PRESIDENT Trump’s bold economic reset via tariffs, cuts and deregulation aims to prevent a debt crisis and revive US growth. The UK must follow with pro-market reforms.
Unwarranted hysteria
There is a widespread consensus that Trump’s tariff policies and attacks on the Fed are dangerously destabilising and counterproductive. Respected commentators fulminate about Trump’s assaults on economic and financial orthodoxy and global economic institutions – the very orthodoxy and institutions (including central banks) that have overseen a vast rise in global debt levels and unsustainable global imbalances. There is much unwarranted hysteria. Sure, investors and businesses don’t like the increased day-to-day volatility and uncertainty caused by the chaotic (though more nuanced now) implementation of the tariff policy and are concerned about increased risk of recession.
However, this hysteria is mainly confined to media headlines, market commentary, and statements from politicians and prominent businessmen. On a net basis financial markets have so far not gone into panic mode since Trump’s ‘Liberation Day’ on April 2. At time of writing the dollar has fallen by a mere 3 per cent, 10-year Treasury Bond yields have risen a measly 20 points (from 4.13 per cent to 4.33 per cent), and the S&P 500 is unchanged. Has personal animus towards Trump led critics to miss the bigger picture?
The Trump 2.0 Economic Plan is aimed at averting a future US economic crisis
Paradoxically, Trump’s most venomous economic critics are the same people who consistently warn about the unsustainability of US economic policies and the dangerously unbalanced nature of global economic activity. In their obsession about tariffs and Trump, they have missed that a credible wider plan is being put in place that is precisely aimed at tackling these intractable structural issues. This may partly be because Trump does not articulate such a plan, but Treasury Secretary Scott Bessent clearly does. Trump is the battering ram who has the power, but Bessent is the rapier, more subtle and fundamental in his strategic understanding. Bessent worked for many years with the world’s most successful ‘macro’ hedge fund manager, Stan Druckenmiller. They remain friends. Druckenmiller has constantly warned that US fiscal recklessness will end in a major crisis, a view which Bessent shares. Bessent would not have taken this job unless confident that the administration was intent on forestalling such a crisis. Critics fail to appreciate this and also underestimate what the broader economic plan has already achieved.
The main elements of the programme and progress made to date are: *
Radical cuts to federal spending. The new Department of Government Efficiency (DOGE) has already deleted $160billion of waste, fraudulent payments and unspent funds from the Federal Budget. Federal spending fell by 5 per cent annualised in Q1, after many quarters of large increases. The Federal bureaucracy has been downsized by 280,000 employees and contractors, and a major drive to force government workers back to the office enacted. In place of Biden’s plan to hire another 87,000 Internal Revenue Service agents, 20,000 have been fired or offered early retirement. Legal action is being taken to freeze and recover funds allocated to wasteful ‘green’ projects. The Department of Education is to be abolished, and most of the funds diverted to promote ‘free schools’ at state level.
Promoting increased domestic supply of fossil fuels and vital metals and minerals. A stream of executive orders will make it easier to access and develop the estimated $45trillion of US energy and mineral resources producible using existing technologies. Only 5 per cent of global mining now takes place in the US compared with 20 per cent 30 years ago, primarily due to excessive environmental and permitting regulations and limited access, especially on federal lands. This has inhibited US economic growth and made the US dangerously dependent on imports of critical metals and minerals.
An aggressive deregulation drive. Trump has already frozen the constant wave of new regulations under Biden and instituted a ‘ten regulations out for every new one’ rule. Trump’s deregulation drive in his first term successfully promoted increased growth, particularly among small and medium business and Trump 2.0 is re-starting this drive on steroids. The Heritage think tank estimates that the regulation freeze will result in direct Budget savings of $1.1trillion over ten years, plus higher revenues from the resulting higher economic growth.
Major tax reforms. The legislative process to prevent the expiry of the Trump 1.0 tax reforms, which promoted business investment, is well under way. Economists have long argued that the US should raise more tax revenue via consumption taxes. Given the political impossibility of imposing a national VAT or other form of sales tax on a bitterly divided federal system, higher taxes on imports (tariffs) are an achievable second best as they are a tax on consumption and can also contribute to reducing the US trade deficit and promote re-industrialisation.
