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How Trump plans to grow the economy — and the key challenges he faces

From taxes and tariffs to mass deportations and electric cars

President Donald Trump and Vice President J.D. Vance at Trump's second inauguration.
President Trump and his vice-president, JD Vance, have promised a new age of American prosperity
CHIP SOMODEVILLA/GETTY IMAGES
Louisa Clarence-Smith
The Times

President Trump heralded a “golden age” for Americans when he was inaugurated on Monday, telling his countrymen: “We will be a rich nation again.”

The United States is by most accounts still a rich nation. The world’s largest economy has defied predictions of a recession in recent years to outperform other developed countries.

Trump wants to further enrich Americans by expanding and extending tax cuts introduced during his last administration, imposing tariffs, deregulating industries and deporting millions of illegal immigrants.

A swathe of executive orders signed this week have offered some clues about how he plans to achieve this. The question economists are trying to answer is: will it work?

Tariffs

“America First” under Trump means reducing the US trade deficit. He has ordered federal agencies to investigate other countries’ trade practices, which he believes unfairly exploit US consumers and manufacturers.

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He stopped short of immediately imposing tariffs, however, saying on Monday that America was “not ready” to impose his threatened universal levy of as much as 20 per cent on imports. He also spoke this week about imposing a 10 per cent tariff on Chinese-made goods from next month. It is weaker than the 60 per cent tariff he touted during the presidential election campaign.

Trump also threatened 25 per cent tariffs on Canada and Mexico this week, starting on February 1. The European Union was described by Trump as a “big abuser” that will “be in for tariffs”.

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The president hopes tariffs will lead to a manufacturing rebirth in the US, but economists are sceptical. Since Trump imposed higher tariffs during his first administration, manufacturing as a share of US jobs has fallen. Instead of creating a large number of new US jobs, Mexico and Vietnam emerged as winners.

The biggest fear is that if Trump imposes punitive tariffs on trading partners, he will provoke a series of retaliatory tariffs that damage US economic growth. The Peterson Institute for International Economics, an independent think tank, says the lowest-earning Americans would feel the brunt of this the most:

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Taxes

Trump wants to expand the sweeping tax cuts he introduced in 2017 that are due to expire at the end of the year.

They included a lowering of income tax rates and a reduction of the corporation tax rate from 35 per cent to 21 per cent:

The cuts delivered the greatest benefits to the wealthiest…

…but benefited many taxpayers — the child tax credit was increased and the proportion of income not subject to tax rose, helping those on middle incomes. Without a renewal of the cuts, 62 per cent of Americans are expected to face higher tax bills in 2026.

Trump has proposed additional tax cuts, including exempting tips from taxes and allowing Americans to fully deduct taxes paid to state and local governments from their federal tax bills.

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Economists and politicians worry that tax cuts could increase the national debt. The Committee for a Responsible Federal Budget, a non-partisan group, estimates that if Trump’s policy proposals were enacted in full, the US national debt to gross domestic product (GDP), a key metric of a country’s fiscal health, could rise from about 98 per cent last year to 143 per cent in 2035.

Some Republicans have warned the president that the $4 trillion cost of extending the 2017 tax cuts by a decade could put at risk the government’s ability to service its $36 trillion in debt, and cause alarm in the bond markets.

Elon Musk, head of the new Department of Government Efficiency, has declared a goal of cutting $2 trillion in spending from the $6.8 trillion federal budget. Doing so would help fund tax cuts. However, Musk has acknowledged the target is ambitious.

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Immigration

There were an estimated 11 million immigrants in the US illegally or with temporary status in 2022. Trump argues that removing them will create more jobs and prosperity for native-born Americans.

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Businesses worry, however, that his threats to increase deportations will exacerbate labour shortages in some sectors and create a drag on the economy. If Trump follows through with his mass deportation plans, economists believe the policy would hit real GDP, because those immigrants would no longer be spending money in the country.

The main fear is that the deportations would create worker shortages in the agriculture, food processing, construction, leisure and manufacturing sectors.

Economists at Schroders, the asset management firm, believe “the greater threat to inflation probably comes from a crackdown on immigration, along with mass deportations, if it leads to labour shortages that would ultimately result in higher wages and services inflation”.

The Peterson Institute estimates that mass deportations could add 3 percentage points to inflation and cut GDP growth to 1.5 per cent, down from more than 2 per cent last year.

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Energy

Trump has issued orders designed to boost oil and gas production, which is already at a record high, and pull back on Joe Biden’s climate agenda. He says this will help to bring down energy prices.

He declared a national energy emergency to give himself the authority to reduce environmental restrictions on energy projects and cut red tape for new infrastructure.

Oil wells and a housing development under construction in Midland, Texas.
JAMES BREEDEN FOR THE TIMES

Addressing business leaders at the World Economic Forum in Davos, Switzerland, on Thursday, he said: “The United States has the largest amount of oil and gas of any country on Earth, and we’re going to use it. Not only will this reduce the cost of virtually all goods and services, it will make the United States a manufacturing superpower and the world capital of artificial intelligence and crypto.”

Analysts are uncertain whether Trump’s directives will be enough to encourage oil companies to invest more in infrastructure projects, given the pressure from shareholders to prioritise investor returns over spending.

This week, Trump signed an executive order repealing Biden’s directive to block oil drilling in the Arctic and in US coastal areas. It remains to be seen whether this will be enough to encourage companies to drill in the Arctic, given the high costs of working there.

Cars

More Americans could be encouraged to buy petrol cars after Trump took aim at electric vehicles, revoking Biden’s 2021 executive order that sought to ensure half of all new vehicles sold in the US by 2030 were electric.

This week, he cancelled the distribution of federal funds for electric vehicle chargers and said he would seek to revoke a waiver granted to California last year that allows the state to end the sale of gasoline-only vehicles by 2035. The rule has been adopted by 11 other states.

Joe Biden in a Corvette and Donald Trump in a truck.
A tale of two presidents: Biden in an electric Corvette and Trump in an oil-fuelled truck at the White House in 2017
GETTY IMAGES

During the election campaign, Trump claimed that Biden’s commitment to electric vehicles was “killing jobs” in the traditional automotive sector.

However, US automakers could face higher costs if Trump follows through with his threat of 25 per cent tariffs on goods, including on vehicles built in Mexico and Canada. Mexico produces 16 per cent of vehicles sold in the US, while Canada produces 7 per cent.

While in theory, the tariffs could incentivise those companies to move jobs and manufacturing to the US, the cost of doing so could be seen as prohibitive. Meanwhile, the threat of tariffs on European automakers could raise the cost of buying cars for US consumers.

GDP

The consensus view among economists is that American GDP growth is likely to have outperformed that of other developed nations last year and will do so again next year.

Growth in 2024 is expected to come in at 2.8 per cent, higher than any other G7 nation, according to estimates by the International Monetary Fund (IMF). This year, the IMF predicts this will slow to 2.7 per cent but remain far ahead of any G7 country.

The dominance of America’s technology and finance sectors is expected to support ongoing “exceptionalism” for the US economy.

Stuart Kaiser, head of US equity trading strategy at Citi, said: “There’s so many moving parts. But I think most people would agree that President Trump is very aware of what’s going on in financial markets and he’s also very much focused on US economic growth.”

Kaiser said that the last month had been reassuring, with data showing the unemployment rate at 4.1 per cent, the core consumer price index falling from 0.3 per cent to 0.2 per cent in December and the Federal Reserve expected to further reduce interest rates this year.

“All of these things are very growth positive,” he said. “Steady as she goes is probably a good outcome as far as the economy goes right now.”

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