Trump’s Dilemma

The election campaign has ended, and now Donald Trump will have to decide the direction of his second presidency. For years he has promoted the idea of America First, promising a nationalist stance on the economy both at home and abroad. His closest supporters and advisers are convinced of the need for protectionist measures, to help American workers and to counter China. However, differences with more traditional Republicans are already evident, and they place the new president at a crossroads: continue with the anti-globalization march or allow for the return of free market liberalism promoted by the likes of Elon Musk.

The first problems appeared as early as December. Congress had to pass the new budget bill, which means continuing with deficit spending, entailing an inevitable increase in the national debt. There is a group of hardline conservatives who oppose this in principle and threaten to oust House Speaker Mike Johnson if he does not embrace the austerity line. These members are calling for immediate cuts, starting with social and health care spending.

For Trump, this path is anathema, since he is aiming for a big tax cut, but without touching the main elements of welfare spending. Further deficit increases will be inevitable, the very thing that other Republicans say they want to avoid. In fact, the House rejected the incoming president’s request to immediately raise the debt ceiling, the technical limit that allows for new spending. In the end, the budget resolution passed will only last a few months, until March 2025.

Thus, a clash looms between the Trump line, which is aimed at giving the economy a big boost by injecting new resources, and that of conservatives, who are determined to restore so-called “fiscal responsibility.”

In theory, flexibility could be created due to the budget review entrusted to the external DOGE commission on government efficiency. The two individuals in charge, Elon Musk and Vivek Ramaswamy (also a wealthy entrepreneur and a former Republican primary candidate), talk of huge cuts in government spending, on the order of trillions of dollars. A dream for those who espouse the libertarian idea that the state should disappear, but a nightmare for the rest of the country. Indeed, if spending on defense and public pensions (Social Security) and health care for retirees (Medicare) were not touched, as Trump has promised, reaching that goal would make it necessary to eliminate most other government functions.

It is clear that this will not happen, but just focusing the discussion on the need to cut, rather than invest, will be a stark difference from recent years in the United States. Between the first Trump presidency and the Biden presidency, the approach has been to increase government intervention and prioritize industrial policy, certainly not monetary parameters. This has created a boom in industrial investment, especially from 2022 onward, and also significant wage growth. The inflation caused by trade disruptions during the pandemic prevented the Democrats from reaping the political benefits of this progress, but there is no question that a reduction in public services and investment would only hurt the political party that were to implement it.

In addition to this internal dilemma, Donald Trump must decide how to deal with China. In general, the tycoon is promising new tariffs, with two aims: on the one hand, to force trading partners to accept demands on other issues, such as immigration and security; and on the other, to encourage the return of production to the United States. In fact, though, the Biden administration has implemented the most effective measures in this regard, allocating large amounts of resources to incentives for new factories. This policy has provided the stimulus for growth that tariffs alone could not.

With regard to Beijing, the Biden administration has pursued the approach of “de-risking,” seeking autonomy in various strategic sectors, along with an attempt to block Chinese technological progress in semiconductors and other essential fields. In Trump’s world, on the other hand, there is still talk of “decoupling,” a net disengagement from China, and also the elimination of the U.S. trade deficit. This is an impossible goal in the short term, but as in the case of budget cuts, just choosing to pursue it would have the effect of disrupting the current economic system.

The main proponent of this vision is Robert Lighthizer, the U.S. Trade Representative in the first Trump administration. For now, it appears that he will not play a major role in the coming years, while the names chosen for top economic posts are closer to Wall Street, marking an early victory for the more pragmatic view. However, there is a clash looming with America First purists, figures like Steve Bannon and Stephen Miller, who carry significant weight among the MAGA base.

Elon Musk has also been vocal in this area. During the congressional negotiations over the year-end budget bill, mentioned above, Musk lashed out at the initial compromise, bringing Trump to his side. A few days later it became clear that with this move, the owner of Tesla had succeeded in getting a provision removed that could have blocked his plans for new investment in China in the field of artificial intelligence for the automotive industry. This shows the presence of a huge conflict of interest, that underscores another aspect of the economic dilemma for Trump: the business community, however supportive of the deregulation and tax cut agenda, wants to maintain global trade relations and therefore fears protectionist measures.

America First ideologists are pushing an autarkic vision of U.S. industrial reconstruction. The new president will have to decide between pursuing the ideological line he has been promoting for years in his political campaigns and the risk of fixating on a goal that is unattainable, and brings great unknowns for the U.S. economy.