Radical reform of the global trading system. The main objectives here are to increase access to key markets for US exports, promote the re-industrialisation of America, and reduce the dangerously unbalanced nature of global economic activity and excessive US dependence on strategic products and materials.
Taken together this is a credible and radical programme – which is being rapidly implemented and already achieving results – to raise the long-term US economic growth rate** and return sustainability to US public finances.
Tariffs are a means to an end
As a career-long free trader, I would not normally support a major tariff-raising policy. However, in this case the wholesale imposition of US tariffs leverages the vast US consumer market to achieve radical changes to the global trading system which would otherwise never happen. Would the main surplus nations – primarily the EU and China – ever agree to such changes if Trump used conventional diplomatic means and operated through the existing international institutions? You have only to ask the question to know the answer.
According to Trump’s Chief Economist, Stephen Miran, more than 100 countries have approached the US with offers of trade concessions and deals, tacitly acknowledging that the existing global trading system is stacked against the US. Significant tariff and non-tariff barriers are imposed on US products by economies that enjoy relatively unfettered access to the world’s largest consumer market. Priority negotiations are under way with key Asian nations – India, Japan, South Korea and others – to put more pressure on China. It is great news that the UK has been the first country to reach a new trade deal with the US, and as further breakthroughs in these negotiations are achieved in coming months global investor and business confidence will start to recover.
The EU and China’s predictable initial response was to impose higher tariffs on US goods in tit-for-tat fashion – a mistake the UK avoided – but they are already showing signs of backing down. The first trade talks between China and the US have begun. Both the EU and China have a higher trade intensity*** than the US, and large trade surpluses with the US, and so have more to lose in a trade war. They have both already boosted domestic consumption to compensate for the hit to their exports, with the EU raising defence spending and China enacting a new stimulus programme. A re-balancing of the global economy has thus begun – the surplus nations increasing consumption spending while the (main) deficit nation raises its exports and restrains import demand. The negotiating process will result in a significant reduction in current US tariffs (some suspended), but a residual level of tariffs will be retained on countries without comprehensive trade deals, particularly China as a component of the re-industrialisation drive and a revenue raiser.
Trump is right that the Fed should be cutting interest rates
The Fed was wrong to put its rate-cutting programme on hold in 2024. Although US fiscal policy was wildly expansive under Biden (and to a lesser degree under Trump 1.0), this stimulus had ended before then. With Trump intent on major cuts to Federal spending, fiscal policy has turned restrictive. US money growth has been consistent with the Fed’s 2 per cent target for more than three years now. Clear signs of a major US underlying slowdown first emerged in the second half of 2024 and, according to the Fed’s own internal research, have intensified recently – notably in rising layoffs and bankruptcies. Fed chairman Jerome Powell argues that tariff increases are inflationary, but that is only so if ‘financed’ by more rapid money growth, which shows no sign of occurring. Some domestic prices will rise as a result of tariffs, but not all by the full amount, while other prices will be stable or fall – oil, gas and other commodity prices already have – as the economic slowdown continues or intensifies.
While not defending Trump’s threats towards Fed chairman Powell, his calls for lower interest rates could prove prescient, as the Fed is likely to reduce rates sharply before year-end. I doubt that Trump ever intended sacking Powell, but wanted to cement in the public mind Fed blame for a weak economy in 2025. The Fed has a bad record over recent years – overreacting to the pandemic, far too slow to raise interest rates and now too slow to reduce them. There is thus a good case for making the Fed more accountable, and it cannot be above severe public criticism.
