Republican policies may boost U.S. economic growth over the short to medium term, but potentially to the detriment of the rest of the world, especially if U.S. trade policy turns decisively protectionist. On Jan. 20, Donald Trump will return to the White House after campaigning on sweeping economic policy change, including broad tariffs on U.S. imports. Trump has also promised to cut taxes, deregulate the U.S. economy and crack down on immigration. The Republican Party's control of both chambers of Congress will enable the president-elect to push through a number of these changes, as will Trump's likely significant use of his executive powers. However, the Republican majorities in the House and the Senate are small, and a Democratic filibuster in the Senate limits legislative change outside budget reconciliation. 

• On top of winning the presidency in the November election, Republicans won control of the Senate after securing 53 of the chamber's 100 seats. The GOP also managed to maintain control of the House of Representatives, securing 220 out of the 435 seats; however, this is expected to shrink to 217 seats as several members leave Congress to work for the Trump administration, giving Republicans a slim one-vote majority until the three vacancies are filled toward mid-2025. Republican-appointed judges also dominate the U.S. Supreme Court, controlling six of its nine seats. 

Control of the executive and legislative branches will give the GOP significant room to implement its preferred fiscal, deregulation and trade policies, but the party will find it harder to implement wide-ranging legislative changes outside budget reconciliation. With a Republican-controlled Congress, unified government will enable Trump and his Republican Party to push through wide-ranging changes to fiscal policy, primarily tax policy. The Trump administration is all but certain to make its 2017 tax cuts permanent and may cut other taxes. But despite Trump's professed desire to slash government spending, any cuts to the federal budget will likely be limited at best due to a combination of legislative constraints and opposition from centrist Republicans. On trade, the Trump administration will face statutory constraints in terms of imposing across-the-board tariffs on U.S. imports, which Trump may try to circumvent by declaring a national emergency. Republicans in Congress may try to repeal existing legislation, such as outgoing President Joe Biden's Inflation Reduction Act or CHIPS Act, but they will find it difficult to muster the necessary majorities. Trump can also block parts of such legislation via executive action. In general, Republicans will need to overcome Democratic opposition in the Senate, unless they manage to leverage the budget reconciliation process. But for legislation to be enacted through this process, it needs to have a significant budgetary impact, which could impede Republicans' ability to pass immigration and other reforms, such as deregulation and anti-trust policies. 

• Discretionary spending only accounts for one-fourth of U.S. federal spending, half of which consists of military spending, which Trump and his Republican allies are unlikely to cut significantly. Budget reconciliation does not allow for changes to social security spending, which accounts for one-third of federal spending.
• The bulk of spending tied to the Biden administration's Inflation Reduction Act, or IRA, benefits Republican states. The Trump administration is thus likely to target only select provisions of the legislation, rather than slash all IRA-related spending. Additionally, there is significant corporate pushback to repealing or substantially curtailing spending under Biden's CHIPS and Science Act; the CHIPS Act also largely aligns with Trump's pro-domestic manufacturing stance by subsidizing U.S.-made semiconductor chips and boosting investments in cutting-edge science and technology initiatives. 
• To unilaterally impose broad-based tariffs, Trump will need to invoke the International Emergency Economic Powers Act, or IEEPA, which authorizes the U.S. president to regulate commerce with certain countries whenever there is an ''unusual and extraordinary threat'' to the United States. While this would require declaring a national emergency, most legal experts believe U.S. courts would back Trump's authority under IEEPA to enact his threatened tariffs.
• Republicans do not have a filibuster-proof majority in the Senate, which will force them to negotiate legislation, outside of what can be passed through budget reconciliation. Republicans could theoretically consider changing the Senate's rules around what legislation can move forward without being blocked by the filibuster process, though this would run afoul of the traditionalist view held by the present Republican Senate leadership. 

