Aurelia Butler

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyIn his journey to reclaim the White House, president-elect Donald Trump benefited politically from a dispersion of domestic economic outcomes. Left to fester, the forces behind this, as well as those driving the divergence between overall US economic performance and its global peers, are set to strengthen. This risks economic, financial and social breakages in the next few years. Resolving them in an orderly and consistent fashion could well have a material impact on how the president’s second term is remembered.The US has maintained an enviable growth and employment record in recent years. But this “economic exceptionalism” was not widely appreciated by the American electorate. The benefits were seen to accrue to just a narrow segment of society, with too little appreciation for the pain of the more vulnerable, many of whom felt that they weren’t being heard.This undermined overall household confidence in the Democrats’ ability to manage the economy and, thus, contrasted strongly with the positive sentiment about economic developments during Trump’s first term. The resulting “K shaped” economy of differing outcomes for the richer and poorer ends of the demographic spectrum also means that the incoming president inherits significant vulnerabilities at the lower end of the household income distribution.The financial insecurity — amplified by the evaporation of pandemic savings, higher debt and maxed-out credit cards — will take time to overcome through the current growth rate in wages and job opportunities. And if it worsens, it does more than undermine the social fabric. It risks endangering consumption, the most important driver of US growth at a time when the country is best placed to unleash a significant improvement in productivity and growth potential.The dispersion phenomenon has not been limited to domestic developments, given how much the US has outperformed. As noted recently by Goldman Sachs, the gain in the Eurozone’s nominal GDP since the last quarter of 2019 — that is, just before the pandemic — was only 39 per cent that of the US. The UK’s stands at a measly 10 per cent and, in the emerging economies, China’s amounts to 55 per cent. Looking forward, the IMF has just revised up its US growth projections for 2025 by a considerable 0.5 percentage points to 2.7 per cent, while lowering that for Europe.The outperformance of the US has resulted in financial market developments that can aggravate the challenges facing countries with lagging growth, investment and productivity. US bond yields have surged higher because of the country’s stronger than expected growth, sticky inflation, and greater market sensitivity to debt and deficits. This has caused other countries’ yields to also increase given that they compete with the US for funding. The negative spillovers have been particularly consequential in countries with structural vulnerabilities and cyclical headwinds.The UK is a case in point. Not only did it see the yield on its 10-year government bonds rise faster than America and to a higher absolute level, it also suffered a material depreciation in its currency. The resulting stagflationary winds complicate an already difficult economic outlook while limiting the room for manoeuvre for both fiscal and monetary policies. While not as pronounced as the UK, the spillovers in the Eurozone go in the same direction. The same is true for emerging economies where some, particularly China, are excessively inclined to offset domestic weaknesses by devaluing their currency and pushing exports even harder.Like its domestic counterpart, a widening of this external dispersion risks complicating the economic management challenges facing the new Trump administration. After all, it is hard to remain the good house in a continuously deteriorating neighbourhood.The more the rest of the world lags behind the US, the higher the value of the dollar. Given the structural problems in China and Europe, this will not allow for a global adjustment in which slower growth countries converge up to the US. Instead, it risks undermining America where, according to Apollo’s Torsten Slok, 41 per cent of revenues in the S&P 500 come from abroad. It also raises the risk of greater protectionism, given the impact on US competitiveness.While economic dispersion helped Trump return to the White House, he now faces the task of reorienting this phenomenon to lower the risk to the wellbeing of the US economy. From tax policy to tariff implementation, the incoming president should bear that in mind during what promises to be a flurry of policy announcements in the next few weeks and months. Otherwise, promising initiatives risk being derailed. More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe first Trump administration reversed America’s stance on global trade. Joe Biden then doubled down on Donald Trump’s tariffs, while adding industrial policy to the mix. Now his parting gift to Trump is a new trade verdict that argues for US government support for the maritime, logistics