Implications for the UK
Trump’s economic plan has presented the UK with important economic opportunities. The minimum tariff level of 10 per cent imposed on the UK on Liberation Day was combined with an offer to rapidly complete the already far advanced US/UK FTA negotiations. Commendably, the UK government has seized this opportunity, in spite of fears that it might give priority to a ‘reset’ of relations with the EU. While not a comprehensive trade agreement, it is an important step forward and clearly intended as first step towards a wider deal. While it is true that the UK currently exports significantly more to the EU than to the US, this is not relevant to the question of which of the two markets presents the best potential for future growth in trade. Annual UK export growth to the faster-growing US economy has been 10 per cent since 2014, compared with less than 5 per cent growth to the stagnating EU. Given its major structural problems and irreversible demographic decline, continued EU stagnation is likely, whereas this article makes the case that the already superior US growth rate may well accelerate in the longer term. It was thus a ‘no-brainer’ to try to reach agreement with the US before finalising talks with the EU, not least because the UK already has a tariff and quota free trade agreement with the EU. The proposed ‘reset’ in UK/EU relations can achieve only minimal further trade gains for the UK in exchange for possible very costly concessions.
Paradoxically it may turn out that Trump’s aggression on tariffs has set off a new wave of trade agreements, not only between the US and other countries but more globally. It is no coincidence that, faced with the embarrassment that the US might announce a trade deal with India after only a few months of negotiations, the UK suddenly made the necessary concessions to close the deal. The UK has much more to gain from closer economic links with India than with China, as India’s long-term growth prospects and demographics are vastly more favourable than those of China. Not to mention that India is a democracy with no malign intentions towards the West. This is a fully comprehensive trade deal – by far the biggest reached by India – with both sides making substantial cuts in tariffs and the UK securing greater access to Indian markets, including the vital services sector. It is a major achievement, geopolitically as well as economically, that the UK is the first major Western nation to reach a trade deal with India. The EU had been trying for more than 20 years without success. This triumph, and the US/UK deal, are only possible because of Brexit, ironically piloted by the Remainer-in-Chief Starmer – who oddly enough never mentions this! The nitpicking response of the opposition parties to this deal has been frankly pathetic. The Conservatives in particular, having done most of the groundwork for this deal, should have been much more positive. Talk about missing the bigger picture!
Another opportunity for the UK comes from the rise in sterling and fall in oil and gas prices that have followed Trump’s tariff announcements. These will reduce UK inflationary pressures, as will likely dumping of Chinese goods previously destined for the US. This will provide greater scope for the Bank of England to reduce interest rates, particularly when the Fed starts rate cuts. Current market expectations that Bank Rate may fall to 3.25 per cent by year end or soon thereafter now look realistic. One major positive in a gloomy UK economic picture is that the household savings rate is currently well above its long-term average, meaning that an improvement in confidence from depressed levels could result in a rebound in consumer spending.
Although UK economic policy has become slightly more market-friendly in response to the worsening economy – scrapping NHS England, backing greater deregulation, backtracking slightly on the damaging Net Zero agenda – this has so far only been enough to enrage the left of the party but not to move the economic dial. The government needs to be emboldened by its trade policy successes to move much faster in this direction. It then may be possible that the UK avoids a technical recession and returns to moderate but positive growth later in 2025 and in 2026. Don’t hold your breath.
Summary
It is a thankless task in the UK, outside some working-class strongholds, even to partially support Trump’s policies. I am far from backing all his policies, much less his actions and words. However, one description of Trump strikes home:
‘President Trump is a dishonest man who confronts awkward truths’.
The awkward truth for Trump-haters is that he has been proved right on key issues. He was right to be sceptical about lockdown, Europe’s freeloading on the US military budget, a Chinese lab the almost certain source of the covid virus, China’s gross abuse of the global trading system, the counterproductive nature of the Net Zero agenda, the non-benign nature of many global institutions . . . I could go on.
This article argues that the Trump 2.0 economic programme, seen in its entirety, has been misunderstood by its legion of critics. It has a genuine chance of returning sustainability to the US public finances, averting a major US economic crisis, and reforming the global trading and monetary system so as to reduce current unsustainable imbalances. It is a high-risk strategy, but its critics are like a patient who refuses drastic surgery, which might kill him, to remove a malign tumour which definitely will kill him.
*All data in this section sourced from the US think tank ‘Unleash Prosperity’. https://committeetounleashprosperity.com/
** An encouraging feature of the negative 0.3 per cent growth in Q1 US GDP was a remarkable 22 per cent rise in business investment (both figures are annualised growth rates)
*** Trade intensity is measured by the combined value of a country’s imports and exports as a % of GDP
