Decoding Trump's Policies: Goals, Logic, and Uncertainty Shocks

SummarySince Trump took office, policies have emerged frequently, causing significant disruption to the market. We believe that Trump is attempting to construct a "seemingly coherent" policy system through measures such as increasing tariffs, cutting government spending, suppressing oil prices, and reducing taxes, in order to achieve the long-term goals of manufacturing repatriation and fiscal optimization. However, decades of globalization have made global division of labor highly complex, and resource allocation has formed a stable pattern. Forcibly pushing for manufacturing repatriation will inevitably disrupt the existing resource allocation pattern, leading to increased costs and decreased efficiency. In addition, the short-term pain of policy adjustments has already become apparent—its policies have brought significant uncertainty in the early stages of implementation, resulting in slowed economic activity, rising prices, declining confidence, and turbulent stock market corrections.Moreover, Trump's series of policies also face the challenge of time pressure, needing to show results before the mid-term elections in 2026. At the same time, Trump believes that the fundamentals of the U.S. economy remain robust and possess certain resilience, which may increase his tolerance for short-term market declines. These factors not only amplify the short-term impact of policies but also lead to a proactive approach, with multiple policies being advanced simultaneously, further increasing uncertainty. This explains why the recent tariff increases have been rapid, broad in scope, and accompanied by significant government layoffs, with a strong sense of urgency in geopolitical negotiations. In the future, other policies from Trump may follow a similar logic—either quickly reaching cooperation or executing boldly to advance the agenda swiftly without prolonged delays.The impact of policy uncertainty on the economy cannot be ignored. Compared to general shocks, uncertainty shocks belong to "second-order shocks," with different characteristics and transmission mechanisms. Due to the irreversibility of investments, when companies face uncertainty, they often choose to delay investment and hiring decisions, which can lead to slowed economic activity and increased short-cycle fluctuations. Economic literature indicates that uncertainty shocks typically accompany overshooting in economic output, employment, and productivity, and the higher and longer the uncertainty, the more severe the short-term adjustments.Our calculations show that if the uncertainty caused by tariffs and government spending cuts persists, it could result in a negative shock of 0.94 percentage points to U.S. economic output, slowing the growth rate of U.S. real GDP to 1.7% in 2025. This impact is not limited to the U.S. and may also affect other countries, increasing global economic downturn risks. Uncertainty shocks will also influence macro policy formulation. The Federal Reserve may choose to wait and see in the face of uncertainty, which could lead to delayed policy adjustments, posing greater challenges for economic growth and inflation management.Main TextTrump's Policy LogicSince Trump took office, policies have emerged frequently, and to some extent, these policies are logically "seemingly coherent." As shown in Chart 1, this system can be roughly divided into long-term goals, policy tools, short-term costs, and policy hedges.Chart 1: Schematic Diagram of Trump's Policy LogicSource: China International Capital Corporation Research DepartmentLong-term Goals and Policy ToolsTrump has several economic goals, two of which are long-term objectives: the return of manufacturing and the optimization of fiscal revenue and expenditure. From the perspective of manufacturing return, there are at least two considerations. First, over the past forty years, globalization has progressed, leading to a continuous loss of American manufacturing and increasing hollowing out. This has resulted in a reduction in jobs related to manufacturing and exacerbated social wealth disparity. Second, the loss of manufacturing raises national security issues, as some key industries or products (such as steel, medical supplies, semiconductors, etc.) are no longer produced in the United States, posing risks to national security. Trump insists on the return of manufacturing, at least in key industrial sectors.Optimizing fiscal revenue and expenditure also has two considerations. First, on the expenditure side, the Biden administration has significantly expanded fiscal policy in response to the COVID-19 pandemic over the past four years, leading to a rise in government debt that is unsustainable in the long term. This process has also resulted in significant waste, and fiscal expansion has pushed up interest rates, crowding out the private sector and suppressing the long-term growth momentum of the U.S. economy. Second, on the revenue side, the U.S. currently relies mainly on domestic taxation, with a very low proportion of external taxation; tariffs account for less than 2% of fiscal revenue (see Chart 2). Trump believes this is unreasonable, as the U.S. provides global public goods without receiving corresponding returns, and the U.S. economy has been "unfairly treated" by other countries, thus necessitating adjustment.To achieve these goals, Trump first chose tariff policy. In promoting the return of manufacturing, Trump hopes to increase tariffs to "force" companies to return to domestic production. First, the powers of the U.S. president are limited, and there are not many available means to promote the return of manufacturing. Most U.S. policies require legislative approval