ALEX BRUMMER: Trump’s tariff plans threaten growth

Detailed exit polls will ultimately reveal why Republicans, with Donald Trump topping the vote, triumphed in the US elections.

The issue of greatest concern to many Americans was inflation.

The supply-side price shocks of Covid-19, Russia’s war on Ukraine and the misleadingly titled, green-tinged Inflation Reduction Act played a major role in the electorate.

This was the message I heard and experienced last week in Texas while visiting family.

There is much relief on both sides of the Atlantic that the inflation dragon has been slain and that consumer prices are on target – or on track again.

What is forgotten is that higher prices for goods and services are deeply entrenched and rarely fall. There are significant delays in the time it takes for real incomes to catch up.

While the Biden White House can claim success on growth, which reached 2.7 percent in the third quarter, there was little retrenchment for Democrats.

As in Britain, the incumbent paid the price. Big-spending bidenomics was much admired by our Chancellor, but offered no political ballast.

Shares enjoy the result. Presenters from the financial network CNBC (background noise in my office) may be appalled, but they are in Times Square in New York, far from Central America.

The series of professional Wall Street voices had their own take. The outcome would be good for the banks, the big tech companies and mergers and acquisitions, because government intervention would be lighter.

Cryptocurrencies could get the long-awaited regulatory certification that makes for a more respectable asset class.

As a long-standing crypto skeptic, I understand why investors want the comfort of knowing their big brother is watching.

As we have learned in Britain, there is a huge gap between what is said during the campaign and in the manifestos and what happens in office.

Labour’s promise to be business-friendly became ‘tax and spend’ in last week’s autumn budget.

Parts of the trade, including the High Street, hospitality and agriculture, have been deeply shaken.

Trumponomics has two enduring themes. Globalization has gone too far and tariffs (we won’t mention Smoot-Hawley and the Great Depression) will make Americans self-sufficient and more prosperous. Lower taxes on aspirationals and businesses will boost investment, productivity and growth.

The potential for trade wars seems most troubling.

During his campaign, Trump proposed an additional 60 percent tariff on Chinese imports and 10 to 20 percent on everyone else, including, supposedly, Britain.

Domestically, tariffs may not play well on Capitol Hill, even in Republican hands, and are likely to become a bargaining chip. It is essentially a tax on wholesale products and goods in stores. The tariff must therefore be absorbed or passed on in higher prices.

The London-based National Institute of Economic and Social Research thinks tariffs could raise British inflation by two to three percentage points over two years, dampen global growth by 0.4 percentage points in 2025 and lead to higher interest rates.

It is possible that Britain, outside the EU, can avoid the worst. It is difficult to imagine how deeply resentful the President-elect may harbor over unhelpful comments from Labor politicians.

Another concern abroad is what Trump means for the bond markets.

Analysis of his promises to maintain social security and Medicare benefits and the corporate tax cut from 28 percent to 21 percent would add £5.8 trillion to the national debt between 2026 and 2033.

There are signs that the ‘bond vigilantes’ are ready for battle, with the yield – or borrowing cost – on US ten-year bonds rising from 4.1 percent to 4.5 percent as the election results were announced.

The U.S. economy is more immune to a fiscal crisis than most other economies because of the dollar’s size and extraordinary privilege as a reserve currency.

But there is no escaping the fact that the federal debt, which averaged 48.3 percent of national output in the half-century to 2023, now stands at 106 percent of national output and could reach 122 percent in the next decade.

Convincing the world to hold more and more dollar-denominated bonds could be the next US Treasury Secretary’s big challenge.