Economics

The German ­electronics firm Hensoldt has a backlog of orders for its technology, ­including radars that protect Ukraine from Russian airstrikes. Meanwhile, Germany’s car industry is struggling with low European demand and competition from China.As Europe worries about how it can weather the economic and ­political turmoil unleashed by Donald Trump, executives from Munich and Düsseldorf say they have at least a partial answer.In January, Hensoldt offered to take on workers laid off by the car parts suppliers Bosch and Continental. The defence giant Rheinmetall made a similar ­proposal last year, and in February announced it would repurpose two automotive component factories.It was a pivot that offered hope amid America’s rapid ­dismantling of the postwar global order – ­protecting jobs and Germany’s industrial base as access to US ­markets shrinks, while ramping up Europe’s capacity to protect itself.As politicians around the world try to work out how best to ­protect their countries from Trump’s ­capricious policymaking, the one constant in all their calculations for the future is a diminished American role in their countries. Trump has mooted plans for a 25% tariff on EU goods, including cars, and has already put duties at that level on steel and aluminium from the bloc.In February, his vice-president, JD Vance, launched a blistering attack on European democracy in Munich, questioning whether it was worth defending.In his first term, Trump touted decoupling from China as a way to bolster US jobs and the economy against a rapacious rival. Now, in his second term, he is pursuing a much broader decoupling from the ­country’s historical allies – a shift that few had anticipated or were prepared to face.The new US administration is sealing off its markets, retreating from America’s global security role, and cutting soft-power projects that aimed to shape the world through research, aid and culture.The only form of greater American presence beyond the country’s ­current borders that seems to ­interest Trump is ­territorial ­expansion – ­encouraging, ­perhaps, for a dictator such as Vladimir Putin as he wages an ­imperial war in Ukraine, but ­unwelcome and ­alarming elsewhere.“The idea of the US ­abandoning western Europe was ­unimaginable even a decade ago, because its role there also secures broader American influence in the world,” said Phillip Ayoub, a professor of international relations at University College London.“There is a comparative ­advantage to strong alliances because they make you richer in trade and safer because they deter other powers.”Trump’s vision of the world rejects that view, casting his ­country as a naively magnanimous ­superpower that has for decades funded and policed the world while getting little more than debt and ingratitude for its troubles.View image in fullscreenYet if postwar American ­presidents did not pursue the ­territorial empire that Trump now dreams of, they wielded an ­imperial power not reflected on maps. Decisions made in Washington DC reshaped countries from Chile to Iraq without the participation or consent of their populations.And the global order he is ­tearing down made the country so rich and powerful that for a brief, heady moment around the turn of the ­millennium, the US elite embraced the idea that history was over, and that human society had reached its peak and permanent form in the ­liberal democracy embodied in their constitution.The details of the new American relationship with the world are still being worked out day by day in court battles at home and trade and diplomatic negotiations abroad, but the impact of Trump’s presidency will last long into the future.“An election could change ­policy in Washington DC. But the new ­reality is that from government to government you could have a ­different attitude to the US’s place in the world,” Ayoub said. “This retreat will be factored into policymaking everywhere now.”For now, the ­immediate priority in most ­countries is limiting the extent of tariffs and the impact of US cuts, in areas ranging from aid to defence.Geography and the impact of ­previous free trade deals have ­combined to make neighbours of the US extremely vulnerable to its tariffs. Exports to the US account for a quarter of Mexico’s GDP. In Canada, where all other potential trading partners are an ocean or half a continent away, they are about a fifth of GDP.European countries may be less immediately vulnerable to a trade squeeze, with exports to the US accounting for less than 3% of the European Union’s GDP.But budgets from London to Warsaw are also strained by the need to ramp up defence ­spending to make up for the US retreat, both from immediate support for the Ukrainian forces battling Russia, and from the longer-term backing of European defence. Even ­optimistic assessments suggest it will take the best part of a decade before the continent’s own defence ­capacity can match the protection currently offered by the US, excluding its nuclear deterrent.The pain of breaking up or reshaping major relationships does not only fall on one party – ­something even Trump has ­admitted. The cost of some tariffs will be passed on to US ­consumers, and American businesses may lose customers.One early high-profile casualty could be Lockheed Martin, which produces F-35 jet fighters. Contracts allowing the US to restrict how the planes are used by allies caused little debate during friendlier times. Now, in Berlin and other capitals, defence ministers are worrying about a ­possible “kill switch” and hesitating over major new orders.Longer term, Trump could also fuel a ­cultural “decoupling”, with attacks on the arts and academia ­driving highly talented ­individuals to flee the US or avoid it.Several artists have cancelled tours, and the concert pianist András Schiff last week said last week he would no longer work in the US because of Trump. He had already boycotted Russia.Academics at elite