Updates - Strategy

Trump’s Arrival Brightens U.S. Outlook, Darkens Everyone Else’s

Greg Ip
The Wall Street Journal
January 22, 2025

Bankers, government officials and CEOs at Davos see his deregulatory, energy and tariff policies sucking investment from other regions and hurting their exports.

DAVOS, Switzerland—Usually, what’s good for the U.S. economy is good for the world. Not this year.

When participants at the World Economic Forum look at President Trump’s plans, they become more optimistic about the U.S. and more pessimistic about the rest of the world, especially Europe.

The U.S. was outperforming much of the world before Trump was elected.

His agenda could extend that outperformance by making the U.S. the preferred destination for foreign investment via lower taxes and regulation and even cheaper energy, while his promised tariffs hurt others’ exports.

The zeitgeist is embodied by the investment bankers flooding Davos who, in their own version of speed dating, rush from one client meeting to another, late into the night over expensive wine and artisanal cocktails.

Bankers are betting the Trump administration heralds a new wave of megamergers that wasn’t feasible under former President Joe Biden’s harsh scrutiny around antitrust. But a European banker said the tone outside the U.S. is “really depressing,” particularly in Europe, where deal activity is subdued.

At the World Economic Forum, there is unease about Trump’s economic leadership. 

Indeed, some predict that U.S. companies, sporting far higher stock valuations, will soon be snapping up European rivals.

The tariff effect

Traditionally, a strong U.S. economy lifted all boats by helping other countries’ exports. But Trump has seen that dynamic as other countries are taking advantage of the U.S., and now seeks to turn the tables.

The “driving philosophy and mindset of the incoming administration” is a “zero-sum game strategy,” said Tim Adams, president of the Institute of International Finance.

People at Davos who broke away from meetings and parties to follow the new president’s flurry of executive orders were relieved that, for now, tariffs weren’t included.

Still, the prospect of tariffs hangs over U.S. trading partners, especially Mexico, China and Canada, all singled out by Trump.

The breadth of his tariff threats has all countries concerned. Trump’s first term benefited Malaysia because it was the recipient of investment being shifted away from China, said Tengku Zafrul Aziz, that country’s minister of investment, trade and industry.

While “we do not want to jump the gun” on what Trump does in his second term, “from what we read,” it would be less beneficial than the first, he said.

If tariffs on China hurt its exports of electronic products, that would reduce Malaysian exports to China of components that go into such products, he said.

Klaas Knot, president of the Netherlands’ central bank, predicted tariffs’ impact on Europe will subtract just “a few tenths of a percentage point” from economic growth, with the impact diluted by redirection of trade flows and the lower euro.

“The only reason why a few tenths is significant is that unfortunately the starting level [of eurozone growth] is relatively low”—projected at around 1% this year, he said.

One European official worried less about tariffs than the potential loss of investment to the U.S. as energy, already much cheaper than in Europe, becomes even more so under Trump.

“The Biden administration was very ambivalent” about U.S. oil and gas prowess, said energy expert Daniel Yergin, vice chairman of S&P Global. “This administration has no inhibitions about that. It sees the U.S.’s status as the largest producer of oil and gas as a strategic advantage.”

Self-harm

Many at Davos blamed Europe’s dismal outlook on the failures of its own leaders, not on Trump.

European scientists are making progress on technologies that use genetically engineered microbes to solve any number of problems, said Kasim Kutay, the chief executive of Novo Holdings, which manages the assets and wealth of the foundation that controls Danish pharmaceutical company Novo Nordisk.

It takes seven to eight years, however, to get such a product approved by European regulators, compared with two to three in the U.S., he said: “A lot of that innovation is happening in Europe, but the companies ultimately seek funding in the U.S.”

Klaas Knot, at left, the president of the Netherlands’ central bank, predicted U.S. tariffs would subtract just ‘a few tenths of a percentage point’ from already tepid European growth.

One particular source of anxiety in Europe is that its top companies will move to the U.S. in search of higher stock valuations, less regulation and kinder treatment by Trump.

Rich Nuzum, global chief investment strategist for investment consultants Mercer, said Trump’s deregulatory drive might jolt Europe into action.

“If the U.S. economy continues to power ahead, if every company wants to be headquartered in the U.S. and traded in the U.S. because of a lighter regulatory burden…European C-suites will say to European policymakers, ‘Do something, or we’re going to move overseas.’”

The U.S. accounted for 44% of Swedish telecom equipment giant Ericsson’s net sales in the third quarter of 2024, up from 31% a year earlier. Chief Executive Börje Ekholm has criticized excessive regulation for discouraging the upgrading of Europe’s networks. Asked if Ericsson would move its head office to the U.S., Ekholm said: “We are Swedish based. But I think every company in Europe will need to think about this going forward.”

Like Europe, China faces headwinds; tariffs would be just one more.

China’s problem “is not Trump,” said Keyu Jin, a British-based economist specializing in the Chinese economy. “It’s the unemployment numbers. So many companies going under. So much debt the government owes to the private sector. The problems with young people. The ‘lying flat’ problem.”

She said Chinese authorities know the economy needs stimulus, but face a dilemma: “How do you stimulate in the right way” without a “debt explosion?”

The divergence between the U.S. and other countries could create financial strains. Ralph Recto, secretary of finance of the Philippines, said high tariffs would tend to aggravate U.S. inflation and keep interest rates higher. That would weaken his country’s exchange rate and make it harder for the Philippines to lower interest rates, he said.

The U.S. is at risk, too

While Davos is bullish on the U.S. economy, the feeling comes with warnings that Trump’s agenda contains potentially destabilizing contradictions.

For example, stronger growth and investment should elevate interest rates, drawing in foreign capital, boosting the dollar, and raising imports while hurting exports.

“Resisting the trade deficit and craving foreign capital is a logically inconsistent position,” said former Treasury Secretary Larry Summers.

Kenneth Rogoff, an economist and financial historian at Harvard University, said protectionism and populism tend to push inflation and interest rates higher. But populists such as Trump, rather than change their policies, might resort to controls on prices or the international flow of capital. He called such controls “a tail risk” for the U.S.