The Potential of inflation inducing tariffs offset by Deregulation
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The Potential of inflation inducing tariffs offset by Deregulation
Brookmont Capital Management
To assess the magnitude and impact of Trump’s trade and tariff threats, we evaluated his actions during the first administration. At the time the combined U.S. goods and services trade deficit increased to $679 billion in 2020, compared to $481 billion in 2016, the year before Trump took office. The 2020 trade deficit in goods alone hit $916 billion, a record high and an increase of about 21 percent from 2016. However, the Trump administration was successful in bringing down the bilateral trade deficit with China, as a result of the tariffs he imposed on more than $350 billion worth of Chinese goods. Final figures show the trade gap with China totaled $311 billion in 2020, down sharply to the record high of $419 billion in 2018. Key Phases of China Tariff Implementation during the first Trump administration:
July 2018: The U.S. imposed a 25% tariff on $34 billion worth of Chinese goods. In response, China levied equivalent retaliatory tariffs on U.S. exports.
• August 2018: An additional 25% tariff was applied to another $16 billion in Chinese imports.
• September 2018: The U.S. imposed a 10% tariff on $200 billion worth of Chinese goods, which was later increased to 25% in May 2019.
• September 2019: A 15% tariff was introduced on an additional $112 billion of Chinese imports.
The trade war with China under the initial Trump administration had the desired effect of reducing reliance on China imports and shifting those imports to other countries and by doing so not materially impacting inflation for US consumers. This time could be different but we believe the volatility of the rhetoric seldom fully materializes.
The Impact of Deregulation
The market remains optimistic about the future growth of the US economy in part because of the promises of deregulation. The President has often mentioned that he wants to see “Made in America” on more goods. This efficiency gained in both the public and private sectors could offset potential inflation caused by a onshoring of American manufacturing. President Trump specifically mentioned cutting costly regulations to offset these negative economic consequences.
Many ideas have been proposed by Trump’s administration several of which target both the manufacturing and financial services sectors. Determining the exact number of federal regulatory bodies in the United States is challenging due to the complex and evolving nature of government structures. However, as of 2022, there were approximately 392 federal agencies, including:
9 Executive Offices
15 Executive Departments
259 Sub-agencies and Bureaus within Executive Departments
66 Independent Agencies
42 Boards, Commissions, and Committees
11 Quasi-Official Agencies
Manufacturing Sector Deregulation
The federal government has issued at least one manufacturing-related regulation per week since 1981 which has resulted in a total of 297,696 restrictions on manufacturing operations. These regulations are rarely repealed and have led to many duplicate regulations that increase the cost of manufacturing with no positive externalities to be seen for society and only increased compliance costs that are passed onto the consumer. Excess or un-productive regulations can diminish output resulting from the CHIPS Act, Infrastructure Bill, and private investments. The annual Regulatory Cost per Employee is nearly double for the manufacturing sector as compared to the other sectors of the US Economy. The regulations also disproportionately affect small manufacturers more than large manufacturers but that is not unique to manufacturing. These regulatory burdens for the manufacturing sector alone are $3.079 Trillion per year. Obviously not all regulations are bad as they help to provide assurances that the products are safe to use but being able to simplify the regulatory framework for the US Manufacturing sector will help make investment in more attractive and US goods more competitive in the global economy.
Financial Sector Deregulation
After the Trump victory, the us financial sector (IYF) jumped 6.85%. This is because of Trump’s friendly attitude towards the US banking sector and his plan to lower regulatory burdens in that sector. Lowering regulatory burdens on the U.S. banking system has the potential to foster economic growth through several mechanisms. One of the most significant impacts could be increased lending. With fewer constraints, banks may have more capital available to extend loans to businesses and individuals. This access to credit could stimulate investment, enable business expansion, and encourage consumer spending, all of which are critical drivers of economic growth. Additionally, banks facing fewer compliance costs may pass on these savings to consumers by offering more competitive interest rates on loans and other financial products, thus encouraging borrowing and spending. Small businesses, which often rely on local or regional banks, could also benefit from reduced regulatory complexity. Smaller banks disproportionately affected by stringent regulations might be better positioned to serve their communities, thereby fostering entrepreneurship and creating jobs. Simplifying regulations might even enhance the long-term stability of the financial system. Although it seems counterintuitive, some experts suggest that overly complex regulations can inadvertently heighten systemic risk and streamlining them could lead to a more resilient financial framework. We saw this play out during the First Republic and subsequent regional bank failures.
