Trump’s presidency: How will deregulation shape up and trade policies play out?

Last week’s inauguration of Donald Trump heralds a new chapter in US economic policy. It represents a rejection of economic orthodoxy underpinned by promises of deregulation and the dramatic restructuring of global trade.

Central to this agenda are two key pillars: using tariffs to protect domestic industries and reducing regulatory burdens to foster business growth.

These approaches aim to stimulate the economy and restore America’s global economic dominance, which could be good news for global investors. But as with any significant changes, there are risks. Success depends on thoughtful execution and alignment with broader strategic goals.

Deregulation could have unintended consequences

The Trump administration’s deregulation agenda focuses on reducing government oversight across industries with the goal of stimulating innovation, investment and economic activity.

The initial focus of this deregulation drive appears to be the energy industry – oil and gas. The president aims to lower energy costs and boost American energy independence, although it’s already pretty independent as the world’s largest oil exporter.

Again, the potential results of deregulation could be positive for investors. But while it can be a powerful driver of growth, its effectiveness depends on putting safeguards in place to prevent unintended consequences.

In theory, deregulation can lower barriers to entry for new businesses, fostering competition and consumer choice. A historical example is the deregulation of the US airline industry in the 1970s, which significantly reduced fares and expanded access to air travel. However, without appropriate guardrails in place it also resulted in industry consolidation and concerns about service quality in smaller markets.

Deregulation also has the potential to reduce compliance costs, meaning businesses can redirect resources toward innovation and productivity, particularly in sectors like technology and manufacturing. But these efforts must be paired with investments in technology and workforce development to sustain competitiveness.

Safeguards needed to avoid poor service and systemic risks

History shows us the potential risks of unconstrained deregulation. In the financial sector, for example, it’s had mixed results. The dominance of financial deregulation and excessive leveraging ultimately contributed to the 2007/8 financial crisis by enabling risky practices. 

Any new efforts to deregulate banking must strike a balance between promoting growth and maintaining safeguards against systemic risks.

Elsewhere, in deregulated energy markets such as Texas, competition has sometimes exposed consumers to extreme price swings and poor service. The 2021 Texas energy crisis exposed ill-prepared infrastructure as three severe storms swept America, leaving millions of homes and businesses without power.

This again highlighted the need for appropriate frameworks to protect consumers if you remove or reduce the relevant regulation.

The trouble with tariffs

While deregulation is aimed at stimulating domestic growth, Trump’s trade policies take a more protectionist turn.

The proposed use of high tariffs on imports from key trading partners like China, Mexico and Canada aims to boost domestic production and reduce the country’s $78.2 billion trade deficit. But tariffs on the scale proposed by Trump risk creating significant economic turbulence unless carefully managed.

Economists broadly agree that tariffs, when misapplied, can backfire. They function as both a tax on imports and a subsidy for domestic production, but often raise costs for consumers and businesses.

Industries reliant on imported inputs, such as steel and electronics, are particularly vulnerable to such cost increases. Tariffs on steel and aluminium during Trump’s last period in the White House raised production costs for US manufacturers and dented their global competitiveness.

In addition, the US economy’s reliance on global supply chains means higher trade barriers could impact industries like automotive and electronics, which depend on cross-border production. Retaliation from trade partners could further exacerbate these challenges by reducing demand for US exports.

A stronger dollar is another likely consequence of the administration’s tariff agenda. And while a stronger dollar might initially appear beneficial, it could hurt US exporters further by making their goods more expensive in overseas markets.

It’s also worth highlighting that the trade deficit Trump’s tariffs are designed to tackle isn’t necessarily a bad thing. America’s deficit tends to reflect strong US consumer purchasing power and the US dollar’s role as the global reserve currency. It also reflects the huge inflows of global capital flowing into US financial markets. 

When tariffs work well…

Historically, tariffs have played a constructive role when used judiciously and as part of a comprehensive domestic strategy. Countries like South Korea, Taiwan, and China have all leveraged moderate tariffs in the past as a stepping stone to industrial modernisation.

In these cases, tariffs were supported by robust investments in education, infrastructure, and technological innovation. For Trump’s policies to succeed, they must adopt a similar approach—pairing trade barriers with targeted investments to revitalise domestic industries.

Many analysts also believe Trump’s tariff proposals could achieve more if they moved beyond short-term punitive measures against trade partners. For instance, the proposed 25% tariffs on Mexico and Canada, framed as a response to border security concerns, could be more effective if linked to a broader plan for regional economic cooperation.

Overall, Trump’s twin focus on deregulation and tariffs must be integrated into a cohesive economic strategy if it’s to benefit the US and those who invest there. We believe deregulation should prioritise sectors most likely to benefit from reduced compliance burdens, such as small businesses and emerging industries, while tariff policies should target sectors with strong potential for domestic growth.

Our investment positioning

At Coutts we continue to remain positive on stocks overall, as we expect continued, steady economic growth this year and supportive central bank policies. Although inflation has been a little stickier than expected recently, it is trending towards central bank targets – which is potentially good for stock market investing.

Our stock holdings adopt a global approach with a focus on the US, where we still see resilient economic growth and solid company earnings. We will carefully monitor any impact – positive or negative – of the Trump administration’s policies, and stand ready to act quickly if necessary.

We strongly believe in the importance of well-diversified investments so, while we favour equities, we also hold US government bonds to help stabilise returns during periods of market stress. Additionally, our liquid alternatives fund is designed to provide a further layer of diversification, offering resilience in the unlikely event of simultaneous declines in both stocks and bonds. 

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