Trump won a second term in the White House because he promised to "burn" the existing order. Free trade is outdated, protectionism is in vogue; concerns about debt are outdated, tax cuts are popular; ensuring USA security is outdated, self-defense is the trend.

The established order that Trump sought to overturn has not brought any benefits. During President Biden's term, inflation in the USA surged nearly 10%, partly due to excessive fiscal stimulus. Decades of free trade orthodoxy have left blue-collar workers in USA factories exhausted. Wars in Ukraine and Gaza have called into question America's continued leadership in global affairs.

It will take time for this fire to burn, and the reason is simple: any government can only implement its to-do list so quickly. Bloomberg's economic forecast predicts a global economic growth rate of 3.1% for the coming year, unchanged from 2024. Inflation will fall from 6% to 3.4%, with inflation in the USA and other developed economies returning to the central bank's long-standing target of 2%.

However, the global economy and financial markets will still feel some pressure.

The Zhiyuan Financial APP notes that economists do not all share the same views on many things. One of them is that trade is beneficial. By enhancing competition and encouraging specialization, trade can increase productivity, promote growth, and boost income. An additional benefit of trade is that it helps to curb inflation in developed countries, as consumers in these nations can purchase Commodities produced by workers in China, Mexico, and elsewhere at Low Stock Prices.

However, citing the title of a book published in 2023 by Robert Lighthizer, the author of Trump's tariffs during his first term, "No Trade is Free." Lighthizer vividly describes how offshore outsourcing has hollowed out the Steel town in Ohio where he grew up. The outflow of manufacturing jobs has severely dragged down the income of the working class. Meanwhile, China has utilized the opportunity to enter the global market to transform itself into the world's largest exporter.

Economists, including those from Bloomberg Economic Research, have vigorously defended free trade, using their models to attack Trump's pledges to impose 60% tariffs on China and 20% tariffs on other countries. These tariff levels would be the highest in history, and Bloomberg's model predicts that USA GDP would take a significant hit, with inflation also rising dramatically, which is not surprising.

In fact, based on the experience of Trump's first term, tariffs might not achieve the promises made during his campaign. Tariffs are likely to be targeted, rather than comprehensive, and implemented in phases rather than all at once. For 2025, this means minimal impact on the USA and China, while by 2026, the negative effects on economic growth will be more severe and will spread to Mexico, Canada, and other major trading partners.

However, some important things have changed. Even in the best-case scenario, the shift from free trade to protectionism is bad news for the global economy. If Trump aggressively imposes tariffs, everything from Apple's Asian supply chain to General Motors' cars manufactured in Mexico will face risks.

Another view widely accepted by economists is that huge deficits are bad news. Of course, during economic downturns, opening the public spending faucet to stimulate demand is a good idea. But in normal times, borrowing should be controlled, except during wars or recessions.

The Biden administration has been indecisive on fiscal policy. The deficit for 2024 is expected to approach 7% of GDP, a result of excessive stimulus during the pandemic and a failure to control spending in a timely manner after the state of emergency ended.

Trump has promised to accelerate the pace and loosen policies. He and his advisors are promoting a typical supply-side plan, adding some protectionism. First, tax cuts—stimulating economic vitality. Second, raising tariffs—offsetting some of the tax losses. Finally, cutting public spending—filling the remaining gap.

The problem is that tax cuts are easy to achieve; increasing tariff revenue and cutting public spending are much more difficult. Raising tariffs to raise massive funds may have a greater impact on economic growth and push up inflation—while also suppressing imports, thereby actually reducing revenue. Musk and Ramaswamy have been tasked with finding $2 trillion in savings in the federal budget. This is a daunting task: most spending goes towards defense, Social Security, and Medicare, which are sacrosanct and even Trump would not make them sacrificial.

US public debt has been rapidly growing, rising from 79% of GDP in 2019 to nearly 100% in 2024. With Trump promising to extend his tax cuts during his first term (currently set to expire in 2025), there is indeed a risk of public debt continuing to soar.

Bonds Guardian has begun to punish the USA government for excessive borrowing. In November, the yield on the 10-year USA Treasury bond nearly reached 4.5%, up from 3.6% in September. As the borrowing cost of USA Treasury bonds becomes the global benchmark, many Other countries, including Chile, Egypt, and South Africa, will find it more challenging to manage deficits and debts.

In terms of security, allies in Europe and Asia rely on the USA as a guarantee of peace and stability. The 'peace under American rule' achieved at the cost of blood and wealth has become a hallmark of the post-World War II global order.

Trump's 'America First' instinct means it is no longer taken for granted. In Ukraine, he promised to end the war within 24 hours of taking office, which could force Kyiv into unequal negotiations with Russia. For NATO allies, he threatened to stop supporting any country that does not increase defense spending, which would exacerbate the already significant debt pressures faced by some European nations.

Trump's proposals do have their internal logic and intuitive appeal. As a package plan aimed at bringing the benefits of USA economic vitality back home (temporarily ignoring costs), raising tariffs, cutting taxes, and forcing Other countries to pay for their own defense is reasonable.

There is also hope that rational voices in the government (such as Treasury Secretary nominee Scott Besson, who is currently the vessel investors are hoping for) and the daily reality checks from the market will prevent policies from veering too far off course. Will Trump fulfill his promises of imposing a 60% tariff on China and massive tax cuts if the S&P 500 index crashes and USA Treasury yields soar as expected? Probably not.

Nonetheless, most in the economic and diplomatic circles agree that free trade, fiscal responsibility, and USA security guarantees bring significant benefits to the USA and the world. Trump disagrees and promises to carve a new path. In the coming year, who is right will become clear.

Editor/ping