from Congress, which takes a long time and is difficult to implement; tariffs are one of the few policies that a president can directly decide without needing to go through Congress. In other words, apart from tariffs, Trump has no better way to promote the return of manufacturing.Secondly, during Trump's first term, while increasing tariffs on China did not lead to a return of manufacturing to the U.S., it did push manufacturing to shift to third countries, such as Mexico, Vietnam, and other Southeast Asian nations (see Chart 3). This indicates that tariffs can impact global supply chains. Based on this experience, Trump is likely to choose to expand the scope of tariffs this time, by increasing tariffs on third countries to "force" companies to produce in the U.S. Therefore, the "reciprocal tariffs" plan that Trump plans to launch on April 2 deserves close attention. In terms of content, this plan is essentially equivalent to imposing tariffs on all major trading partners (please refer to the report "The Content and Impact of Trump's 'Reciprocal Tariffs'").However, historical experience shows that increasing tariffs can also lead to a decline in resource allocation efficiency and significant costs. From an "economic perspective," unless extremely high tariffs are imposed globally, combined with a substantial depreciation of the domestic currency, it is difficult to balance the high labor costs in the U.S. with the cost disadvantages stemming from an incomplete supply chain. In fact, the globalization and liberalization of the past few decades have led to a complex global division of labor; the U.S. has enjoyed the dividends of globalization, and its resource allocation has formed a stable pattern. If manufacturing is to return, it will inevitably disrupt the existing resource allocation pattern, resulting in a significant increase in costs and a decline in overall social efficiencyTherefore, it is questionable whether Trump's plan can ultimately be realized.Another reason Trump chose tariff policies is that tariffs can generate fiscal revenue for the federal government. Trump had previously proposed establishing an External Revenue Service (ERS) specifically responsible for external taxation, to replace the existing Internal Revenue Service (IRS). This indicates that Trump hopes to "institutionalize" tariffs and turn them into a sustained tax policy. Therefore, tariffs will have a high priority during Trump's second term, which is noteworthy.In addition to tariffs, Trump has also taken measures to cut government spending. This measure had already shown signs before Trump took office. Trump previously nominated Bentsen as Secretary of the Treasury, who had proposed achieving a 3% deficit rate by 2028 and is considered a "fiscal hawk." Recently, Bentsen also stated in an interview that the fiscal expansion during the Biden administration has led to significant waste, which should be reduced, and that the U.S. will experience a "detox period" in the future.The measures to cut government spending are mainly implemented by the Department of Government Efficiency (DOGE) led by Musk, which includes: 1) launching a "buyout plan" for federal employees to encourage voluntary departures; 2) directly laying off federal government employees; 3) reviewing the government's "improper expenditures" and expanding the review scope to mandatory spending areas such as Social Security and Medicare. Although Musk's actions have faced some controversy and resistance, Trump continues to firmly support Musk, fully demonstrating his recognition and emphasis on the initiative to cut government spending.Chart 2: The proportion of U.S. tariffs in fiscal revenue is less than 2%Source: Haver, CICC Research DepartmentChart 3: The proportion of China's exports to the U.S. is declining, while that to emerging markets is risingSource: Wind, CICC Research DepartmentEconomic Costs and Hedging MeasuresThe implementation of the above policies will inevitably come at a cost. Currently, tariffs and government layoffs have already produced negative effects, mainly reflected in: slowing economic activity, rising prices, declining private sector confidence, and stock market corrections. The mechanism here is that policy adjustments bring significant uncertainty, and when consumers and businesses face uncertainty, they tend to wait and see, which leads to delayed consumption and postponed investment, resulting in slowing economic activity (Chart 4). Recently, most business survey indicators—such as consumer confidence from the University of Michigan and the Conference Board, NFIB small business confidence, and NAHB homebuilder confidence—have shown signs of decline (Chart 5). On the other hand, tariffs have led consumers to worry about rising prices; according to a survey by the University of Michigan, consumer inflation expectations for the next five years rose to 3.9% in February, the highest level in the past 30 years (Chart 6) In the capital markets, investors are fleeing the stock market due to concerns that a slowdown in economic activity may trigger a recession, flocking to safe-haven assets such as bonds and gold. Since Trump took office, the U.S. stock market has been in turmoil, with the S&P 500 index falling 10% from its peak on February 19, entering a correction zone. This contrasts with the stock market performance after Trump took office during his first term (Chart 7). This also indicates that Trump's policies are "different this time."To mitigate the aforementioned negative effects, Trump is also taking other policy measures to hedge. For example, he has repeatedly emphasized his desire to lower oil prices, hoping to partially offset the price increases caused by tariffs. Recently, Trump's very