Thought of the Week:
Unlike some of my friends who regularly drive to Connecticut, Florida, and Massachusetts, my wife and I are not big drivers. I know for a fact the furthest we have ever driven together was a pre-marriage trip to Charleston, South Carolina, a bit more than seven hours away. When our kids were growing up, we rarely drove further than two-and-a-half hours in any direction. For the most part, family summer vacations to Dewey Beach on the Delaware shore, about 3 hours away, were the outer limit. If we went to New York, we took the train; back down to South Carolina, we flew; and we both dreaded the odd trips to West Virginia or Pennsylvania that were going to be four hours or more. Don’t get me wrong, we both love to travel and experience new places, it’s the driving that gets to us. Even today, when heading out, neither of us wants to be the one behind the wheel, and there’s always a question about whose car we’re going to take. Suffice it to say, our retirement won’t be one that involves an RV and trips cross country. “Are we there yet” is not just a question we often heard from the backseat, it’s also one we’re now hearing regularly about the incoming Trump administration. The answer to both is “almost.” President Biden delivered his farewell address to the nation earlier this week, darkly warning of a coming oligarchy and the rise of a “tech industrial complex.” President-elect Trump’s cabinet nominees are currently steering their way through confirmation hearings, and in a far cry from just a few weeks ago when several appeared to be at serious risk, the biggest question for Senate Republicans seems to be not who they will be able to confirm, but how long will it take to confirm them all. Politico even noted that Democrats seem to be using the hearings less as an opportunity to derail confirmations but instead to collect fodder to use against the administration down the line. And Inauguration Day, where more than a quarter million people are expected to jam the National Mall, is this coming this Monday. While what might happen over a president’s first 100 days used to be a significant mile marker, today’s superhighway has sped this question up to what will happen on Day One. We’ve been told that unlike 2017, when President Trump had just 25 officials in place, the president-elect’s transition team this time around is much better organized, and he will have as many as 2,000 officials in place on the first day. What’s more, it is estimated that President Trump could issue as many as 100 Executive Orders (EO) beginning January 20th. These Day One executive actions will generally fall across six lanes—Immigration and Border Security; Trade and Tariffs; Deregulation; Government Efficiency; Social Policy; and Foreign Policy. This initial tranche of EOs, which will actually be rolled out over the course of a two-week span, are expected to set the stage for policy change over the Trump administration’s first year. To discuss any of the potential potholes these, and other, Trump policy actions could make, do not hesitate to contact the Washington office.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Eurasia Group Predicts USMCA Renegotiation Will Likely Prompt New Tariffs. In 2025 President-elect Trump will seek to renegotiate the US-Mexico-Canada Agreement (USMCA) as part of its regularly scheduled review process. For Trump, the review process will also implicate a litany of grievances in the bilateral U.S.-Mexico relationship, including fentanyl, immigration, Chinese market access, and qualms with the Mexican energy sector. Trump has separate concerns with Canada, with defense spending and the Digital Services Tax (DST) being the most significant. USMCA is very likely to be renewed (95% odds), but the process will likely be a painful one that sees tariffs imposed temporarily within the current USMCA framework before leaders of the three countries come to an agreement, likely in 2025. The high costs of tariffs and the prospect of a total breakdown of USMCA will lead key constituencies to pressure the three leaders to come to an agreement, which would likely see Mexico accept an increase in the number of third-country nationals deported from the U.S. to Mexico and Canada make concessions on the DST. The “blowup” scenario in which Trump leaves the USMCA is highly unlikely (5% odds), given that Mexico and Canada are willing to make the necessary concessions to the U.S. on trade and immigration.
Eurasia Group Believes Republicans are Likely to Score a Major Legislative Victory in the First Half of the Year. A single reconciliation bill extending current tax policy and addressing energy permitting, immigration, and the debt ceiling is likely to pass before the July 4th recess (70% odds). Additional cuts to the corporate tax rate remain unlikely, although marginal changes to business tax deductions and personal income are possible; spending cuts will probably fall short of fully offsetting the cost of these extensions. While passage of a single reconciliation bill is the most likely scenario, it is still possible that Congress could split the effort and move tax legislation near the end of the year. Regardless, under either scenario, a tax policy extension will occur before the current provisions are set to expire on December 31.
