Higher tariffs, debt-fuelled spending and a shrinking migrant workforce are weakening US growth while adding to inflationary and financial pressures.
We are all familiar with Trump’s foreign policy failures. The quagmire of the Iranian war that he started at Netanyahu’s insistence. Trump’s betrayal of Ukraine and homage to the Russian autocrat, Putin. And how Trump has sacrificed US status and leadership by disavowing long-time US alliances.
On the other hand, Trump’s economic strategy gets little publicity here in Australia. This is strange because the forthcoming US election will mainly be determined by the ‘economy, stupid’. While the success, or otherwise, of Trump’s foreign policy will be of secondary importance to most Americans.
The major economic changes initiated by Trump that are likely to matter most have been:
- A large increase in tariffs, but which have bounced backwards and forwards;
- The big, beautiful budget stimulus, and now an election bribe of $5,000 for every adult citizen if the Republicans win the election;
- Major cuts in migration and deportation of many former migrants.
The strange thing is that these policies are the opposite of traditional Republican economics. Ronald Reagan would denounce them.
What exactly Trump has achieved with a combination of more expensive imports, fiscally irresponsible handouts, and cuts in the supply of often essential workers?
US tariff increases
According to Trump, other countries have been taking American jobs, and especially manufacturing jobs, through their exports to the US. In particular, he believes that countries which have a trade surplus with America must be unfairly pinching US jobs.
Trump’s tariffs have gone up and down like a yo-yo, but some countries like Canada and China have been hit with 50 per cent tariffs or even more. While even countries like Australia, with which the US has a trade surplus, have been hit with a 12.5 per cent tariff.
Overall, America’s effective tariff rate briefly topped 20 per cent, and even after falling back a little it is still at its highest rate since the 1940s.
The net result is that over the four quarters of 2025 the volume of US imports fell by 1.9 per cent but is expected to rebound by 6.5 per cent during 2026. While the volume of US exports increased by 1.1 per cent and an expected 5.4 per cent over each of the four quarters in 2025 and 2026 respectively.
Over the four quarters after Trump became president, manufacturing output in real terms increased slightly by 0.3 per cent – not much and no faster than previously – while manufacturing employment continued to fall.
It is difficult to see that Trump’s tariffs have achieved anything much for Americans, but they have upset many of America’s trading partners.
Fiscal policy and the debt problem
Trump inherited a major federal budget deficit equivalent to around 6 per cent of GDP in 2024, with government financial liabilities (for all levels of government) amounting to as much as 121.8 per cent of GDP in 2024 – the fourth highest debt ratio out of the 40 most developed market economies.
But since then, Trump has added substantially to the debt problem. The Congressional Budget Office estimates that the One Big Beautiful Bill will increase the national debt by $4.1 trillion over the next ten years, or an increase of about 11 per cent. But a few days ago, Trump promised to give every adult American $5,000 on condition that the Republicans win the forthcoming election, and that is estimated to cost another $1.3–1.4 trillion.
Already confidence in the US dollar has been falling, with countries selling down their holdings. This massive debt problem is sure to put more downward pressure on the US dollar and/or upward pressure on interest rates.
After the US abandoned the gold standard in 1971, gold lost its status as a reserve currency. It was considered better to buy US bonds which were more liquid and paid an interest return, while being deemed very secure.
But the surge in US debt means that traders are less confident that the US dollar will hold its value, and countries are switching their reserves to other currencies or gold. As a result, the US dollar is dropping in value, which adds to inflationary pressures in the US.
For example, on the day that Trump was inaugurated for his second term, gold was trading at about $US2,700 an ounce, but today it’s about $US4,400, or a 60 per cent increase in less than two years. While since Trump took office the US dollar has depreciated by 13.4 per cent against the Australian dollar, and no doubt by a lot more against many other currencies.
Already long-term interest rates are rising in the US, with the ten-year bond rate reaching 5 per cent at the end of last week – an increase of 0.85 per cent since 1 January, despite the efforts of the Trump administration to purchase ten-year bonds in a desperate attempt to reduce their effective interest rate. And in the US it is the ten-year bond rate that determines the mortgage rate, so mortgagees are already feeling some pain.
