"Trump Tariffs, Fiscal Deficit...Real Risks to the Global Economy"

2025 American Economic Association

Scholars Express "Deep Concerns Over Major Policies"

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Leading American economists have expressed concerns over the economic policies of President-elect Donald Trump, including increased fiscal spending, tariffs, and deportation of immigrants, known as Trumpnomics. There are warnings that Trumpnomics could lead to an expanded fiscal deficit, increased prices of imports, and labor shortages, adversely affecting not only the U.S. but also the global economy.

At the annual meeting of the '2025 American Economic Association (AEA)' held in San Francisco from the 3rd to the 5th (local time), David Card, a Nobel laureate and professor of economics at UC Berkeley, warned of "significant problems" related to the U.S. fiscal deficit. He analyzed that "there will be tax cuts when Trump takes office, but the issue is whether the second Trump administration will allow the fiscal deficit to increase." An increase in the fiscal deficit could shock the bond market due to an increase in government bond issuance.

Shaphat Yar Khan, a professor of economics at Syracuse University, expressed concerns about inflation in the 'U.S.-China Trade War' session, stating that "the U.S. will face increased production costs due to higher import prices from tariffs on China." Kimberly Clausing, a professor of economics at UCLA, addressed the issue of immigrant deportation in the 'Trump Administration's Economic Policy' session. She pointed out that a large-scale deportation policy would reduce labor supply, hindering economic growth and GDP.

There were also significant concerns about the global economy, including China's economic shock and Europe's slowdown due to Trumpnomics. Mary Daly, president of the San Francisco Federal Reserve Bank, stated, "I believe there are some real risks to current global economic growth," warning that "global economic growth is slowing, centered on Europe and China, and this could act as a headwind for the U.S. economy."

U.S. Economists Warn "Trump's Tariff Bomb...A Boomerang Worsening Corporate Profitability"

Main Topic of the Annual Meeting...Aftermath of 'Trump Tariffs'

At the '2025 American Economic Association (AEA)' annual meeting held in San Francisco from the 3rd to the 5th, various sessions were held simultaneously regarding President-elect Donald Trump's tariff policy. It was commonly mentioned in these sessions that U.S. tariffs could become a boomerang, worsening corporate profitability. Some scholars warned that it could also affect corporate employment, leading to a labor market shock.

"Trade Uncertainty, Recession Effects"

In the 'Policy Uncertainty and Economic Activity' session held on the 4th (local time), research results on the negative impact of trade policies, such as tariffs, on the economy were presented. Celine Fouai, a professor at Aix-Marseille University, created a 'Trade Policy Uncertainty Index' by combining sectoral volatility of import tariffs and the composition of imports by U.S. states. She analyzed the impact of such trade policy uncertainty on GDP and employment. Professor Fouai stated, "States with high trade policy uncertainty experienced recessions and employment declines," noting that the durable goods production sector was the most sensitive.

In the same session, Justin Pierce, an economist at the Federal Reserve, argued that "tariff increases are fully passed on to consumer prices, and U.S. companies and consumers will bear the burden." He pointed out that while large companies can increase imports from countries other than China and leverage their pricing power to lower unit prices, small businesses lack such capabilities. Economist Pierce explained, "Tariffs are intended to reduce supply chain risks for companies, but instead, costs increase and trade transactions are disrupted."

Trump May Turn Attention to Weak Dollar

There is also a forecast that if President-elect Trump fails to reduce the U.S. trade deficit as expected through tariffs, he may turn his attention to a weak dollar policy. Morris Obstfeld, a senior fellow at the Peterson Institute for International Economics, who participated in the 'Geopolitical Fragmentation' session on the 3rd, said, "If the Trump administration's tariff policy neither reduces the trade deficit nor increases manufacturing jobs, the policy focus will shift to a weak dollar," suggesting that "trade partner countries may be pressured to support the U.S.'s economic goals."

In the same session, Philip R. Lane, a member of the Executive Board of the European Central Bank, presented a theory that if trade and economic cooperation between countries are severed and fragmented due to protectionism, it would negatively impact global economic growth. He emphasized, "The worst-case scenario of global trade fragmentation is an 8-9% decrease in global real GDP," adding that "if selective decoupling intensifies, GDP losses could be even greater."

Possibility of Interest Rate Freeze Due to Inflation Concerns

Mary Daly, president of the San Francisco Federal Reserve Bank, expressed concerns about China's economic slowdown due to tariffs. In an interview with Korean reporters on the 4th, she emphasized, "We have seen global economic growth slowing in Europe and China," and "we need to watch if this continues to act as a negative factor for the U.S. economy."

She also hinted at the possibility of an interest rate freeze in the first half of the year. President Daly said, "I don't feel an urgent need to change interest rates."

She also mentioned that the Fed's Summary of Economic Projections (SEP) presented last December indicated two interest rate cuts in 2025, stating, "I think it's a reasonable place we can go." Given that the Federal Open Market Committee (FOMC) meets eight times a year, if the expectation of two rate cuts is met, a freeze decision is likely to be made in the first half of this year.

San Francisco = Park Shin-young / Song Young-chan Correspondents nyusos@hankyung.com