Melting down: Trump has put America on the road to a deep economic crisis

So much for the buying opportunity. Every indicator on the equity, bond, commodity and currency exchanges is flashing a full recession alert.

Donald Trump thought markets would beat his victims into submission. Instead, they have turned on him as it becomes clear that the US has vastly overplayed its hand and now faces furious retaliation from an angry world. It is America that risks spiralling into a deep economic crisis.

Donald Trump has America headed for a painful recession.Credit: AP

The assorted tariffs against “predators, scavengers and rapists” on Trump’s Rose Garden list together erect the highest tariff barrier since 1909, when America was still a semi-autarkic economy trading chiefly within its own borders.

The Yale Budget Lab says they push the effective tariff rate to 22.5 per cent, amounting to an immediate tax rise of well over $US700 billion ($1.1 trillion) on US consumers and firms. This is a contractionary macroeconomic shock of 2.3 per cent of GDP, even before taking into account reprisals, and ignoring the carnage in the industrial supply chain.

The damage is worse than the Smoot-Hawley fiasco in 1930. The sudden jump in tariffs may look similar (plus-20 percentage points now versus plus-14 points then), but the US trade gearing today is five times higher. Nobel trade economist Paul Krugman calls it the greatest trade shock in world history.

It comes at a time when the Atlanta Fed’s instant tracker of GDP growth has already collapsed to minus 3.7 per cent. Confidence has crashed by every measure, and 1970s Nixonian stagflation is on the way. Whose brilliant idea was it to impose a 25 per cent tariff on aluminium when the US depends on Canada for half its supply, and needs years to rebuild its own smelters?

The Fed’s monetary hands are tied by inflation. Unless Congress offsets this macro-squeeze with giant tax cuts, the US will slide rapidly into a recessionary spiral, and once this starts spreading through credit markets, the process is difficult to stop.

Those analysts who told us airily that Trump’s tariff talk was just bluster now tell us the tariff rates will be negotiated back down soon as targeted countries pay their ransoms. Well, perhaps.

Trump’s executive order does indeed state that the rates might be reduced should any trading partner take “significant steps” to remedy the alleged abuse and to “align sufficiently with the US on economic and national security matters”.

But Trump has also stated vehemently that he will pile more pressure on any country that dares to retaliate, as much of the world clearly intends to do. We must therefore assume that the tariff war will get worse, above all for America.

Markets across the globe tumbled as investors digested the impact of Trump’s tariffs.Credit: AP

He also continues to insist that his “beautiful” tariffs will generate $US6 trillion of revenue over 10 years, which means they will be permanent. The Budget Lab says he will collect just half that level once the “dynamic” effects of lower growth and economic damage are factored in. The US economy will be 0.6 per cent smaller in the long run and households will be $US3800 poorer.

Needless to say, such modelling cannot capture the force of emotion and political anthropology in world affairs. How to “score” what Trump is doing to the European and Asian security systems?

He has thrown Japan, Korea and Vietnam into the delighted arms of China’s Xi Jinping. Nobody believes a single word uttered by US Defence Secretary Pete Hegseth as he tours the region promising “credible deterrence”. They can see what that looks like in Ukraine.

Trump has hurled invectives at Taiwan. He has accused it of industrial theft and has now imposed tariffs of 32 per cent, though wisely exempted semiconductors.

Should we be surprised if the Taiwanese people yield to a Chinese blockade, which may happen sooner than we all think? The US may then find that China scoops up the chip fabs of TSMC, securing half the world’s EUV lithography scanners and 90 per cent of its advanced semiconductor capability without a shot being fired. Kiss goodbye to US tech supremacy, then.

The White House is right in one sense about global imbalances. Asia saves and invests too much. It consumes too little. China produces 31 per cent of the world’s manufactured goods but absorbs only 13 per cent. The rest flood the global market.

Europe is also guilty of free-riding. The fiscal and tax structure of the eurozone has led to a chronic surplus in goods trade. The White House says consumption is 68 per cent of GDP in the US, 39 per cent in China, 49 per cent in Korea, and 50 per cent in Germany.

Does the fault lie with the world, or does it lie with US hedonism and a structural budget deficit above 6.4 per cent of GDP? Both are guilty. But Britain is not gouging the US market by this method. It is a blameless victim caught up in this dispute.

It is a charming self-deception to imagine Britain has been spared the worst because it was hit only with a 10 per cent tariff, forgetting the 25 per cent hit on steel and cars.

It is beyond delusional to progress from that false assumption to think that Britain might even profit positively from Trump’s near-complete destruction of the postwar trading and security system.

The UK has chosen to be an independent trading nation outside any protectionist bloc, and I voted for this in the halcyon pre-Trumpian world of June 2016. But that renders it a little rowing boat bobbing about on the rough oceans, hyper-dependent on stable trade and finance under the ethos of the World Trade Organisation – now dead.

The greater damage to the British economy comes from the recessionary shock to Europe, and from the drastic spillovers of global retaliation, not from the direct tariff hit. It is compounded by the diversion of exports from other countries shut out of the US, whether Chinese rebar steel, or EU-made cars.

British service exports to the US may be shielded, but the business model of the services industry is not, since much of its revenue comes from lubricating world trade and investment.

Twenty countries have free trade agreements (FTAs) with the US. That made no difference when Trump attacked: 25 per cent for Korea; 24 per cent for Japan (partial trade deal). He has brutalised Canada and Mexico, even though they are part of the North American pact that he negotiated himself. Nothing he signs is worth the paper it is written on.

British Prime Minister Keir Starmer is condemned to stay calm and keep pushing for a UK-US trade deal. But have no illusions: even if he succeeds, any deal will be hostage to wild mood swings in the White House, weaponised at a later date to force the MAGA agenda upon us or to yield to the cultural nihilism of America’s tech brotherhood.

Credit: Matt Golding

Trump may well use it to try to turn back the clock and force Britain to recarbonise the economy.

It would be nice to think the UK could have it both ways, securing an Atlantic trade deal and becoming a manufacturing platform for EU companies seeking tariff-free access into the US market. But does anybody think that either Washington or Brussels will tolerate this for long?

Will the Commission meekly roll over the Brexit trade deal (TCA) next year if Britain has a sweetheart accord with the US, secured by abandoning trade solidarity and bowing to every Trumpian demand?

If only life were so easy.

Telegraph, London

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.