The Trump Effect

Despite waves of dismay and dire prophecies in many quarters, there is some good news. Mr Trump will inherit an American economy that, yet again, is demonstrating its historical and remarkable ability to overcome setbacks. In particular, it has recovered better than most from the impact of the 2022 Russian invasion of Ukraine and the subsequent reigniting of inflation across the world.

Should the new administration follow through on its undertakings to slash regulation and taxes, the outlook for further growth is positive. This will be good news for importers to America. The biggest five in 2023 were, in descending order, Mexico, China, Canada, Germany, and Japan.

Naysayers prefer to focus on Mr Trump’s avowed plan to slap tariffs ranging from 10 percent to 60 percent on imports. Those critics argue, that it will not just reduce import volumes from those Top Five, but it will depress international trade overall. 

That is an overly simplistic analysis; international trade entails many interdependencies. For example, Mexico’s largest exports to the USA are motor vehicles, as well as vehicle parts and accessories. They were 27 percent of its imports to America in 2023 and are crucial to US manufacturers of passenger cars and commercial vehicles.

Similarly, Mexican heavy oil is essential to the USA because many of the latter’s refineries cannot process the light ‘sweet’ oil that comes mostly from its own producers. That’s also why Canadian heavy oil is an essential feedstock for many US refiners. It would take many years and many billions of dollars to replace those Mexican and Canadian supplies.

Meanwhile, the incoming US administration has indicated that not all importers will be treated equally. Allies and ‘friendly’ nations could be exempt from tariffs. While no names have been named, the UK might reasonably hope that its ‘special relationship’ with America will let it off the hook.

Not only that but, although Britain ran a £72.1 billion trade surplus with America in the 12 months to end-June 2024, 68.7 percent of its US exports were in services. There is no plan to impose tariffs on those.

The 19th century German statesman, Otto von Bismarck, said that “politics is the art of the possible”. Many election promises go unfulfilled because of that; the Trump administration is unlikely to disprove it, especially when it comes to foreign policy.

In particular, the president-elect has long and often bashed NATO. He wants to withdraw from the organisation, viewing it as a crutch that absolves Europe from building an appropriate defence capability of its own.

While many even in Europe would agree with that, an American withdrawal from the treaty requires a two-thirds majority vote by the Senate. It is unlikely that enough Democrats would side with the new government to make that happen.

In any case, the threat of a US withdrawal from NATO is bringing some strategic benefit to Europe already. The EU has appointed a defence commissioner for the first time and is discussing the establishment of a €500 billion joint defence fund.

Mr Trump has said also that he will settle the Russia-Ukraine conflict “in 24 hours”. Russia’s ambassador to the United Nations disagreed, saying the crisis cannot be resolved so quickly.

That seems obvious, given the need to negotiate security guarantees, prisoner exchanges, and so much more. All of that might take months, even years. The talks to end the Vietnam war lasted for five years.

Nonetheless, settlement of the Ukraine conflict would be good news for the protagonists, as well as for Europe and the world. Not only would the enormous misery, destruction, and loss of life be brought to an end, but sanctions would be lifted, economies revived, and trade boosted. The work of reconstruction would benefit the Ukrainian people with jobs and the possibility of ‘rebuilding better’.

Africa, especially, would welcome a settlement. The Russian invasion slashed Ukraine’s grain exports, causing massive shortages, especially of wheat, maize, and soybeans. Wheat prices spiked by over 40 percent in some African countries.

While the shortfall has been made up from other sources, prices remain well above 2020 levels. A peace settlement would help to reduce them.

That is pretty much the sum total of benefits that a Trump presidency could bring. Most will happen by default rather than design. Nearly every other aspect threatens disruption to trade and geopolitics, higher prices, and investment-sapping uncertainty.

Already this year, China has applied six rounds of sanctions on several US defence contractors and personnel. Although these restrictions have been a response to US arms sales to Taiwan, they illustrate what will happen if Mr Trump goes through with his stated intention to apply a 60 percent tariff on all Chinese imports to America.

In fact, a trade war between China and the USA has been developing ever since Joe Biden was inaugurated as president in 2021. In three stages, he curbed exports of US technology to China’s semiconductor manufacturers.

Recently, the People’s Republic responded by banning exports of various minerals and rare earths essential to the American production of semiconductors, infrared equipment, fibre optics, ammunition, and batteries for electric vehicles.

