Op-ed by Andrew Graham: Trump and what to do

Andrew Graham is a British political economist and former Master of Balliol College, Oxford. He played a key role in founding the Oxford Internet Institute and has advised UK Prime Ministers on economic policy.

The State of the World

The starting point has to be that the so-called Western Alliance and the so-called multilateral rules-based order that has been in place since 1945 has gone. As many have said, we are in a multipolar world dominated by Trump, Xi, and Putin, with Europe somewhere in play simply because it remains a very large economic market, and with India and Modi in the background (Modi is a bully, but Trump is a larger bully, so Modi is keeping his head down).

It is now a world in which might is right. Deep down this has always been true, but from the Berlin airlift of 1948 until the US invasion of Iraq, it was held in check.

The most dramatic turnaround has been in the USA. In less than three months it has moved from being a democracy to being under authoritarian rule – and a highly capricious authority at that.

Anyone living in the USA now faces the following situation. Federal agents can enter anyone’s home at any time without a warrant. If they are a US citizen, they can be arrested. If not a citizen, they can be deported. In neither case is any evidence of a crime required for this to be done. Indeed, we now live in the entirely Catch 22 world in which the lack of evidence against you is the proof of how dangerous you must be. How could you have hidden yourself from everyone’s surveillance for so long? In short, the rule of law in the country which held itself up as being a model to the world has killed the rule of law.

Now let’s stand back a little and look at the long run factors which brought Trump to power.

The consensus amongst mainstream economists that multilateral free trade is beneficial to economic growth is, broadly speaking, correct. It happens to be even more the case when free trade is combined with free (or near-free) movement of labour. However, while there have undoubtedly been gains, the mainstream has completely ignored who gained. In reality, the vast amount has gone to the top end. The so-called “left behinds” have indeed been left behind.

Overall what has happened is that income inequality between countries has gone down (as Chinese workers have become richer relative to US workers), but, income inequality within countries has gone up sharply (with low wage workers having seen falls in their income in the light of cheap foreign competition and with high earners going sky high on the back of their monopoly profits). Overall, USA real wages have been constant or falling for a quarter of a century. It’s hardly surprising that people in the USA are mad. They have a reason.

Will Trump’s policies do anything about this? It seems most unlikely. Musk and his ilk expect yet more tax cuts for the rich, while DOGE is aimed at reducing welfare payments, which will, in its turn, lower wages at the bottom end even more. Moreover, if there is a recession, as seems increasingly likely, it will be those at the bottom end who are hit hardest – both by higher unemployment from the recession and from higher prices from the tariffs. Furthermore, if Trump and his Treasury team really do bring about the change that they intend (according to Scott Bessant, US Secretary to the Treasury, and Stephen Miran, Chair of the US Council of Economic Advisers) – that is both reducing the external deficit and the internal deficit – imports will go down, but so, too, will domestic consumption will have to go down! (*) If via their tariff bashing, they also manage to lower the dollar, and if this were to be very successful, the boost to exports might eventually raise the growth rate in the USA and then in the long run US consumption (and real wages) could rise. But there are a great, great many “buts” and “ifs” along the way.

(*) A point often missed is that in order for a devaluation to work (which is what the Trumpites desire) the distribution of National Income has to move in favour of profits and against wages – the very opposite of what MAGA voted for!

To underline those “buts” and “ifs”, we need look no further than the massive uncertainty that Trump is creating. This alone is highly likely to be his undoing. It is certainly likely to be bad for investment in the USA. When we add to his capriciousness, plus his attacks on universities and on foreigners, it is likely that he will lose human capital as well as physical.

