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Business

Trump economics - no reason for Europe to make a fuss

Donald Trump's protectionist trade policies will likely create serious ramifications for the world economy, fears DW's Rolf Wenkel. But there are more than enough dangerous populists in Europe, too.

In essence, it's quite simple: whoever promises tax cuts to the American public almost always wins elections. Hillary Clinton wanted to raise the taxes paid by the richest segment of Americans - i.e. the top one percent of the US population. The Democrat also stated her intention to hike taxes on this group and close loopholes in the tax system that are being exploited by the rich and privileged to avoid paying their fair share of taxes. The measures sounded like a credible budget plan.

But elections are not won with such solid budgetary plans, as evidenced by the outcome of the 2016 US presidential election.

Clinton's opponent - the Republican Donald Trump - promised a slice of heaven, to both the rich and the poor.

His plan foresaw a cut in the top tax rate in the country from 40 to 25 percent, while abolishing the income tax on low-wage earners from 2017 – a step that is expected to benefit over 60 million US households.

The policy is estimated to reduce the US government's tax revenue by between $2.6 trillion and $3.9 trillion over the next ten years. It's extremely unlikely that Donald Trump would be able to generate enough tax revenue to cover this reduction.    

Furthermore, it's highly probable that the Republican will not be able to strictly implement all the tax reform measures that he pledged during the campaign season. 

Wenkel Rolf Kommentarbild App

DW business writer Rolf Wenkel

Free trade in peril

Unrealistic electoral promises, however, are not specifically an American phenomenon; populists are everywhere. But it will be much worse for the US economy and world trade should Trump manage to enforce another of his electoral pledges that involves global commerce.

After taking over the reins of the world's largest economy in January, Donald Trump's administration is widely expected to closely scrutinize all the trade deals the US has inked in the past. During the campaign, Trump repeatedly lambasted the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, criticizing that the pact had had a negative effect on the American economy and workforce.

Mocking NAFTA as the "worst trade deal in history," Trump pledged that he would negotiate better terms with Mexico and Canada, and if they don't agree, he'd pull out altogether.

Meanwhile, the Trans-Pacific Partnership free trade deal involving the US and 11 other Pacific Rim countries is unlikely to ever be ratified under President Trump. Likewise, the Transatlantic Trade and Investment Partnership (TTIP) - a massive free trade pact under negotiation between the US and the EU - will be shelved.

At the same time, access to the US market is expected to become harder for countries like China, South Korea and Japan, with high import duties already being mulled on products coming from these Asian export powerhouses. All of this, Trump has claimed, is to protect the domestic industry from unfair practices of foreign competition.

There is a word for this way of thinking, and that's called "protectionism."

As a business man, Donald Trump should actually know that competition is vital to business. And Trump will not be doing domestic enterprises any favor by protecting them by creating an artificial fence made of customs duties and other trade barriers.

On the contrary, companies that are protected in that manner become complacent, inefficient and unproductive, while neglecting research and development, which eventually leads to their losing their edge in innovation and competitiveness. The repercussions of such a development will also be felt by America's export sectors in the long run.

Protectionism, punitive tariffs and barriers to trade – all of these will have devastating consequences for global trade and, in effect, the world economy, which is already in a poor shape.

For years, global trade has been growing only at a moderate pace. And when one looks at the inflation-adjusted figures, it's clear that trade hasn't grown at all for the past two years. In fact, this is the time to give new impetus to global commerce by concluding new free trade deals. But Trump will now seriously damage the idea of global free trade.

More profound than the Brexit

German companies will also feel the negative effects of this remarkable shift. As a consequence of the slowdown afflicting European and Chinese economies, the US recently emerged as Germany's most important trading partner and export market. Around one million jobs in Germany depend directly or indirectly on the country's exports to the US. Against this backdrop, Trump's restrictive trade policy could hurt Germany, particularly when the consumer spending-driven growth of the country's economy peters out in a few years.

As recently as June, no European could imagine that the British would vote to leave the EU. But what we witnessed in the US election was far more profound than the Brexit vote. That's because it's not about the British economy, which is relatively small, it's about the direction the world's largest economy took – one that's skeptical about free trade. And this will have much more serious consequences for the global economy than the British vote.

Populists also in Europe

Moreover, the populism of a Donald Trump could reverberate across Europe. The continent is not an island that is free of such demagogues; it already has many and Trump's success emboldened them even further. On December 4, Italians will vote in a referendum on senate reform. If PM Matteo Renzi loses it, he is likely to call new elections, which could very well result in a former comedian becoming the nation's prime minister. We would then practically have a Trump in the EU.

Trump's election victory, therefore, does not entitle us Europeans to make a fuss.

It's because we not only have populists such as Silvio Berlusconi or Beppe Grillo in Italy, Victor Orban in Hungary or the power broker in Poland, Jaroslaw Kaczynski. But we also have Marine Le Pen in France and the right-wing populist Geert Wilders in the Netherlands, who appear poised to benefit from the anti-establishment sentiment running deep in their countries during the elections next year.

Have I forgotten anyone else on this list? Oh yes, the right-wing Alternative for Germany (AfD) party, whose popularity has been on the rise, courtesy of the abandoned and left-behind citizens who are incensed at the people "at the top." This fury was what propelled an eccentric Donald Trump to victory on the other side of the Atlantic, catapulting him into the most powerful politician on this planet.

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