Inside U.S. Trade Reports Goldman Sachs Sees Heavy Economic Fallout from Steepest Trump Tariffs
While Goldman Sachs’ top economist says he expects President-elect Trump to settle on a relatively “benign” slate of early term tariffs that would cut expected economic growth only slightly, if the administration were to follow through on the most aggressive plans—especially those targeting China—the result would take the U.S. back to the 1940s. Jan Hatzius, chief economist at Goldman Sachs, estimates that U.S. gross domestic product will rise 2.5% this year based in part on the assumption of a “modestly benign outcome” on trade in which the new administration pursues a tariff approach less stringent than what Trump has threatened. However, the possibility of much more serious impacts should not be ignored if the White House moves forward with extremely high duties on all goods from China—Trump has suggested 60%—and other target countries, potentially paired with tariffs on all imports regardless of origin. The Congressional Budget Office (CBO) recently reported that a 10% universal tariff and 60% duties for goods from China would reduce the budget deficit by almost $3 trillion over the next decade, reduce GDP by 0.6% over the same span, and raise inflation by about 1%. While Hatzius says there is a “significant” chance Trump decides to pursue the more aggressive approach, Goldman Sachs is using as its baseline an approach by which Trump’s tariff hikes are finely targeted to individual countries and sectors. This scenario is described as one in which duties rise 20% to 60% on Chinese goods, but with most consumer goods at the lower end of that range while the 60% hike would be reserved for industrial and capital goods that the first Trump administration targeted on its “List 1” and “List 2” rosters under Section 301. That level of tailoring would avoid the “very inflationary outcome” of major price increases on consumer goods. Outside of China the bank is expecting more sector-specific tariffs such as duties on European-made automobiles and electric vehicles imported from Mexico.
“Inside Baseball”
President-Elect Trump Says He’ll Create ‘External Revenue Service’ for Tariffs. President-elect Trump says he will create an “External Revenue Service” tasked with collecting tariffs on imports, an indication that he aims to carry out his promises for sweeping trade levies when he retakes office. Although the president-elect did not provide any details about the creation of a new government agency, analysts widely consider the action a marketing gimmick, not a policy change. Tariffs are currently collected by Customs and Border Protection, whose agents review paperwork, preform audits, and collect levies and penalties, with the money deposited in the Treasury Department’s General Fund. The announcement does underscore Trump’s desire to frame tariffs as an offset to the costs associated with his policy agenda. Trump was elected on vows to levy tariffs on both allies and adversaries, casting the duties as tools to bring in more revenue, compel companies to bring manufacturing jobs back to the U.S., and as an offset to the growing federal deficit. Bottom line: the establishment of a new agency with a name twinned to the Internal Revenue Service is a marker that Trump is, at least rhetorically, serious about substantially increasing tariff revenues. If Trump does follow through on his promise, it would not be unprecedented, as there have been examples of rebrands and spinoffs of government agencies in recent decades. The Bush-era establishment of the Department of Homeland Security being the most prominent example.
In Other Words
“Hopefully, everyone is cool with me skipping the inauguration so I can go to the national title game,” Vice President-elect Vance after the Ohio State Buckeyes advanced to the NCAA football national championship.
Did You Know
Generation X has finally eclipsed Baby Boomers in the House of Representatives. In the 119th Congress, there are 180 House members born between 1965 and 1980 compared with 170 born between 1946 and 1964. The Generation X group includes both Speaker Johnson (R-LA), who was born in 1972, and Minority Leader Jeffries (D-NY), born in 1970. However, Boomers still dominate the Senate with 61 members compared to 28 Gen Xers.
Ronald Reagan has the distinction of taking the oath of office on both the coldest and warmest Inauguration Days. In 1985, Washington, D.C., hit -4 degrees the morning of President Reagan’s second swearing in and climbed to only 7 degrees by noon. Four years earlier, the mercury stood at a balmy 55 degrees.
When President-elect Trump is sworn into office, he will be considered the 47th president of the United States. However, an argument can be made that Trump will actually become the 48th president. In fact, Senator Atchison (D-MO) served in the Senate from 1843-1855 and played a crucial role in the 1849 presidential transition. Due to President Taylor’s observance of the Sabbath, the incoming president delayed his swearing-in by one day—leaving the country without a leader on March 4, 1849. As president pro tempore, Atchison was considered acting vice president and as a result, acting president. Atchison’s term started at noon on March 4 and ended at noon on March 5, when Taylor was officially sworn in.
Graph of the Week
DOGE Resets Expectations. The Department of Government Efficiency (DOGE) has backtracked on its pledge to identify $2 trillion in federal budget savings, saying $1 trillion is a more achievable figure; however, $1 trillion, roughly the size of all non-defense discretionary spending, is only slightly less pie-in the-sky than $2 trillion. Rather than cutting spending, DOGE is likely to be more successful in its deregulatory efforts. While DOGE is a serious operation with 50 staffers and representatives dispatched to various federal agencies, its unorthodox location outside the structure of the federal government means that it will be dependent on allies within government to accomplish its aims. As always, the challenge for deficit hawks will not be identifying budget cuts but getting enough members of Congress to vote for them.