and shipbuilding sectors in the face of Chinese competition. It will be the first big test of whether Trump’s second term will be focused on the economic desires of his base, or the “tech-industrial complex” decried by Biden in his parting speech.The timing is no accident. The investigation, issued by the US trade representative under Section 301 of the Trade Act, lays out how China has used non-market practices to dominate the global maritime industry. While Biden has supported pushing back against such practices, not everyone in the Democratic party has been eager to make the shift. By releasing the case four days before Trump’s inauguration, the departing administration has made sure it didn’t get derailed by Democrats who would prefer to tip-toe away from the issue of Chinese mercantilism. It also threw down a gauntlet for Trump. Will tariffs be his only tool? Or will he support industrial policy and US workers in more effective and durable ways?Whether or not you support Section 301 action, it’s tough to read the case and argue that China’s behaviour in shipbuilding isn’t discriminatory. There are the usual problems, like massive state loans and access to non-market excess capacity in raw materials. Then there are the distortions in the Chinese labour market that make it nearly impossible for market economies to compete in the maritime sector, where China now has a market share of more than 50 per cent.One of the most interesting sections of the report dives deep into the hukou system. In this, Chinese citizens are classified as rural or urban residents, and can’t receive state benefits such as education, housing, or healthcare outside the jurisdiction in which they were born. Since many rural residents migrate to coastal areas to work, the result is that half of the population resides in urban areas, but only a third have an urban classification.That has a hugely distorting effect on Chinese and global labour markets. As one scholar quoted in the report notes, the hukou system creates a “huge class of super-exploitable, yet highly mobile or flexible industrial workers for China’s new economy, now closely integrated into global trade networks”. It is essentially a massive state transfer from labour to the owners of capital, which is one of the reasons why Chinese economists concerned about bolstering domestic consumption would like to get rid of it (hukou reform is happening, though not as fast as many would like).It’s also one of many ways in which China’s system is incompatible with the Bretton Woods trading system as it exists today. “There’s no question that China’s very different economic model makes it difficult to have a system of globalisation based on WTO rules,” notes economist and Nobel laureate Michael Spence. Indeed, that’s the reason that Biden’s trade representative, Katherine Tai, pushed (albeit unsuccessfully) for a new model of trade based on setting a floor, rather than a ceiling, on environmental and labour standards.Trump certainly won’t care much about the former, but politically, he will need to care about the latter. The fractures between the Maga base and billionaire class populating the top ranks of his administration are already showing. If he chooses not to take on the shipbuilding support recommendations left by his predecessor, unions and Maga hardliners alike will pitch a fit, which could sow major discontent in his first 100 days.But I’m betting that the Trump administration will take up the issue, and perhaps even offer up more vigorous support than Democrats might have done. Trump loves bright shiny objects, and nothing is brighter and shinier than a new aircraft carrier.More importantly, there are legitimate national security and commercial supply chain reasons to build more non-Chinese maritime capacity. Nearly half of US goods and 80 per cent of global trade is transported by ship. China can significantly influence the pricing and availability of ships given its share of the market. It’s hard to imagine that this power wouldn’t be weaponised in the event of any US-China conflict. Trump has already suggested the US build ships with allies like South Korea.Of course, increasing maritime capacity is a long-term, heavy lift. And yet, the success of the Chips Act, which has rebooted US semiconductor production in less than two and a half years, shows that it is possible to create more resiliency and redundancy in critical industries when there is political will. The question is whether Trump will have any. Slapping tariffs on adversaries and allies alike is much easier than actually crafting a multifaceted industrial policy.That said, the political pull towards it will be pressing. Much of the Biden administration’s stimulus went into red states. The Chips Act is supporting construction of new semiconductor plants in Ohio, Texas and Arizona, all of which voted for Trump. The bipartisan Ships Act introduced last month provides a road map for maritime industrial policy. Whether Trump follows it will say much about the direction of his second term.rana.foroohar@ft.com  More