positive stance on peace negotiations between Russia and Ukraine also reflects this. Another policy hedging measure is tax cuts; Trump hopes to boost private sector confidence and promote economic growth by extending the Tax Cuts and Jobs Act of 2017. However, tax cuts require Congressional approval, which will not happen quickly, thus failing to stimulate the current economy.Finally, tax cuts are also an important part of Trump's long-term goals. Trump hopes to use the revenue generated from tariffs and the savings from reduced government spending to subsidize tax cuts, which would optimize the fiscal structure and help reduce government debt pressure. Tax cuts would also help increase the incentive for companies to invest in the U.S., thereby promoting the return of manufacturing. Trump has previously stated that if companies produce in the U.S., they will not have to pay additional tariffs and can enjoy lower corporate income taxes. However, whether this will happen as he wishes has been discussed earlier.Chart 4: U.S. Trade Policy Uncertainty Index RisesSource: EPU, CICC Research DepartmentChart 5: U.S. Consumer Confidence Index WeakensSource: Haver, CICC Research DepartmentChart 6: Consumer Inflation Expectations RiseSource: Haver, CICC Research DepartmentChart 7: U.S. Stocks Continue to Adjust Since Trump Took OfficeSource: Haver, CICC Research DepartmentBeyond long-term constraints, there is short-term urgencyAs mentioned above, Trump's goal of bringing manufacturing back to the U.S. faces significant long-term challenges, and in the short term, his series of policies also confront the dilemma of insufficient time. Does Trump care about the stock market decline? Typically, he wouldn't, but from his recent statements, it seems he is not as concerned about short-term market drops and weakening economic data (for example, Trump recently stated in response to questions about the stock market decline that he "doesn't look at the stock market at all"). One possible reason is that Trump tends to believe that the fundamentals of the U.S. economy remain robust; if the private sector's balance sheets are healthy and the labor market is resilient, then the U.S. economy will have a certain degree of resilience.An increased tolerance for short-term stock market declines may indicate more downside risks. The capital markets are looking for a "Trump put option," hoping that a stock market decline could prompt Trump to adopt more moderate policies, but if Trump is less concerned about short-term interests, this constraint will be weakened in the short term. Additionally, U.S. Secretary of Commerce Gina Raimondo stated in an interview that Biden should take responsibility for the recent weakening economic data and stock market decline. She also mentioned that the effects of Trump's policies have a lag, and the real impact will not be fully realized until the fourth quarter of 2025.Compared to the stock market, Trump's greater constraint comes from the pressure of the midterm elections; his policies need to take effect before the 2026 midterm elections, or the electoral pressure will increase. This also explains why the recent tariff increases have been swift, broad in scope, and the government has been quick to act on layoffs. This constraint also leads to a result: due to the urgency of time, Trump's policies need to be implemented quickly, which also results in a strong short-term impact of his policies. Furthermore, the concentrated release of policies may lead the private sector to face multiple policy adjustments simultaneously, further amplifying uncertainty. In terms of geopolitical negotiations, Trump has also shown a strong sense of urgency, hoping for a quick ceasefire agreement between Russia and Ukraine. In the future, Trump's other tariff policies may also follow a similar logic—either quickly reach cooperation or execute boldly and decisively, avoiding long delays.Focus on the Impact of Uncertainty ShocksTrump's policies are characterized by their rapid implementation, broad scope, and strong short-term impact. A key question is: how significant will these policy changes be? We can analyze this from two perspectives: first, by evaluating the policies themselves and estimating their impacts, such as assessing the strength of tariffs and the extent of layoffs. Second, we can assess the uncertainty caused by these policies and then reference historical experience to estimate the economic impact of rising uncertainty. Since we have already measured the impact of tariff policies in our previous report "The Content and Impact of Trump's 'Reciprocal Tariffs'," we will focus on the second method here.The Mechanism of Uncertainty ShocksCompared to general economic shocks, uncertainty shocks are considered "second-order shocks," possessing different characteristics and transmission mechanisms. The impact of general shocks is more direct, with relatively clear pathways, usually leading to deviations in economic variables from their original trends. For example, a central bank interest rate hike directly raises financing costs, suppressing corporate investment; rising oil prices reduce consumer purchasing power, suppressing consumer spending. In contrast, the impact of uncertainty shocks is more indirect; it transmits by altering the expectations of economic agents, relying on their risk preferences and adjustment costs. Even without changing long-term trends, it may amplify fluctuations through feedback mechanismsThis leads to severe fluctuations and overshooting in the economy in the short term.Professor Nicolas Bloom from Stanford University has conducted a series of studies on economic policy uncertainty. In simple terms, policy uncertainty mainly operates through the