Migration
The arrests of migrants, many of whom are American citizens, has been very controversial. For example, Immigration and Customs Enforcement (ICE) recorded as many as 49,571 arrests in July 2026, although more than half of those arrested had no criminal conviction or pending criminal charges. However, these arrests do not necessarily result in deportations, just harassment.
According to the administration, as of 28 July more than 605,000 immigrants had been deported since Trump returned to office in January 2025. In addition, the White House also claims that another 1.9 million people have self-deported. But so far the Trump administration is still well short of achieving its stated goal of deporting a million immigrants a year.
While much of the motivation for deporting immigrants has been to reduce competition for jobs and housing, there is also a risk to the economy.
Normally the total US labour force can be expected to grow each year, contributing about 1.4 percentage points a year to potential GDP growth according to the Federal Reserve Bank. But since January the total US labour force has shrunk by more than one million because of the deportations, and this is bound to hit US economic growth.
In addition, many employers are objecting to their staff being arrested and the consequent disruption. Also, as in Australia, some industries are especially dependent on migrant labour. In the US, construction has been hardest hit, with roughly 30 per cent of construction employees being foreign-born, but immigrant employment is also falling sharply in restaurants and hotels, food processing, grocery stores and care services.
Further damage may also come from Trump’s clampdown on student visas. American-trained workers born abroad make up 35 per cent of those with PhDs in science, technology, engineering and maths. According to research done at the Peterson Institute for International Economics, Trump’s squeeze on student visas, if sustained, would shrink that top-notch workforce by 11.5 per cent and could reduce annual real GDP by 1.6 per cent.
Overall, it seems likely that Trump’s migration policy will be yet another factor reducing US economic growth.
Conclusion
When Trump resumed the presidency in January 2025 he inherited an economy that was in quite good shape.
In 2024, GDP grew by 2.8 per cent, productivity by 1.6 per cent and employment by 1.2 per cent. The economy was fully employed with unemployment at 4.0 per cent, and inflation was 2.9 per cent over the course of 2024.
However, Trump’s tariffs, fiscal irresponsibility and migrant deportations have all damaged the American economy.
In the current year, 2026, GDP is forecast by the OECD to only increase by 2.0 per cent, and employment to fall by 0.2 per cent, with all the increase in GDP being due to a 2.1 per cent increase in productivity, most of which is probably due to the take-up of AI, not Trump.
Unemployment is forecast to be a little higher, averaging 4.4 per cent in 2026 even though the labour force is in decline, and inflation over the course of 2026 is forecast to be 3.8 per cent – almost double the Federal Reserve Bank’s target.
In other words, Trump’s signature economic policies have delivered very little, if anything, by way of material benefits.
While Trump is doing everything he can to resist it, the pressure is now on the Federal Reserve Bank to increase interest rates.
The ten-year bond rate has now passed 5 per cent, and clearly the market is expecting the Federal Reserve Bank to increase its interest rate. In addition, foreigners are exerting more pressure on the US dollar and US interest rates.
At present most foreign investors are only unwinding their dollar positions gradually because they want to avoid precipitating a slump in the value of their holding, but such a slump cannot be ruled out, given the extent of America’s liabilities and the way that Trump is adding to them.
Indeed, the circumstances right now are very similar to 2007, when the ten-year bond rate also hit 5 per cent, and that was then followed by the global financial crisis.
As Kenneth Rogoff, a former chief economist at the International Monetary Fund, has written:
The premium on long-term US Treasuries – a major part of the dollar’s “exorbitant privilege” as the global reserve currency – has largely evaporated. US debt no longer trades as a special safe asset relative to other advanced economies. The value of dollar dominance is thus fading even under the best of circumstances. And if budget pressures eventually trigger a crisis, the result could be a rapid loss of the dollar’s global market share that might otherwise take decades.
So while Trump loves to blame everyone else, he is pursuing a very risky course with his crazy tariff, budget and migration policies that are adding to demand while reducing supply capacity.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.