From tariffs to tax cuts, Trump’s second term is shaping up like a three-ring circus – and he’s juggling semiconductors, Medicaid, and a “Big, Beautiful Bill” with all the finesse of a reality TV ringleader. But, asks Chris Kent, Co-Manager of the Artemis US Select Fund, can he keep the balls in the air – or will markets demand a safety net?
Trump’s explosive economic opening act
President Trump’s “Liberation Day” announcement on trade tariffs certainly made for an explosive start to his economic policymaking. A key question now, of course, is whether further blow-ups are in prospect.
Although there are signs that we may be approaching what would be a manageable position for corporate America as far as tariffs are concerned, experience tells us we should not rule out negative surprises. To understand why, it is first necessary to grasp the two purposes that tariffs serve in the President’s mind.
On the one hand, Trump wants to use tariffs as a stick to compel businesses to relocate productive capacity back to the US. To that end, he is likely to use sector-specific tariffs quite liberally – for instance, by targeting semiconductors and parts of the pharmaceutical supply chain.
On the other hand, Trump does not want everything to return to the US – even if that were possible. This is because he also needs the tax revenue generated by tariffs to help offset the tax cuts he has promised.
Tax cuts and the “One Big, Beautiful Bill”
This brings us to his next priority, which is the passing of what is officially known as the One Big, Beautiful Bill Act. Say what you like about the Commander-in-Chief, but he does have a snappy turn of phrase sometimes.
Running to 1,116 pages, the Act covers domestic taxation and spending and, as a result, government indebtedness. These are issues that the President cannot address through executive orders, which is why he has resorted to a process called budget reconciliation.
A focus on domestic investment
One of the attractions of budget reconciliation for Trump is that it allows the One Big, Beautiful Bill to be passed along party lines. In other words, there is no need to involve the Democrats if the Republicans can agree on the Act.
In theory, since the Republicans control both the House of Representatives and the Senate, the way should be clear. However, the majority in both Houses is slim, and Trump has yet to secure complete backing from his own party on every aspect of the Bill.
Cutting taxes will certainly not stir much controversy among Republican lawmakers. The first order of business will be to extend the personal tax cuts that Trump enacted during his first term, which are due to expire at the end of this year. No taxation on tips and overtime has also been promised.
Trump campaigned on lowering the corporate tax rate on domestically generated profits to 15%. Recently, though, this proposal has been shelved in favour of more investment-led taxation incentives.
These policies have the advantage of being a narrower tax giveaway but also encouraging domestic investment in production. Notable among the current suggestions are immediate tax breaks for research-and-development expenditure and accelerated allowances for capital equipment inside “productive buildings”, as well as for the purchase or construction of such buildings.
These are precisely the sort of policies we envisioned at the outset of this administration. They are designed to boost investment in the US, strengthen American companies and bring increased high-value-added jobs in research and development, among other benefits.
The real tension lies in spending cuts
So much for the non-contentious elements. At the other end of the scale is the reality that giving away taxpayers’ money is much easier than taking money from programmes that provide services to taxpayers “for free”.
During his first term in office Trump repeatedly attempted to repeal Obamacare, which had greatly expanded the number of people eligible for Medicaid – healthcare coverage for low-income individuals. There are plenty of ideologues and fiscal conservatives who want to cut Medicaid expenditure, but there are at least as many Republican Congresspeople who are acutely aware that many of their constituents rely on this support.
It is this sort of pushback that could mean the President’s initial deadline for passing the Bill – July 4 – is not met. Particularly since expiry of his 2017 personal taxation cuts is something no Republican wants to see, we should not dismiss the possibility of timeline constraints forcing a resolution.
Avoiding another ‘Truss moment’
A further crucial consideration here is that every administration wants to avoid its own Liz Truss moment. Accordingly, the balance between tax cuts and spending cuts will need to be something that markets – specifically, the bond market – can accept.
By any standard, investors have experienced a rollercoaster ride since Trump’s inauguration. At best, Q1 2025 served up a false start to the “positives” that investors still hope his presidency will bring. As the One Big, Beautiful Bill continues to edge its way through the legislative maze, are we now moving more towards the expected outcomes?
Despite further bumps in the road – including the US’s recent loss of its last perfect credit rating – we are cautiously optimistic. We believe the tariffs saga will reach a coherent conclusion, and we believe the administration will be able to use carrot and stick alike to drive domestic investment and boost the economy. That said, a narrow path remains to be negotiated.