British ­universities say they have seen a surge in job applications from US-based colleagues, many ­willing to lose tenure and take a ­considerable pay cut in order to move across the Atlantic. A French university that offered ­“sanctuary” to US researchers said it had received 40 applications, and one academic moved this month.As with the economy, the US’s ­cultural standing is not under direct threat. American music – much of it made by ­people who publicly oppose Trump – will be consumed worldwide. The Oscars are likely to remain the most ­coveted prize for cinema, the Emmys for ­television, the Pulitzers for ­journalism. Yet an exodus would still be ­damaging in a country where research and the creative arts are key drivers of growth, and benefit the places they settle instead – the long-term US allies that Trump sees as threats.The US president has promised voters that where his economic policies cause pain it will be short-term, and pave the way for long term prosperity in America.To critics, they look like a ­template for a poorer, more ­dangerous and fragmented world, where any limited benefits of ­decoupling are as likely to be reaped by a British university or a German defence firm as by Americans.View image in fullscreenCultureThe hit to America’s creative ­sector, from budget freezes and threats to the federal bodies and national schemes that fund ­museums, ­galleries, theatres and libraries, is set to take a toll on its income from tourism – and send visitors to Britain and Europe instead.In response to the second Trump presidency, some international ­artists are already pulling out of ­appearances in American venues, or at music festivals, and the likely knock-on effect is a reduction in ­visits from abroad.Last week, the Canadian singer/songwriter Leslie Hudson cancelled her American tour, saying on social media: “Like a lot of Canadians, and so many others, I no longer feel safe to enter the country.” The German violinist Christian Tetzlaff cancelled a spring tour in protest at the new administration’s policies, with particular reference to Ukraine.In Pittsburgh, Pennsylvania, the managing director of City theatre, James McNeel, has ­spoken of a growing funding threat. “What we need more than anything is stability,” he says.Prior to the pandemic, the US Travel Association ­valued the total spending of the near-80 million tourists who came into the US at about $2 trillion (£1.5tn).This was supported by federal investment in ­infrastructure and the ­airline industry, but travel experts also traced back much of this tourism success to the diverse image of many of its cities. Art tourism was a big part of this, with art fans who ­travelled to North America in 2023 ­accounting for more than a ­quarter of the global total. Cities such as New York, Los Angeles, and Chicago boast ­celebrated museums and ­galleries, and the rise of immersive art and public installations has broadened this appeal. The attraction of art fairs such as Art Basel Miami has also grown internationally. In 2023, it was reportedly visited by more than 79,000 people.But Trump has made rapid and determined cuts to all museum ­projects tied to diversity, equity and inclusion (DEI) initiatives, ­affecting the Smithsonian Institution, which has closed its DEI office. The National Gallery of Art also closed its office of belonging and inclusion, while exhibitions across the ­country have been cancelled. The biggest impact may well be on cultural ­tourism associated with LGBTQ+ communities and climate activism.Trump at one point intended for 2026 to be a bumper year for American tourism, with a ­“special one-time festival” planned for “­millions of people from around the world” at the Iowa State Fairground to mark 250 years since ­independence.The level of ­international advance booking will be watched.Likewise, a new status for London, Berlin and Paris as “refuge cities” for American artists is being predicted.British and European ­institutions might also soon have to make room for American artwork. The Washington Post has reported that large collections of public art have been left without professional ­security or conservationists.View image in fullscreenEconomicsShould the UK government decide to untangle the economy’s many ties with the US, it would need to tread carefully. America is the single ­largest market for Britain’s exports, ranging from the most sophisticated components in US navy submarines to artisan scented candles.Official figures show total trade in goods and services – exports plus imports – between Britain and the US was £294bn in the year to 30 September, 2024. The stock of investment by US companies in the UK stood at £708bn in 2023, or 34% of total of foreign direct investment.Jonathan Reynolds, the business secretary, is hoping to sign a limited trade deal with his counterparts in Washington that covers digital services and commits both countries to secure supply chains for vital goods.But a deal with any scope or ­judicial oversight will need Congress to agree, and that is far from certain to happen.UK manufacturers could begin to wean themselves off US raw ­materials and components, but the presumption must be that they traded with the Americans in the first place because they provided the best products. Exports could be directed back at the EU, though without rejoining the single ­market and customs union, the benefit would be limited.It would be a harder job switching services exports away from the US. The common language may often divide the two nations, but in ­practice the sector is a huge boon.In Brussels, officials believe any kind of trade deal with the US is off the agenda.As Donald Trump is only too well aware, the EU has a large trade ­surplus with America. In 2014 the surplus was about €100bn. By last year the gap had grown to almost €200bn. For this reason, the EU has already adopted a more ­confrontational stance.The British Chambers of Commerce says