How the U.S. Tax Plan Will Affect the World

Not only is the new tax plan expected to boost the U.S. economy, but it will also give a boost globally, especially for our main trading partners.

The International Monetary Fund (IMF) released its latest World Economic Outlook (WEO) report where it revised its previous forecast of a 3.7% increase in global economic growth to a higher estimate closer to 3.9% in the next two years.  

If this ends up being accurate, this will be the fastest rate since 2011.

“With Donald Trump, the US president, due to give a speech at the forum on Friday, the IMF raised the US growth forecast for 2018 from 2.3 percent to 2.7 percent and added a 0.6 percentage point upgrade to its 2019 US forecast, lifting it to 2.5 percent. By 2020, it said the total effect of the corporate tax cuts was likely to boost the US economy by 1.2 percent, although there would be some payback in subsequent years as the nation had to restore its public finances,” writes Financial Times.  

This boost will offer a “perfect opportunity now for world leaders to repair their roof,” said Christine Lagarde, the IMF Managing Director on Monday in Davos, Switzerland where the World Economic Forum met. “Growth in our view needs to be more inclusive.” 

After Trump’s first year, the U.S. unemployment rate is down, and the stock market, labor market and consumer spending are up.

“We have a growth rate — a GDP — which has been much higher than, as you know, anybody anticipated, except maybe us,” said Trump last August. “But it’s going to go up. It’s going to go higher, too.” 

This year of growth was all before the tax plan was rolled out.  

“About half of the IMF’s global upgrade stems from the Republican tax cuts passed in December and enacted this year. Cuts to the corporate tax rate will give the world’s biggest economy a shot in the arm, lifting U.S. growth to 2.7 percent this year, 0.4 point higher than the fund expected in October, the IMF said Monday in an update to its World Economic Outlook. Projected U.S. growth was the highest among advanced economies,” writes Bloomberg.

However, the IMF warned that the boost could be short-lived, especially with Trump’s plans to renegotiate trade deals.  

“An increase in trade barriers and regulatory realignments, in the context of these negotiations or elsewhere, would weigh on global investment and reduce production efficiency, exerting a drag on potential growth in advanced, emerging market, and developing economies,” said the IMF.

According to the IMF findings, Asian countries like China and India remain the fastest growing.  

“The region continues to account for over half of world growth,” said the IMF.  

As the U.S. economy improves, the more money China is making from trade deals. The U.S. trade deficit with China is already at an all-time high, but Trump promised to implement measures to alleviate this.

The Trump administration has discussed introducing penalties on Chinese imports, like aluminum, steel, and solar equipment.  

Ultimately, the U.S. Federal Reserve’s actions in 2018 will impact the U.S. economy. But the IMF predictions will likely keep the Fed on track with its increases in interest rates expected to start in March.

Author’s note: It looks like the tax plan is going to be a good thing for trade partners, which certainly gives Trump negotiating power when it comes to revisiting trade deals.