About a two weeks ago, a message popped up on my iPhone about an available software update from Apple. I quickly went into my settings and spent about 10 minutes updating my phone. Then, I texted my wife and kids, “Hey everyone, there’s a software update for your phones. It’s probably important. Update immediately!” As of today, I’m pretty sure only one family members has updated their iPhone.
Generally speaking, most software updates introduce minor changes—cosmetic tweaks, security enhancements, or new features—while the core platform remains largely unchanged. Presidential elections can feel similar. And to that point, many people believe that a second Trump term (Trump 2.0) would be much like the first (Trump 1.0).
However, the challenges that Trump 2.0 faces are vastly different from those in 2016. As we start 2025, it’s important to look at some of the most important differences he’ll face from an economic point of view:
Tariffs: Polls indicated that inflation was a significant political disadvantage for the Democrats, a theory confirmed by the election results. In Trump 1.0, the economic narrative was not inflation but rather deflation and low growth. During his first term, Trump’s policies included running massive budget deficits, restricting immigration which increased labor costs, and implementing tariffs (embracing protectionism). These measures, when combined, laid the groundwork for inflation. The arrival of COVID-19 and the subsequent passage of the Inflation Reduction Act (which included massive stimulus) unleashed a wave of inflation.
Trump 2.0 is keenly aware of the political risks associated with inflation. To help the Republicans win the House of Representatives in 2026, he might need to compromise on some campaign promises. Specifically, he may have to choose between tax cuts, mass deportations (which could increase labor costs), and tariffs.
Additionally, Trump 2.0’s cabinet nominees, Secretary of Commerce Howard Lutnick and Secretary of the Treasury Scott Bessent, have both indicated that tariffs will be used as a negotiation tactic—an escalation to de-escalate. While Trump 2.0 remains as unpredictable as his first term, I believe more strongly that he will phase in tariffs strategically to renegotiate deals.
Reindustrialization: I’ve previously discussed this topic and consider it a top priority for Trump 2.0. Since 2018, when Trump first imposed tariffs on China, and later when Biden intensified these measures, China has redirected significant resources towards strengthening its industrial capabilities, contributing to the real estate market crash as banks were instructed to finance industrial projects over real estate.
The Ukraine-Russia conflict furthered underscored the importance of having a robust industrial base for strategic success, garnering bipartisan support for reindustrialization in the U.S. Yet, the road ahead is far from simple. Trump 1.0 didn’t face this challenge, making it a significant hurdle for Trump 2.0. As I noted before (here), there are several, less-than-ideal strategies for devaluing the U.S. dollar to boost U.S. manufacturing.
However, Trump 2.0 has one of two paths:
- Massive tariffs on China, Europe, and Japan. This would likely result in a global recession and increased inflation in the U.S. as noted earlier.
- Browbeat China, Europe and Japan producers to come and produce in the U.S. This not only solves the manufacturing issue, but it also brings expertise to revive industry to train younger labor.
Deregulation: One similarity between Trump 1.0 and Trump 2.0 is deregulation. In Trump 1.0, he signed Executive Order 13771 that required that for every one new regulation issued, at least two prior regulations must be identified for elimination, aiming to reduce the regulatory burden on businesses. Trump 2.0 looks to supersize this past executive order. Based on interviews and articles, it appears that Trump 2.0 will use executive orders to put a stay to hundreds of regulations right away. These will be challenged by lawsuits from blue states, but with recent Supreme Court cases (see West Virginia v. EPA & Loper Bright Enterprises v. Raimondo), many of these will be made permanent.
The second step for Trump 2.0 is to allow Agency heads to cut regulations through the normal process (via Administrative Procedures Act). This process can take a long time, but it will be another source of deregulation. So, while this carries some similarities as Trump 1.0, look for Trump 2.0 to accelerate the process.
Taxes: Trump 2.0 has promised big income tax cuts for both individuals and corporations. These taxes are supposed to be funded by increases in tariffs and cuts in wasteful government spending. But will the math add up? Trump 1.0 was not considered a traditional Republican as he didn’t care much about the deficit. Will Trump 2.0 be akin to a software update to focus on deficits by offsetting tax cuts with tariffs & spending cuts?
Lastly, despite the mixed messages on protectionism from even Trump’s more moderate economic advisors, I believe a key political necessity will keep him from escalating into a significant trade conflict with Canada, Mexico, Europe, or even China, at least during his first two years in office. This is due to a subtle yet crucial shift in U.S. politics over the last month: the Republican majority in the House of Representatives has dwindled to a single vote due to recounts and forced resignations post-election. Consequently, the so-called “trifecta” (the same party controlling the White House, Senate, and House of Representatives) of Republican control in Washington has become extremely unstable. Trump must now recognize that his party is almost guaranteed to lose control of the House in the 2026 elections. Post-2026, with a deeply divided Congress, Trump’s ability to push through contentious legislation will be severely hampered. Considering the delay between legislative action and its impact on public opinion, this leaves Trump with roughly a year to demonstrate superior economic management compared to Biden. Should the U.S. face any major economic downturn in 2025-26, particularly a spike in inflation rather than the anticipated economic boom, Trump’s approval ratings could nosedive, relegating him to spend the remainder of his term as one of the weakest presidents, politically speaking.