Moreover, lying in the background is a further uncertainty which has only just started to manifest itself. Bessant, Miran and Trump all want the dollar to drop, and it has started to do so. Moreover, there has even been talk of the USA deciding to cut the interest it pays on its debt – in effect a partial default. Yet the dollar totally dominates all international transactions, roughly half of all transactions are in dollars, and holdings of reserves are even larger, probably 60% or more. There is therefore no other reserve currency anywhere in sight. What then will happen when dollar holders take fright? I don’t believe anyone knows. But with the dollar being large relative to everything else (3 times greater than euros, ten times more than sterling or Yen and 30 times more than anything else), the danger is that “small” dollar flights will cause much larger currency surges elsewhere. In short, I expect much larger currency volatility than we have seen recently.

What can/should the UK and the EU do?

To see how the UK and the EU should respond to Trump it is essential to have the big picture in mind. There are three parts to the big picture.

First, what matter is not just the tariffs but also his attacks on immigrants, many of them highly skilled, plus his attacks on universities, plus his denial of climate change, plus the huge uncertainty that Trump’s random bullying is producing.

Second, the big picture must remember that we export more than twice as much to the EU as we do to the USA.

The third big picture point is to think about China both because it is huge and because it seems to be the focus of most of Trump’s hate.

Taking these three things together, presents huge opportunities for Europe (and I speak intentionally of Europe so as to take the UK and the EU together). If we have the wit to do so, we should put all the following in place:

1. The aim should be to create as close to a free trade zone as possible in the non-US part of the world. Europe, India, Southeast Asia, Canada, China, and South America should all come closer together.
   
2. This area, with Europe and China in the lead, should focus on the innovation that will tackle climate change. Necessity is the mother of invention, and that necessity has been taken away from the USA. The gap left is a great opportunity for us.
   
3. Europe, and especially the UK, should aim to attract all the top technologists and top scientists who are either being pushed out of the USA (because they immigrants or are distinctly unhappy or having their departments closed around them). The huge reductions in, for example, funding to the NIH and the CDC will mean that many top scientists are looking for jobs – and remember that Silicon Valley is stuffed with really smart Indians.
   
4. In the case of the UK, this means changing the rules about foreign students and their families at UK universities, thus injecting the cash they badly need, both to stay alive and to be able to attract all the talent which is waiting to be pulled in our direction. It would be insane not to grasp this opportunity.
   
5. It is critical that, in conjunction with the measure above, the EU and the UK, working together, open discussions as fast as possible with China. Why? Because if we do nothing, China will dump a huge amount of goods on the rest of the world that it can no longer export to the USA. Incidentally, I noted an idiotic report on the BBC which spoke of iPhones becoming more expensive in the UK because of the tariffs. Nonsense. The danger is of a flood of cheap stuff, depressing the profitability of all European producers of anything remotely similar to Apple. What we need to say to China is that in this non-USA trading world, it has to be a rules-based order, because it is only with this that business gets any certainty, and it’s only with certainty that is invests. And, of course, in this rules-based world there are well understood anti-dumping provisions. In addition, China has to be urged to expand its domestic demand to offset the loss of demand from the USA.
   
6. Finally, we must think hard about where Europe’s comparative advantage lies. The language in vogue in Brussels right now is of the need for Europe to be “more competitive”. Being translated, this means more deregulation. But, in many areas this will be exactly the wrong move! The question to ask is “Why does the regulation exist?” If it is for a good purpose you want to promote it – indeed to sell it – not abandon it. For example, no-one wants their kids harassed with pornographic images or their social media flooded with hate speech. And I doubt that many wish to take the risk that chlorine washed chicken will prove in the long run not to increase the probability of cancer. We regulate against these practices for good reasons. Similarly, the evidence of the damage to our health was there for cigarettes and will soon be there for ultra-processed foods. In other words, Europe should emphasise why standards matter to everyone. Well-chosen standards, well promulgated, have the scope to be our comparative advantage not our lack of competitiveness.

Trump’s erratic door slamming opens many opportunities. Europe needs to get on the front foot and take them. The UK with its stable political system and its clear rule of law is especially well placed to attract business and highly skilled technologists; and, unless it kills its universities out of wilful ignorance, the UK is even better placed to attract the top researchers being pushed out of the USA.

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