mechanism of investment irreversibility. Irreversibility refers to the sunk costs associated with corporate investments; once funds are invested in purchasing equipment or building factories, these assets often cannot be sold or recovered at their original price. This makes companies more inclined to postpone investment decisions in the face of uncertainty, waiting for clearer information. Additionally, uncertainty can lead companies to pause hiring, resulting in a decline in employment, which freezes the reallocation of resources between sectors, thereby reducing overall productivity in society. In the medium term, as uncertainty dissipates, companies will resume investment and hiring, and economic activity will recover. Therefore, policy uncertainty shocks can lead to brief and severe adjustments in the economy, with economic output, employment, and productivity all experiencing overshooting. The higher the degree of policy uncertainty and the longer its duration, the greater the extent of the overshooting.Estimation of Uncertainty ShocksA commonly used indicator in economic literature to measure policy uncertainty is the Economic Policy Uncertainty Index (EPU). Historical data shows that the U.S. EPU index has a strong explanatory power for fluctuations in the U.S. economy and stock market. During the 2001 9/11 attacks, the 2008 global financial crisis, the 2011 U.S. debt ceiling dispute, and the outbreak of COVID-19 in 2020, the EPU index rose significantly, accompanied by substantial stock market volatility and a slowdown in economic growth. From 1985 to 2024, the average value of the U.S. EPU was 106 points, with a standard deviation of 51 points. According to the latest data, the U.S. EPU index has risen sharply since Trump took office, with a reading of 313 points in February (Chart 8). In other words, the policy uncertainty shock brought about by Trump has exceeded three times the standard deviation.According to research by Bloom and others, after the U.S. EPU index experiences an increase shock of about 90 points, the negative shock to real GDP peaks at 1.2 percentage points over the next three quarters, with an average magnitude of about 0.96 percentage points over the year following the shock. Based on this, we assume that the uncertainty surrounding Trump's tariffs and government spending cuts will persist in the first half of 2025, with the EPU index for the first and second quarters consistent with the average level of January-February, at 274 points. Starting in the third quarter, as tariff policies are implemented and some tariff negotiations begin, the policy uncertainty index starts to decline, reaching a level of 94 points in the fourth quarter, which is close to the level during the fourth quarter of 2019 when U.S.-China tariff negotiations were nearing completion. Based on these assumptions, the average EPU index for the entire year of 2025 is estimated to be around 207 points, an increase of 88 points compared to the average of 119 points in 2024, corresponding to a negative shock of approximately 0.94 percentage points to GDPIf these assumptions hold, then the actual GDP growth rate in the United States in 2025 will slow to around 1.7% from our baseline forecast in the annual outlook (refer to the report "Overseas Macro 2025 Outlook: From Soft Landing to New Equilibrium").Chart 8: The U.S. Economic Policy Uncertainty Index has risen sharplySource: EPU, China International Capital Corporation Research DepartmentThe above estimates also face uncertainties. If the uncertainty surrounding Trump’s policies is eliminated and the U.S. EPU index declines more rapidly in the coming quarters, then the slowdown in GDP growth will be less than our estimates. Additionally, if Trump implements tax cuts more quickly in the second quarter, it could help reduce the uncertainty faced by businesses; if the Federal Reserve can cut interest rates more quickly, it may also help stabilize the capital markets sooner. However, these changes have not yet occurred, and until then, we tend to maintain a cautious attitude towards the U.S. economy.The rise in U.S. economic policy uncertainty will also have negative impacts on other countries. The most direct impact is on U.S. exporting companies, which will face the same issues, namely, that in the face of uncertainty in tariff policies, they are more likely to postpone investment decisions and freeze hiring to wait for clearer information. This may lead to a slowdown in economic output, employment, and productivity growth in these exporting countries, and the global economy may also face more downside risks.Uncertainty shocks will also affect the Federal Reserve's policy-making. In the face of tariff uncertainties, the Federal Reserve is also inclined to adopt a more cautious approach, choosing to wait and see rather than quickly adjusting policies, which may dull the responsiveness of monetary policy. Federal Reserve Chairman Jerome Powell recently stated that there is no rush to adjust policies and that he hopes to take action once the data becomes clearer. This view is also relatively common among Federal Reserve officials. However, this cautious strategy may lead to delayed policy adjustments, making economic growth and inflation management face greater challenges. Therefore, we believe it will be difficult for the Federal Reserve to provide effective protection against recent market declines, and the "Federal Reserve put option" may become ineffective in the short term.Authors of this article: Xiao Jiewen, Lin Yuxin, et al., Source: CICC Insights, Original title: "CICC | Decoding Trump’s Policies: Goals, Logic, and Uncertainty Shocks"Risk Warning and DisclaimerMarkets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk