Here are two stupid questions you can ask about the result of the US election. The answers could help us understand what it could mean for the rest of us.
The first stupid question is why Americans are so deluded about their own economy, which was the most important issue in voting. Most Americans believe their country to be in recession. In fact the US has grown at twice the rate of other developed economies under the Biden administration, which also pulled off the economic miracle of bringing inflation down from double digits without precipitating a recession. Why don’t Americans get this?
The second question is posed this graph. Under Trump, Americans’ real wages rose. Under Biden, they fell. Why don’t the Democrats and economists get this?
The answer to both questions is that it’s about timing. The Biden administration did an incredible job of dealing with a global wave of inflation. But under Trump – thanks to the massive stimulus of the pandemic – Americans’ purchasing power increased. Therefore, they think Trump is better at running their economy.
The difference is that Trump was playing the US economy on easy mode, with the extra cheat code of trillions of dollars of quantitative easing unlocked, while Biden was playing it on fiendish mode while being jabbed repeatedly in the eye.
America is about to find out what happens when Trump plays the economy on a harder setting. With any other country this would just be interesting to watch, but as anyone who has shared a restaurant or an aeroplane with Americans will know, they cannot resist imposing their drama on everyone else.
This looks as if it will be especially true of the second Trump administration. America’s economy is definitely not broken but Donald Trump is going to try to fix it, and he’s bought a copy of Eighteenth-Century Mercantilism For Dummies. He believes that by imposing much higher tariffs on imports he can force companies to return manufacturing jobs to the US, and he’s discussed boosting US exports by devaluing the dollar.
This would not be good for the UK, because the US is our largest single export destination. The National Institute of Social and Economic Research (NIESR) and Goldman Sachs both predict that 10 per cent tariffs from the US would reduce the UK’s GDP growth by 0.7 percentage points next year, which is a lot in the current period of stagnant growth (our economy grew by 0.1 per cent last year).
Some industries would be particularly hard hit: our largest export sector to the US is pharmaceuticals and medical goods, followed by cars and parts. Smaller industries such as Scotland’s whisky producers are also highly dependent on US exports (although like many people, I took the edge off the US election result with a significant contribution to the Scotch whisky industry).
Our big economic forecasts haven’t been able to account for this yet; yesterday’s monetary policy report from the Bank of England predicts no change in import prices next year. An unpredictable White House does not help the UK to make stable fiscal policy.
There is one way in which a weaker dollar would help the UK. Wholesale commodity prices are typically in dollars, which means oil and gas – and especially the liquefied natural gas, or LNG, that is extracted in the US and burned in your boiler – could become cheaper to us. Then again, Trump might decide to use the threat of tariffs on gas, which would drive up inflation in the UK and Europe, as a tool in negotiations over trade or defence spending. The chats that he may or may not have had with Vladimir Putin may or may not have touched on this issue. (When asked if he had conducted illegal diplomacy with Russia Trump responded, in paraphrase of OJ Simpson, “If I did, it’s a smart thing.”)
In 2026, Trump will also have the opportunity to appoint perhaps the most influential role in the global economy, the chair of the US Federal Reserve. Perhaps he’ll give the job to Hulk Hogan. Trump, Musk and others in their orbit have been vocal about their desire for lower interest rates. Cheaper money in the US – and the inflation that it might unleash, especially when combined with new trade barriers – will have significant effects across the global economy.
What will those effects be? Rachel Reeves was right to tell the Treasury Select Committee on Wednesday that it’s “too early” to say what the impact will be on the UK. Last time Trump was in office he did about half of what he’d said he was going to do.
What we do know is that Donald Trump has a guiding principle: he is terrified of being a loser. He sees the world as a series of zero-sum games. This is why mercantilism makes sense to him, because in the mercantilist view of the world there are no trading partners, only competitors. You cannot have a “special relationship” with a nation that wants to make sure you are the loser in any given deal.
As Angus Hanton points out in his excellent book on America’s economic dominance of Britain, Vassal State, this relationship has been dysfunctional even when there were nice people in the White House. The US has long taken a very aggressive approach to ensuring its companies can out-compete (or just buy) British businesses. A good relationship with the EU has never been more important.
[See also: The provincial working class is being abandoned by Labour]
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