Trump to bring limited tariffs; higher growth, rates – economists

HOUSTON (ICIS)–Under US President Donald Trump, US chemical companies will unlikely see the full-blown tariffs that he has proposed during his campaign, but they will operate under a faster growing economy with higher inflation and interest rates that will settle at an elevated rate, economists at Oxford Economics said on Monday.

Oxford is forecasting what it calls a limited Trump scenario, under which his administration will not fully adopt the policies he proposed during his campaign. Tariffs will be limited, targeted and phased in, while Congress will limit growth in the government deficit by restraining some of his tax cuts and spending measures.

Oxford’s baseline scenario for 2025 does not change much because it is assuming that Trump will focus most of his first year in office on extending the tax cuts of his earlier administration, said Ryan Sweet, chief US economist for Oxford Economics. He made his comments during a presentation.

The consultancy’s forecast for 2025 GDP is a tenth of a point higher versus its estimate in October, he said. Inflation will rise by a tenth of a point in 2025. Trump is inheriting a strong economy, so there is little risk of recession.

In these initial years, the biggest effect on the US economy will be tax cuts, and these should increase growth in GDP, said Bernard Yaros, lead US economist for Oxford.

After 2026, Oxford assumes Trump will adopt some of his immigration restrictions, and it is expecting GDP growth to fall below its earlier forecast. Stricter immigration policies will reduce the supply of labor and slow down the consumption of goods and services.

LIMITED TARIFFS
Oxford expects the Trump administration will not impose the widespread tariffs it proposed during its campaign, which included 60% duties on Chinese imports and baseline tariffs of 10-20% on all imports. Yaros said these campaign proposals were likely negotiating tactics.

Sweet expects that Trump will require Congress to pass some of his tariffs, and legislators will not pass such high rates, Sweet said. In other cases, advisors and trade representatives will restrain Trump.

For China, Trump will likely impose tariffs of 25% on major categories, such as machinery, electronics and chemicals, Yaros said.

For the EU, Canada and Mexico, Trump will likely impose very targeted tariffs on steel, aluminum, base metals and motor vehicles, Yaros said.

For Canada and Mexico in particular, Trump will unlikely adopt measures that will threaten the United States-Mexico-Canada Agreement (USMCA), the trade agreement that his administration signed during his first term.

That trade deal was one of the signature achievements of Trump’s administration, so he will not want to pursue policies that will threaten the upcoming renewal of that agreement, Yaros said.

While the tariffs will be limited, they will still be a drag on the economy by nudging inflation higher, reducing real consumer income, tempering consumer spending and encouraging the misallocation of resources, Yaros said.

LIMITED TARIFFS REDUCE RETALIATION RISK FOR CHEMS
Oxford’s scenario will limit the risk of countries imposing retaliatory tariffs on US exports.

US chemical producers were vulnerable to such tariffs because they purposely added capacity for export over the years, particularly for polyethylene (PE) and polyvinyl chloride (PVC). The magnitude of these exports and the existence of a global glut in plastics and chemicals would make US chemical exports a likely target for retaliatory tariffs.

On the import side, the US does have deficits in key commodity chemicals, such as benzene. Targeted tariffs could carve out exceptions for benzene was well as other chemicals in which the US has a trade deficit, such as methyl ethyl ketone (MEK) and melamine.

Targeted tariffs will likely rule out duties on imports of oil. US refineries rely on imports of heavier grades of oil to optimize the operations of some of their units.

US shale oil makes up nearly all of the growth in the nation’s crude production, and that oil is made up of light grades.

Meanwhile, tariffs could shield some chemicals from competition, such as epoxy resins.

CONGRESS MAY LIMIT GROWTH IN DEFICIT
Oxford pointed out that some moderate Republicans could restrain some of Trump’s tax and spending proposals to limit growth in the government deficit, Yaros said.

Other economists have expressed concerns that the US will issue larger amounts of government debt to fund the growing deficit. That would lead to a cascade effect that could ultimately increase rates for US mortgages, which would slow down the housing market and the plastics and chemicals connected to that market.

Still, all of Oxford’s scenarios forecast a rise in the government deficit.

SLOWER RATE CUTS BY FED
Oxford expects Trump’s policies will be inflationary, which will prompt the Federal Reserve to slow down the pace of cuts on their benchmark federal funds rate.

It expects the federal funds rate will settle at 3.125%, versus its forecast of 2.75% that was made in October.

TRUMP WILL PRESERVE MOST RENEWABLE TAX CREDITS
Trump will likely preserve most of the tax credits in the Inflation Reduction Act (IRA) because most of them benefitted states controlled by his party, the Republicans, Yaros said.

These include tax credits on renewable fuels, renewable power, hydrogen and carbon capture.

The exception will include incentives for electric vehicles (EV), which Trump had singled out during his campaign, Yaros said.

OXFORD’S FORECAST
The following chart shows Oxford’s new baseline forecast and compares it with a scenario under which the policies of the previous administration are maintained.

The following chart shows Oxford’s forecast that assumes Trump will fully adopt all of his campaign proposals. This is not the consultancy’s baseline forecast because it does not expect such a full-blown Trump scenario will happen.

Thumbnail shows the US Capitol. Image by  photo by Lucky-photographer.