This week, I asked Libby Cantrill to guest author Macro Signposts to discuss a potential outcome of the U.S. presidential election. Libby analyzes policy and political risk for the firm and leads U.S. policymaker engagement and policy strategy.

Unless explicitly stated, views expressed do not constitute official PIMCO views.

A Peek at the Policy Priorities of a Hypothetical Second Trump Administration

By Libby Cantrill

With the Iowa Republican caucuses fewer than 40 days away and former President Trump maintaining a formidable lead in both the national and the state primary polls, many clients are asking what a second Trump administration may mean for policy – economic and otherwise – that may be relevant to markets. While it is still very early – and a lot would depend on whether a Trump 2.0 presidency were accompanied by a united Congress or a divided Congress – we provide a rundown of likely policy priorities based on Trump's campaign website and speeches. They include:

Taxes: The Trump personal tax cuts are slated to expire at the end of 2025. If Congress were to do nothing, all personal taxes would revert to their pre-2017 levels, the standard deduction would be cut in half, the expanded Child Tax Credit (CTC) would expire, and the full mortgage deduction and the state and local tax deduction (SALT) would be reinstated (something that many of our New York and California clients would cheer, to be sure). If there is a unified Republican Congress, we should expect an extension of all of the Trump personal tax cuts, no reinstatement of the SALT deduction, plus an extension of some of the corporate tax provisions that expired at the end of 2022. If all of these tax policies were extended, the Congressional Budget Office estimates they would add ~$3.5 trillion to the national debt over ten years.

Under a divided Congress (Democratic House and Republican Senate, for instance), we would likely see an extension of most of the Trump tax cuts for those making less than some income threshold (e.g., $500,000), as well as some compromise on corporate taxes, the CTC, and SALT.

Foreign policy/Ukraine: Trump, like all U.S. presidents, would have significant unilateral discretion over foreign policy. He would likely maintain his "America First" focus, meaning there would likely be a very high threshold for U.S. involvement. As it relates to the conflict in Ukraine, according to Trump's campaign website, he wants to "end the ridiculous war and demand peace in Ukraine now before it gets worse"… since "America's chief interest in Eastern Europe is peace and stability." Trump has also indicated he would spend time "reevaluating NATO's purpose"; though this is vague in terms of his intent, it would be destabilizing globally (needless to say) should the U.S. under Trump decide to withdraw from NATO.

Defense: Trump says he would rebuild "the depleted military" by proposing "record funding" for defense from Congress (without 60 Republican votes in the Senate, "record" defense spending may be challenging, however); Trump indicated he would also ask Europe "to reimburse the U.S. for the cost of Ukraine funding."

Trade: Trump wants to enact a 10% across-the-board tariff on all imports coming into the U.S., but most experts agree he could not do this without Congress. Instead, as he did in his first administration, he could pursue tariffs on national security grounds under Section 232 or Section 301. Trump says he will also encourage Congress to pass a bill – the "Trump Trade Reciprocal Act" – which would provide him broad authority to impose "reciprocal tariffs," but this bill would face significant obstacles even in a united Republican Congress.

China: Trump wants to revoke China's Most Favored Nation (MFN) trade status with the U.S., which would enable the U.S. to increase tariffs and reimpose import quotas. He would need Congress to do this, and despite bipartisan skepticism of China on the Hill, it seems unlikely; currently only Cuba, Russia, Belarus, and North Korea are denied MFN status with the U.S. Regardless, Trump also has stated he plans to "implement a 4-year national reshoring plan so that the United States no longer needs to rely on China for essential medical and national security goods," and he also plans to ban Chinese ownership of "all critical infrastructure" in the U.S., a lot of which he likely could do without Congress.

Energy: Trump is focused on supporting the traditional energy industry and has outlined numerous "day one" activities that can be done without Congressional action, including: 1) exiting the Paris Climate Agreement (again); 2) expediting outstanding leases and permitting applications; 3) filling the strategic petroleum reserve; 4) speeding approval of natural gas pipelines; 5) supporting nuclear energy production and hydroelectric power; and 6) reducing reliance on foreign sources of oil, including Venezuela.

Inflation Reduction Act (IRA): Trump has said that he would roll back the electric vehicles tax credit ($7,500) and would abolish the Biden administration's "insane" wind subsidies, but otherwise he has not said much about the IRA. He couldn't do much about these policies under a split Congress anyway (House Democrats would not touch the IRA, for instance), and even under a united Republican Congress, a wholesale rollback of the IRA looks very unlikely. Trump would not need Congress's approval to tweak some of the tax-related components of the IRA, however, such as imposing caps on some of the tax credits.

Immigration: Trump plans several "day one" actions on immigration as well: 1) reinstating a travel ban; 2) suspending "chain migration, visa lottery, and all non-essential workers" visas; 3) increasing border security (including possibly trying to deploy the military); and 4) cutting off "all immigrants to the welfare state." Some of these are statutory – meaning they require an act of Congress. One of Trump's featured policy proposals is to "end birthright citizenship," i.e., to stop allowing children of non-U.S. citizens to receive U.S. citizenship. We believe this would not have enough support even in a unified Congress, and although Trump asserts he can end birthright citizenship without Congress, it is enshrined in the Constitution.

Healthcare: Trump has argued (again) that Congress should roll back Obamacare, but this seems even more unlikely now given Obamacare has become more popular over time. Trump's campaign website also states that he would "stop all COVID mandates and restore medical freedom, end surprise medical billing, increase fairness through price transparency, and further reduce the cost of prescription drugs and health insurance premiums." Many of these issues have had a hard time getting through Congress; we wouldn't expect that to change.

Entitlements: Trump has made it clear he will not touch entitlements; in his words: "President Trump will always protect Medicare, Social Security." Case closed.

What are the key implications for investors? A second term for President Trump would likely tend to benefit the traditional energy sector, defense, and financial services, among other sectors that could benefit from lighter regulation. Depending on how they are administered, Trump's trade policies could be (incrementally) inflationary, and could increase tensions with China. Depending on what happens with Ukraine and NATO, we could also see more geopolitical risk premium priced into markets. Lastly, with tax cuts likely to be extended, a push for more defense spending, and little political appetite to reform Medicare and Social Security, we should expect to see a continuation of large deficits and accumulating debt under a hypothetical second Trump administration as well.

For regular insights on U.S. policy via email, please write to [email protected] and ask to receive the Washington Watch.

This report, like future reports, summarizes the vast array of data analysis that we do at PIMCO. Please don't hesitate to ask us about the underlying data and analysis. If you would like to reach out, please email [email protected].

IMPORTANT NOTICE
This communication contains the current opinion of the author, but not necessarily those of PIMCO and such opinions are subject to change without notice.

All investments contain risk and may lose value.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC Avenida Leandro N. Alem 882, 13th floor Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.

CMR2023-1211-3277469