ‘enormous amounts’ of waste. He also promised to roll back the Biden administration’s pro-climate policies, to end the war in Ukraine and to double down on efforts to constrain China’s access to US technology.  

What the president-elect actually wants in each policy area is far from clear.

Trump’s actions as president-elect have not fundamentally changed this package. His nominees for the main economic posts – Bessent at Treasury, Lutnick at Commerce, Greer at USTR, and Hassett at CEA – have the relevant skills and experience (in contrast with some of his other nominations), but also strongly support his goals and methods. The consequences of Elon Musk’s appointment as Trump’s adviser on government efficiency are harder to predict. 

But what the president-elect actually wants in each policy area is far from clear. Nor is it obvious how he will respond when faced with resistance at home or abroad. 

Moderated policies

Thus Trump may not actually expect to impose across-the-board tariffs, but rather intends to use them as leverage to negotiate benefits for the US. If so, the outcome will depend on how other countries respond. The major trading blocs – China and the EU – are likely to initiate targeted retaliation but will also seek to negotiate.  

Over 80 per cent of federal government expenditure comprises payments for social security, Medicare, defence, debt interest and transfers to states. These areas are either mandatory or largely untouchable politically, leaving just $1.1 trillion to absorb cuts.

Much of this spending is vital to the operation of the US economy or has strong political support. So the scope for Trump to make significant savings in federal spending appears limited. 

A renewed surge in US public debt relative to GDP (currently at 120 per cent) is therefore more likely. This will probably not have significant short-term economic consequences given the strength of international demand for US assets.  

There is arguably more scope to make an impact through deregulation, given Republican control of Congress and Trump’s role in appointing the chief regulators. Rolling back financial regulations implemented after the global financial crisis looks to be the priority, along with steps to reduce constraints on cryptocurrencies. Trump will also move to dismantle pro-climate regulations and scale back Russia sanctions. 

However, some key Democratic-led states (notably California and New York) may step in where the federal government pulls back. And the serious consequences for broader US technology leadership of delaying the US move to electric vehicles may give the administration pause for thought. 

It is also unclear whether Trump will fully abandon Biden’s attempt to rein in the monopoly power of US big tech. While Trump may lift economic and financial sanctions on Russia, he could expand their use against China, Iran and other countries. 

On migration, Trump will likely move quickly to implement his pledge to expel undocumented migrants. But his approach to future legal migration is uncertain and his supporters are split. While his political base opposes all migration, many of his tech and corporate backers want a ready supply of high-skilled migrants facilitated through the H-1B visa programme.  

The net result of all this could be increased inflationary pressures, a slower pace of Fed interest-rate reductions, and some cooling in growth, bringing it back to the US trend rate of 2–2.5 per cent in 2025.  But the long-term economic implications of Trump’s domestic and international governance agenda could be a lot more serious. 

Politicization of government institutions

Domestically, Trump is expected to undermine the independent prosecutorial role of the Justice Department as he pursues political opponents and seeks to suppress what he sees as the ‘deep state’. 

Without an independent and objective federal prosecutor, there is likely to be a significant weakening in business standards.

This does not mean the end of the rule of law – federal courts and state systems of justice will continue to operate as now. But without an independent and objective federal prosecutor, there is likely to be a significant weakening in business standards across the board.

At the same time, the push to reduce civil service headcount combined with a much deeper than usual politicization of the remaining bureaucracy and possible growth in favoured company influence (‘crony capitalism’) would over time see a widespread deterioration in the quality and effectiveness of the US civil service. 

Most concerning is the prospect that public policymaking by the federal government will cease to be based on evidence or objective analysis. Being forced to ignore the evidence of the impact and consequences of climate change, for example, can be expected to have a corrosive effect on the quality of decision-making across public policy.

And what happens in government will quickly influence the private sector. Such developments can have dire consequences, as shown by the Soviet Union’s politicization of science under Stalin in the 1930s or South African President Mbeki’s questioning of the link between HIV and AIDS in the 2000s.     

Economic decoupling from allies  

Internationally, the most striking feature of Trump’s post-election statements have concerned his aggressive stance towards some of the US’s closest allies. 

A fundamental rethink of the way the US is viewed by its traditional allies appears increasingly inevitable.

They include the threat to impose 25 per cent tariffs on trade with Canada and Mexico if they fail to take measures on border security, and the demand that Denmark, a NATO member and a close US ally, sell Greenland (part of its sovereign territory) to the US. Trump further refused to rule out force and economic coercion in securing this objective as well as renewed US control of the Panama Canal.

In the short term, the countries facing this pressure have typically sought to play down the extraordinary nature of what Trump has said, in part in the hope that this may be the quickest way to restore ‘business as usual’.

But a fundamental rethink of the way the US is viewed by its traditional allies appears increasingly inevitable, leading to a degree of economic, political and even military ‘decoupling’.

Initial practical measures may include steps to create a non-US global trade and investment space where trade rules continue to be respected – e.g. through linking the EU with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – or a common approach to financial regulation (again excluding the US) designed to insulate non-US financial markets from risks from US deregulation.

The economic costs to the US of these developments will grow over time and range from distortions in public policy at home to a wider loss of private-sector confidence in the US economy abroad. They are hard to quantify. But they will likely far exceed the short-term effects of Trump’s economic policies.