The Trump challenge

Now that the Trump presidency is getting going, it is easier to see the impact of the new Presidency on the economy of the world.

There can be no doubt that these early weeks have seen a spurt of growth in the US economy. This can be seen in higher and higher stock market levels which have seen the Dow Index reach the all-time high of 20,000. It can be seen in lower and lower unemployment figures. It can be seen in new investment flowing into the US.

There is no doubt that Trump’s outspoken protectionism encapsulated in his slogan “America first” and his threat to fine any US company that produces goods outside the US and then wants to export to the US has been heeded. Companies that were about to open factories in lower wage jurisdictions are having to think again.

During the campaign, Trump made a big deal about American jobs being lost, factories relocating elsewhere, and industrial areas going to seed. Much of what he said is true, but his economic programme seems to have thrown away the baby with the bath water.

Over the past decades, the world has entered the phase of globalisation. We have seen frontiers disappearing, not just the physical frontiers between countries through Schengen, but also the creation in Europe of a large single market which is still incomplete but which is sufficiently robust to enable cross-border trade.

Today, including in the US, companies never produce their products all inside their factories. Many times they outsource the production of eg parts, and many times this outsourcing is done in other countries. When Brexit happens, especially if it is a hard Brexit, there will be huge complications to unravel which parts should be taxed and how much. The same will happen in the US especially if the Trump presidency raises not just the Mexico wall but also all sorts of tariff walls.

As we said at the beginning, the initial results of the new Trump logic has been very positive for the US economy, and notwithstanding Trump’s strictures about banks and Wall Street for the entire American financial capital.

But if taken to its logical conclusion, this will isolate Amer- ica from the rest of the world. America, it is true, is such a big country it can survive without depending on any other country but many of its companies, especially the most advanced ones, the Silicon Valley ones, depend on foreign outsourcing. They even depend on foreign employees, as witness the protests at the ban on people from seven countries entering the US.

In other words, Trump risks taking back the US economy to the times when America was self-sufficient.

But if the impact of Trumpeconomics will hurt the American economy in the long run, it can be devastating to the rest of the world. Trump and his cohort have a different economic view of the world from the one we used to have. They see Germany as having taken over the EU, China as having used the exchange rates to its own benefit, etc.

Shocked and traumatised by the implications of Trump-economics, the rest of the world, including and especially the EU, will inevitably have to retaliate.

Hopefully, this will not happen and hopefully saner minds will emerge.