CICC: Policy Order and Impact of Trump 2.0

CICC released a research report stating that Trump's future four years in office may be based on two underlying logics. The first is to correct the policies of the Biden administration, mainly reflected in controlling inflation, restricting immigration, and reducing government expenditure. The second is to implement a mercantilist economic strategy, emphasizing protection of domestic industries and promoting exports through high tariffs, which contrasts with the trade liberalization promoted by the US after World War II. The main points of CICC are as follows: Trump may adopt a policy sequence of "tariffs first, tax cuts later, saving first, spending later." In the areas of tariffs, immigration, energy, and foreign affairs and national defense, Trump may push for legislation in the first 100 days of his term that will involve immigration, energy, and defense expenditures. This legislation may include content related to cutting government spending. Tax cuts could be implemented in the second bill, possibly in the latter half of the year. Areas where spending cuts are expected may include cutting subsidies for new energy consumption, stopping student loan forgiveness, cutting expired federal expenditures, streamlining government departments and reducing government employees, and reducing military assistance to other countries. These measures may be carried out under the guidance and advice of the Department of Government Efficiency (DOGE) led by Musk and Ramosvami. From a policy impact perspective, CICC presents four conjectures: 1. The impact of tariffs on inflation remains to be observed. Historically, the relationship between tariffs and inflation is not so simple and direct. In the current context, with the risk of deflation higher than that of inflation, small-scale tariff policies may not necessarily raise inflation. However, the possibility of broad-based tariff hikes forcing the Trump administration to act cautiously cannot be ruled out. 2. The fiscal deficit may not necessarily expand greatly. If tariffs and cuts in government spending are implemented faster than tax cuts, fiscal policy may first move towards tightening. Ideally, the US may adopt a macro policy combination of "tight fiscal, loose monetary, and loose credit" in the future. With the help of the Federal Reserve lowering interest rates and the Trump administration relaxing regulations, the US financial cycle may further move upwards, and the economic cycle expansion may continue. 3. The US may move towards a "goldilocks" economy. If the inflationary effects of tariffs are not significant, and the fiscal deficit does not expand greatly, the US economy may continue its current trend - without excessive inflation or high unemployment, the economy is in a stable state. If the Federal Reserve continues to lower interest rates in the first half of 2025 and monetary policy returns to neutral, the second half of the year may enter a wait-and-see mode, with policy direction depending on the effectiveness of Trump's governance. 4. The US and other countries may move towards differentiation. History shows that countries facing tariffs will experience a decline in export demand, deteriorating trade conditions, and pressure for currency depreciation. The risks of these events occurring in 2025 should not be underestimated. Imposing tariffs may mean that the monetary easing efforts of other countries exceed those of the Federal Reserve, keeping the US dollar strong, putting pressure on commodities, and causing bond yields to fall. This may be the difference between Trump 1.0 and 2.0 in the first year.