As China is the dominant supplier for many of these raw materials, new sources will be hard to find. If and when secured, they will almost certainly be more expensive. That, in addition to the higher consumer prices flowing from any other tariffs, will add to the inflationary pressures already building in the US itself.

The pattern has been set and, where China goes, all other nations affected by tariffs will surely follow. It’s clear no lessons have been remembered - at least, not by the incoming US administration - from the disastrous Tariff Act of 1930, better known as Smoot-Hawley.

It applied or raised US tariffs on thousands of imported goods and seemed, at first, to have been a roaring success. American factory output and workers’ pay increased sharply in the months following implementation.

After that, the retaliatory tariffs and other defensive actions taken by America’s trading partners began to bite hard. As a result, partly at least, US imports and exports crashed by more than 60 percent from 1930 to 1933.

The economy contracted by no less than 46 percent over the same period. Worldwide trade contracted by about two-thirds. Overall, Smoot-Hawley was a significant contributor to the Great Depression of the early-1930s.

Although not faced with the same economic circumstances, Mr Trump’s tariffs could disrupt and depress world trade and economic progress significantly. It’s been estimated they could reduce the annual growth of American GDP by -0.64 percent, China’s by -0.68 percent, and the EU’s by -0.11 percent. They will also boost inflation in the US, where wages have been rising steadily for over two years.

Donald Trump’s public views on man-made global warming are somewhat contradictory. He has called it “an expensive hoax” and, as recently as September 2024, “one of the greatest scams of all time”.

On the other hand, he has also said: "Nothing's a hoax about that. It's a very serious subject” (January 2020) and "Climate change is very important to me” (December 2019). Often it seems as if he says what he thinks will resonate with whomever he’s addressing at the time.

Nonetheless, his actions have been unequivocal. In June 2017, just six months after his first presidency began, he withdrew the USA from the 2015 Paris agreement on climate change. Later, he watered down the Obama administration’s restrictions on industrial pollution.

The signposts for the second Trump presidency seem equally unhopeful for climate initiatives. His nominee to head the Department of Energy is an oil industry executive who has stated: "There is no climate crisis”. Meanwhile, Mr Trump has declared his intention to boost both oil exploration in Alaska and fracking.

Even so, when considering a decision to retreat from existing efforts to avert or mitigate a climate crisis, the president-elect could put himself on the horns of a dilemma. Worldwide investment in green energy has been running at almost double the total for oil and gas.

American industry is making a lot of money from this and foresees much more to come. The Department of Energy has reported that jobs in clean energy, which employed almost 3.5 million people in early-2024, have been growing at twice the rate for the rest of the energy sector.

Will Donald Trump and Chris Wright, his nominated energy tsar, strangle such a golden goose? Not only would it be economically damaging for the US, but it would be a gift to China, the world’s leading investor in clean energy.

Mr Trump has a long record of talking out of both sides of his mouth, as his contradictory opinions on climate change illustrate. Mr Wright should be more realistic, given the substantial investment in renewables made by Liberty Energy, his current employer.

However, like most if not all of the intended Trump cabinet, it’s likely he was nominated mainly for his loyalty to the future president. Certainly, it was not for any readiness to challenge his boss.

The best hope may be that US action on climate change will continue among those corporations already committed to it. Happily, that’s most of them. Without government support, however, their collective investment is unlikely to grow much, if at all.

Just as significantly, without US leadership on this, literally, existential issue, there’s a real danger that climate policies could be moved to the back burner by other nations.

Just as the current strength of the American economy will provide the incoming administration with a following wind, so the fall of the Assad regime in Syria will favour Donald Trump’s desire to end his country’s longstanding role as world policeman and guardian of democracy.

In the Middle East, it’s clear he intends to give Israel a free hand to do whatever it deems necessary for its own security. That could include a permanent Israeli military presence in Syria and Lebanon, if not outright occupation of both. Exactly that seems to be in progress already, while Mr Trump has declared on social media (in capitals, presumably for emphasis):

The statement ignores the fact that America has been ‘involved’ for the near-80 years that Israel has been in existence. It is by far the biggest recipient of US aid, both military and economic. That’s not likely to change.

In Europe, although the Russia-Ukraine conflict may be settled fairly soon, the terms are likely to favour Mr Putin. He’s one of Mr Trump’s heroes and, in his words, “a genius”.

