ALEX BRUMMER: Trump’s tariff plans pose a threat to growth

Detailed exit polls will eventually show why Republicans with Donald Trump at the top of the ticket triumphed in the US elections.

The most influential issue for many Americans was inflation.

Supply-side price shocks caused by Covid-19, Russia’s war against Ukraine, and the misleadingly titled and green-tinted Inflation Reduction Act all played a role in the electorate.

This was the message I heard and experienced last week in Texas when I visited my family.

There has been much relief on both sides of the Atlantic that the dragon of headline inflation has been slain and consumer prices are on target (or returning to target).

What is forgotten is that higher prices for goods and services are entrenched and rarely go down. There are significant delays in the time it takes for actual revenue to recover.

Although the Biden White House can boast success on growth, which reached 2.7 percent in the third quarter, Democrats made little progress.

As in Britain, the party in power paid the price. Our Chancellor has greatly admired big-spending Bidenomics, but offered no political ballast.

Stocks enjoy the result. The anchors of the financial network CNBC (background noise in my office) may have been dismayed, but they sit in New York’s Times Square, far from Central America.

The Wall Street Professional Voices Series had its own opinion. The result would be good for banks, big tech, and mergers and acquisitions, because government intervention would be lighter.

Cryptocurrencies may be given the much-desired regulatory nod that makes them a more respectable asset class.

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

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

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

Sectors of trade, including the High Street, hospitality and agriculture, are deeply shaken.

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

The potential for trade wars seems very worrying.

During the election campaign, Trump proposed an additional tariff of 60 percent on Chinese imports and 10 to 20 percent on everyone else, including, we assume, the United Kingdom.

Domestically, tariffs may not work as well on Capitol Hill, even in Republican hands, and are likely to become a bargaining chip. In fact, they are a tax on wholesale products and goods in stores. Therefore, the tariff must be absorbed or passed on in higher prices.

The London-based National Institute for Economic and Social Research estimates that tariffs could raise UK inflation by two to three percentage points over two years, slow global growth by 0.4 percentage points in 2025 and lead to higher interest rates.

The UK, outside the EU, may be able to avoid the worst. It is difficult to know how deep resentment the president-elect may harbor over unhelpful comments made by Labor politicians.

Another concern abroad is what Trump means for bond markets.

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

There are signs that the ‘bond vigilantes’ are ready for combat, and the yield – or borrowing costs – on US ten-year bonds jumped from 4.1 percent to 4.5 percent when the election result.

The US economy is more immune to the fiscal crisis than most due to the size and extraordinary privilege of the dollar as a reserve currency.

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

Persuading the world to hold more and more dollar-denominated bonds may be the next US Treasury secretary’s big challenge.