How a Trump victory could send shockwaves through the West

The return of the former president would have economic ramifications that extend well beyond America’s frontiers

Believe it or not, after last week’s Budget, this week we face another potential shock, namely the impact of the American elections. Could there be a major effect on the UK economy?
Historically, US presidential election results have not usually had a major impact on the American economy, let alone on the economies of the UK or the world. What matters more for economic policy is normally the outcome of the Congressional elections.
If Kamala Harris were to win the presidency, we should probably expect not very much to change, unless the Democrats were also to gain control of Congress, which seems pretty unlikely. Accordingly, analytically speaking, the interesting outcome would be a Trump victory.
And in this regard we should acknowledge the possibility that the Republicans could also win the House of Representatives while holding the Senate, thereby giving them a clean sweep and handing President Trump greater power over the economy.
The impact of a Trump presidency on world affairs could be highly significant and this could have far-reaching economic ramifications.
For a start, Trump has said he intends to end the conflict in Ukraine. The worry in most European capitals, including London, must be that this would involve cutting off aid and putting pressure on President Zelensky to settle with Russia even on highly unfavourable terms.
That would be a serious blow to the UK and its Nato allies. After an initial period of relief, the result would surely be more pressure for increased defence spending across Europe and increased anxiety about what President Putin would do next, causing a fall in the confidence of consumers, businesses and financial markets.
But it is by no means certain that President Trump would put such pressure on Ukraine.
Meanwhile, President Putin has surely been holding out in the hope of a Trump victory forcing Ukraine to the negotiating table. If Trump wins but intense pressure on Ukraine fails to materialise, then Putin might well feel he has to negotiate and the outcome might not be so unfavourable to Ukraine, and hence to the UK and the West in general.
Donald Trump has made it clear he intends to use energy prices as a foreign policy weapon. He wants to do whatever he can to boost oil, coal and gas production, leading to lower energy prices, which would put pressure on the financial position of both Iran and Russia.
The hope would be that we would end up with (at least temporarily) lower global inflation and a long-term solution to the Russia/Ukraine conflict. But it remains to be seen what Trump could achieve.
The policy measure that threatens to have the largest direct impact on the UK is Trump’s proposal to introduce a 60pc tariff on imports from China and a 10pc tariff on imports from everywhere else. This is especially important to us because UK goods exports to the United States amount to about 7pc of all our exports, while our services exports to the US amount to about 15pc of total UK exports.
Accordingly, you might think that if the UK were to face a 10pc tariff on exports to the US then the economic impact here could be pretty serious.
In practice, however, I doubt that it would be. The evidence is that as the imposition of a tariff put up the US price of British exports, the responsiveness of US purchasers would not be great. Moreover, tariffs are not normally imposed on services, which make up the bulk of our exports to America.
Furthermore, it is likely that the dollar would rise quite considerably. This would operate in the opposite direction to the imposition of tariffs, making our exports cheaper in the US, thereby reducing the likely loss of UK export sales to America.
Meanwhile, a stronger dollar/weaker pound would tend to reduce the UK demand for imports from the US, thereby giving a boost to the demand for goods supplied from within the UK. It is even possible that the overall effect could be a boost to UK GDP.
Admittedly, this all sounds rather Panglossian. As so often with economics, the biggest effects could come indirectly. In particular, some analysts have suggested that the impact of a 10pc US tariff could be to reduce euro zone GDP by as much as 1pc, with a commensurate reduction in demand for imports from the UK.
As it happens, I suspect that this is a substantial overestimate. Yet who knows how the EU would react?
It might well respond by introducing a tariff on imports from the US. Might tariffs end up being imposed on imports from the UK? And we don’t know how China would respond to a 60pc tariff on its exports to the US. There has to be a danger that all of this would lead to a round of retaliatory actions which ended up by reducing world trade.
That said, I doubt that things would go that far. When Trump introduced tariffs the last time he was president, the impact on the world economy was relatively minor.
Within the US, the imposition of tariffs, combined with moves to restrict immigration and deport large numbers of illegal immigrants, thereby reducing the labour supply, would tend to increase US inflation. It is likely the bond markets would look negatively on this prospect. Indeed, US bond yields have been rising in the last few weeks, partly reflecting the increased chances of a Trump victory.
Higher bond yields in America often spill over into other countries. If that were to happen this time, then it would exacerbate the pressures for higher gilt yields unleashed by last week’s Budget, as investors recoil from the prospect of increased bond issuance and higher inflation.
Roger Bootle is senior independent adviser to Capital Economics and a senior fellow at Policy Exchange