The Potential of inflation inducing tariffs offset by Deregulation
Brookmont Capital Management
To assess the magnitude and impact of Trump’s trade and tariff threats, we evaluated his actions during the first administration. At the time the combined U.S. goods and services trade deficit increased to $679 billion in 2020, compared to $481 billion in 2016, the year before Trump took office. The 2020 trade deficit in goods alone hit $916 billion, a record high and an increase of about 21 percent from 2016. However, the Trump administration was successful in bringing down the bilateral trade deficit with China, as a result of the tariffs he imposed on more than $350 billion worth of Chinese goods. Final figures show the trade gap with China totaled $311 billion in 2020, down sharply to the record high of $419 billion in 2018. Key Phases of China Tariff Implementation during the first Trump administration:
• August 2018: An additional 25% tariff was applied to another $16 billion in Chinese imports.
• September 2018: The U.S. imposed a 10% tariff on $200 billion worth of Chinese goods, which was later increased to 25% in May 2019.
• September 2019: A 15% tariff was introduced on an additional $112 billion of Chinese imports.
The trade war with China under the initial Trump administration had the desired effect of reducing reliance on China imports and shifting those imports to other countries and by doing so not materially impacting inflation for US consumers. This time could be different but we believe the volatility of the rhetoric seldom fully materializes.
The Impact of Deregulation
The market remains optimistic about the future growth of the US economy in part because of the promises of deregulation. The President has often mentioned that he wants to see “Made in America” on more goods. This efficiency gained in both the public and private sectors could offset potential inflation caused by a onshoring of American manufacturing. President Trump specifically mentioned cutting costly regulations to offset these negative economic consequences.
Many ideas have been proposed by Trump’s administration several of which target both the manufacturing and financial services sectors. Determining the exact number of federal regulatory bodies in the United States is challenging due to the complex and evolving nature of government structures. However, as of 2022, there were approximately 392 federal agencies, including:
Manufacturing Sector Deregulation
The federal government has issued at least one manufacturing-related regulation per week since 1981 which has resulted in a total of 297,696 restrictions on manufacturing operations. These regulations are rarely repealed and have led to many duplicate regulations that increase the cost of manufacturing with no positive externalities to be seen for society and only increased compliance costs that are passed onto the consumer. Excess or un-productive regulations can diminish output resulting from the CHIPS Act, Infrastructure Bill, and private investments. The annual Regulatory Cost per Employee is nearly double for the manufacturing sector as compared to the other sectors of the US Economy. The regulations also disproportionately affect small manufacturers more than large manufacturers but that is not unique to manufacturing. These regulatory burdens for the manufacturing sector alone are $3.079 Trillion per year. Obviously not all regulations are bad as they help to provide assurances that the products are safe to use but being able to simplify the regulatory framework for the US Manufacturing sector will help make investment in more attractive and US goods more competitive in the global economy.
Financial Sector Deregulation
After the Trump victory, the us financial sector (IYF) jumped 6.85%. This is because of Trump’s friendly attitude towards the US banking sector and his plan to lower regulatory burdens in that sector. Lowering regulatory burdens on the U.S. banking system has the potential to foster economic growth through several mechanisms. One of the most significant impacts could be increased lending. With fewer constraints, banks may have more capital available to extend loans to businesses and individuals. This access to credit could stimulate investment, enable business expansion, and encourage consumer spending, all of which are critical drivers of economic growth. Additionally, banks facing fewer compliance costs may pass on these savings to consumers by offering more competitive interest rates on loans and other financial products, thus encouraging borrowing and spending. Small businesses, which often rely on local or regional banks, could also benefit from reduced regulatory complexity. Smaller banks disproportionately affected by stringent regulations might be better positioned to serve their communities, thereby fostering entrepreneurship and creating jobs. Simplifying regulations might even enhance the long-term stability of the financial system. Although it seems counterintuitive, some experts suggest that overly complex regulations can inadvertently heighten systemic risk and streamlining them could lead to a more resilient financial framework. We saw this play out during the First Republic and subsequent regional bank failures.