Ukraine, with support from the EU and the UK, will want firm assurances for its future security. In that regard, any intransigence on President Zelenskyy’s part seems unlikely to persist in face of the financial realities. As this chart shows, below, President Trump will call the shots, not Mr Zelenskyy - and certainly not EU President von der Leyen or UK Prime Minister Starmer.

Any settlement that favours Russia, or which does not buttress Ukraine’s security unequivocally, will be a signal to Putin that neither the USA nor Europe are willing to stand in the way of his territorial ambitions. Ultimately, he may be wrong about that, but he could be right for long enough.

He justified the annexation of four of Ukraine’s provinces as the recovery of “historically Russian lands”. Reinforcing that statement, he lamented the 1989-92 fall of the USSR as “the disintegration of historical Russia”. In a separate comment on that collapse, he remarked that “what had been built up over 1,000 years was largely lost”.

Those and other public statements suggest strongly that Putin wants to rebuild the old Russia of the tsars. If that is the case, other regions and countries he might want to invade or otherwise control could include all of Central Asia, as well as Armenia, Azerbaijan, Estonia, Finland, Georgia, Latvia, Lithuania, Moldova, and Poland. Even Alaska could be on his list.

If this seems far-fetched, it’s worth remembering that’s exactly what the rest of the world thought about the possibility of Russia’s invasion of Ukraine right up to the moment it happened in February 2022.

Alarmist conjecture aside, a Trump-sponsored deal for Ukraine would determine the security, or lack of it, in all of Europe for many years to come.

So far, this assessment of the fallout from a Trump presidency has concentrated mainly on his declared policies and plans. Damaging as many of those could be, they could pale in comparison with the effects of his character and circumstances.

He will be oldest-ever US president, but that hardly matters when he will be the first convicted felon in the Oval Office. He will also be the first legally-defined rapist in that position.

He is the subject of two civil cases in New York, where a total of some $530 million in damages was awarded to the claimants. The same court also barred Mr Trump from being an officer of a New York corporation and appointed a receiver to liquidate his company. All of those decisions are under appeal.

Then there are the nominees for his cabinet. Several have flagrant conflicts of interest, notably, Chris Wright, the oil executive nominated as energy secretary. Robert Kennedy, who opposes vaccination and water fluoridation, has been selected to head the Department of Health. Various members of the extended Trump family have been named as US ambassadors.

Less dispassionately, the nominees have been described as “a cavalcade of bozos” by a British TV personality*. That raised a laugh, but it’s unwise to be dismissive of so many self-interested sycophants with the power to affect the lives and liberty of us all.

None of this is of any concern to Donald Trump. By his actions and words in his previous presidency and since, he has made it plain that what he values most in his advisers is loyalty - not to his office, not to the United States of America, but to him, personally.

Even if the loyalty of some may not survive his inauguration, Mr Trump’s ship of fools will be freighted with four years of domestic and international disruption and uncertainty. Those are the conditions he prefers and even encourages.

Some have drawn parallels with the decline and fall of the Roman Empire. The comparison is stretched, but valid enough. The Pax Romana fostered peace, stability, and prosperity over the first two centuries of the Christian era. Similarly, American economic and political hegemony have been the foundation for the advance of democratic capitalism across much of the world in the 80 years since 1945.

Under Trump, that hegemony is to be cast adrift; its client nations will have to find their own way. It is, as the Senate minority leader, Mitch McConnell, has warned, “a very, very dangerous world”. Mr Trump’s America will create a vacuum that other empires are only too ready and eager to fill.

Not Russia, however. It has neither the economic strength needed, nor the international outreach. In contrast, China has been building both of those essentials for decades. As America did, but unlike Rome or Putin’s Russia, it has sought international power through investment and trade, not military conquest.

That long-term vision has served the Middle Kingdom exceptionally well. The Atlantic Age of the past 100 years looks as if it’s giving way to a Pacific Age. China has not only established itself as the regional economic leader, but is overtaking the US on its way to becoming a world leader. Political power will surely follow.

Thus, with no vision beyond his own glorification, Mr Trump will give away what was once considered America’s birthright in return for the proverbial mess of pottage.

To paraphrase Winston Churchill’s observation*, this may not be the end of America. It may not even be the triumph of China. But it is, perhaps, the beginning of America’s end and the end of China’s beginning.