Donald Trump should have learnt the lessons of Brexit

During one of Donald Trump’s embarrassing televised meetings, in which cabinet members are invited to outdo one another in their deranged, fawning, sycophantic praise of the tangerine Dear Leader, one reporter lobbied the president about the US economy shrinking in the first quarter of the year.

Trump explained that he’d only been in charge for a couple of months, so can’t be blamed for anything, really – least of all a US economy that shrank 0.3 per cent in the first quarter of the year, the first drop in three years.

On social media, he’d elaborated his case in typical style: “This is Biden’s stock market, not Trump’s. I didn’t take over until January 20th. Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS, only that he left us with bad numbers, but when the boom begins, it will be like no other. BE PATIENT!!!”

Like a lot of Trump guff, it actually sounds terribly reasonable – economies take time to change course, and monetary and fiscal policies, including tariffs, can have long and variable lags between announcement and full impact.

In Trump’s case, that’s even more true, given that so many policies are quickly paused, cancelled, adjusted before they become the stated intent of the administration. After all, one might add, the main tariff schedules, such as they were, weren’t announced to a stunned world until 2 April, so-called Liberation Day, just after the first quarter ended.

So he’s in the clear, right? Obviously not.

The “Trump effect”, or what they judged it to be, has been “fully costed” into business decisions and financial markets ever since the election result was clear back in November. Confidence and the markets were pretty strong for a while, coming out of what was near enough a “Biden boom” – America was financially stable and the fastest-growing major advanced economy.

But then Trump started to behave even more erratically than forecast, a dread fear of what he might do set in, and confidence collapsed – first gradually, then chaotically – hence the market turmoil earlier in the month. Morbid fear of what kind of a trade war Trump might unleash meant businesses stockpiled consumer goods and components, chiefly from China, to dodge the tariffs. As imports are treated as a negative element in the national accounts, the unexpectedly large inflows of stock pushed the US economy lower by more than expected, and the markets, yet again, marked down stocks, and with them, the value of Americans’ pension pots.

By rights, what should happen now is that imports will slow and that will help the growth figures in coming quarters. This is normally what happens when there is some one-off factor in trade, like, say, a bulk order for aircraft, which can distort the figures for a month before they go back to normal.

But we’re not going back to normal.

It’s obviously difficult to predict what happens next, but even if Chinese imports stay low, then US exports to China will suffer, and the effects of the trade war on other nations – notably Canada, Mexico and the European Union countries – are hard to determine precisely.

Tariffs will certainly increase prices, and thus wage pressures and inflation, maybe keep interest rates higher than they would otherwise be, slow the US economy towards or into recession, hit profits, jeopardise the balance sheets of the banks, and reduce the living standards of American households.

A “Trump slump” is beginning to be priced in by markets, and stands in uncomfortably stark contrast to the Biden boom. The fiscal position will be made worse by the “big beautiful” budget bill grinding its way through Congress, which makes permanent the Trump tax cuts of 2017; and Trump’s continued harassment of Jay Powell, chair of the Federal Reserve, is critically weakening confidence in the dollar and US Treasury Bonds.

If Powell’s replacement next year is another Trump crony from Fox News, the world’s reserve currency will be in danger. With impeccable, if inadvertent, timing, the very worst of the Trump slump will make itself felt in the run-up to the midterm elections in the autumn next year. Trump may change course then – but it will be too late. The concatenation of appalling decisions will have developed a depressing momentum of its own.

Not that he’d care to look, but President Trump should have observed the malign effects on the British economy of a similar experiment: Brexit.

As with the Trump tariffs and his war on migrant labour, the UK needlessly added obstacles to the flow of trade, investment and workers from the European Union, all of which had boosted the growth of the British economy for decades. The net effect of Brexit was to knock about 4 per cent off GDP, make inflation worse and force tax rises and deep cuts in struggling public services.

America, a larger, more dynamic economy than Britain, ought to escape the worst of such suicidal policies because it should be able to spend and borrow its way out of trouble in the way no other nation can. But that cannot be taken for granted.

A similar Brexit-style disaster, or worse, might unfold for the US if it loses its “exorbitant privilege” of borrowing unlimited sums because of the dollar’s role as the prime reserve currency, and if US Treasury securities cease being the safe haven of choice for investors in times of stress and uncertainty.

Held globally in vast quantities by nations, pension funds and banks as a prime asset, the consequences of a panicky sell-off of US government securities are too awful to contemplate.

As Trump said at his 100 Days rally in Michigan, “we’re just getting started” – and we should fear the worst.