If the Trump administration successfully implements its preferred tax, immigration and trade policies, inflationary pressure in the United States will increase relative to the baseline, leading to a stronger dollar and higher U.S. interest rates. While tax cuts and deregulation will raise short- and medium-term economic growth, large-scale tariffs (and foreign trade retaliation) and concomitant economic uncertainty will weigh on the U.S. economic outlook. In particular, an expansionary fiscal policy will put upward pressure on inflation — especially if Trump also follows through on his pledge to deport a large number of undocumented immigrants, which, if implemented on a large scale, would leave a sizeable hole in the U.S. workforce. A return to rising inflation could prompt the U.S. Federal Reserve to slow down and perhaps, depending on the magnitude of policy changes, reverse interest rate cuts. Relatively higher U.S. inflation will keep interest rates higher for longer, especially vis-a-vis other economies, such as the European Union and China, where interest rates are expected to fall faster over the next 12-24 months. This will translate into a stronger dollar due to a widening interest rate differential and a relatively more favorable U.S. economic outlook. If tax cuts prove extensive and spending cuts paltry, a larger deficit will also put upward pressure on U.S. government debt and hence increase the risk premium on long-term government bonds. Though unlikely given the legal-institutional autonomy of the Federal Reserve, the Trump administration could pressure the U.S. central bank into pursuing a more dovish monetary policy, though this would risk exacerbating inflation and further undermining financial and monetary stability by casting doubt over the Fed's independence.

• The macroeconomic policy mix, particularly if combined with protectionist trade and hawkish immigration policies, will lead to higher long-term yields on government debt. Provided protectionist policies do not prove too detrimental to economic confidence, an expansionary fiscal policy, higher interest rates and deregulation should provide a short-term boost to economic growth in the context of higher-than-anticipated inflation, which should benefit equities, broadly speaking. Moreover, deregulation, corporate tax cuts and a less hawkish antitrust policy should benefit selected sectors, such as banking and fossil fuels. 
• During his first term, Trump used protectionist threats and policy measures to coerce U.S. trade partners into either negotiating new trade agreements (as he did with the European Union, unsuccessfully), or renegotiating the terms of existing deals (as he did successfully with South Korea, Canada and Mexico). Trump also imposed sweeping tariffs on U.S. imports of Chinese goods, as well as sector-specific tariffs on U.S. steel and aluminum imports, among other goods. Trump has broadly pledged to return to such protectionist policies in his second term, portending increased trade tensions and economic uncertainty. 

A stronger U.S. dollar and protectionist trade measures will negatively impact many other countries, particularly those with highly trade-dependent economies and/or large dollar-denominated debts. A stronger dollar will put greater strain on economies with larger dollar-denominated debt by increasing the cost of servicing their debts. A stronger dollar also typically leads to a fall in global commodity prices (in dollar terms), in part because weaker currencies in commodity-producing countries tend to translate into lower dollar prices. While this may benefit commodity-producing emerging and especially developing economies in terms of local-currency revenue, the negative financial impact stemming from a stronger dollar on indebted economies will likely outweigh the effect of higher local-currency export revenues. A stronger dollar and higher U.S. growth might also help increase U.S. demand for imports, though Trump's plans to increase tariffs on those imports will limit the extent to which other economies will benefit from greater U.S. purchases of their goods. Against this backdrop, countries with net dollar obligations would take hits on both their capital account (lower financial inflows) and their current account (lower exports). This would be greatly magnified if the Trump administration enacted high tariffs on imports from China, which would slow Chinese economic growth. As China is the dominant trade partner of over 120 countries around the world, emerging and developing economies would suffer from the consequent slump in Chinese demand.

• While most emerging markets will be able to ride out the negative effect of U.S. economic policies due to their manageable foreign debt position and generally flexible exchange rates, many highly indebted developing countries could face renewed financial distress. These include selected emerging economies currently undergoing IMF reforms, such as Argentina, Egypt, Pakistan, and many African countries.
• In terms of the global impact of Trump's economic policies, much will ultimately depend on the scope of his tariffs and how long they remain in place. Both the European Union and China — the world's second- and third-largest economies, respectively — are currently in a weak and vulnerable position. While the IMF projects euro area growth to recover from 0.8% in 2024 to 1.2% in 2025, the prospect of a trade war with the United States or even just uncertainty about U.S. trade policy under Trump makes this forecast look optimistic. When it comes to China, the IMF also expects the country's real GDP growth to slow from 4.8% this year to 4.5% in 2025. However, a significant increase in U.S.-China trade tensions — particularly if Trump imposes his threatened 60% tariff on all U.S. imports from China — could reduce Chinese economic growth by more than 200 basis points if Chinese authorities do not take strong counter-cyclical policy measures to stabilize economic activity.
• Higher U.S. tariffs on their goods would also prove painful for Canada and Mexico. However, both countries' dollar debt is manageable, which — along with having weaker currencies and possibly higher domestic interest rates — will help absorb the financial fallout from a stronger dollar and higher U.S. interest rates.