almost two-thirds of factory owners that export to the US are worried. European ­manufacturers have revealed similar concerns in recent surveys.Some are comforted by figures showing the US has a trade surplus in goods with the UK and how, in practice, trade and investment relationships exist well away from the White House and remain robust.However, businesses thought the same about Brussels after the vote to leave the EU. It didn’t happen and a breakdown in relations ensued.That said, rekindling relations with the EU can be part of the answer. Reset talks are under way and there is a leaders’ summit on 19 May that should address at least some trade barriers. The UK might find that food exports become easier and it gains access to a wider range of raw ­materials and ­components by rejoining the Pan-Euro-Mediterranean convention.Still, the US will remain a major trading partner and upsetting the Trump White House could have huge consequences.View image in fullscreenDefenceDonald Trump’s abandonment of Europe’s defence and disdain for Nato marks one of the most ­profound and influential breaks with longstanding US policy, even for a supremely disruptive leader.Many US presidents have grumbled about European over-reliance on American deterrence in recent decades, with predecessors including Barack Obama demanding allies spend more on their own armies.But their frustrations were rooted in concern that European defence cuts undermined an ­alliance that almost everyone in Washington – across the political divide – saw as critical to American global leadership.Trump, in contrast, appears to be seeking European spending to replace or supersede Nato, not strengthen it. He says Washington’s defence priorities are now deterring China in Asia and fighting organised crime at home.In his first term, he touted the idea of withdrawing America from the alliance, which was formed in 1949 for protection against the Soviet Union. This time he has opted to undermine it from within.The president himself has ­publicly contemplated ignoring Article 5, the core mutual defence clause at the heart of the transatlantic ­alliance, which requires Nato ­countries to come to the aid of any member that is attacked. It has only been invoked once – by the US after the 11 September attacks on Washington and New York in 2001.Trump said the US might ­condition any support for other members on military spending, and questioned if US allies would come to the country’s aid if in need. His administration is considering giving up the Nato command role inaugurated by war hero president Dwight D Eisenhower and held by America ever since, NBC reported last week.Europe was already scrambling to increase defence spending and ­coordination when the US halted military aid shipments to Ukraine, and intelligence-sharing with Kyiv earlier this month.Trump’s decision came after a spectacular on-camera showdown in the Oval Office with Ukraine’s president, Volodymyr Zelenskyy. But his willingness to cut loose a force that Washington has trained, armed and backed, and which is fighting a major US rival, stunned even some of his own political allies.European governments who have also spent billions on Ukraine’s defence, and have been dealing with covert Russian sabotage and spy operations across the continent, were not informed in advance.The flow of weapons and aid has now resumed, but the message was clear. Major European military powers, including the UK and Germany, are now reportedly racing to put together a five- to 10-year plan for a managed transfer of European defence, to stave off any more abrupt moves from Washington.Trump’s unpredictability has been heightened by his choice of ­leaders for key security roles, ­including a former Fox television host, Pete Hegseth, as defence secretary, and Tulsi Gabbard, who has a long ­history of pro-Russian views, as director of national intelligence.Security experts warn that ­turmoil in the leadership and ­management of intelligence agencies may also lead to a less visible but highly ­damaging defence decoupling – of the relationship between America’s spies and the secret services of its allies.View image in fullscreenDiplomacyThe votes in the United Nations marking the third anniversary of Russia’s invasion of Ukraine ­provided a bleak snapshot of the yawning diplomatic divide between Donald Trump’s America and the country’s traditional allies.On February 25, the US joined international pariahs Russia, Belarus and North Korea to vote against a resolution condemning Russia as an aggressor state and calling on it to remove its troops from Ukraine.The wording rejected by Trump’s diplomats had been put forward by Ukraine, whose defence the US has funded, and the European Union, Washington’s partner in that effort. It passed in the general assembly with backing from 93 countries.The isolationist bent of Trump’s politics extends beyond the ­economy and defence, into international diplomacy. He has ordered the US to withdraw from a host of global organisations and initiatives, from the World Health Organization to the Paris climate agreement.The process of taking the world’s second biggest emitter of planet-heating pollution out of the accord to tackle global ­emissions will take about a year. As with the UN vote on Ukraine, that move puts the world’s most ­powerful democracy in unusual ­company, with Iran, Libya and Yemen as the only countries outside the deal.Trump imposed sanctions on officials at the International Criminal Court over arrest warrants it had issued for the Israeli prime minister Benjamin Netanyahu and Yoav Gallant, who was the country’s defence minister at the time.His predecessor Joe Biden had also criticised the court, but such a direct attack on an institution ­established with broad international support was unprecedented.Several former British ambassadors to Washington warned this month that there has been a seismic and perhaps permanent shift in the so-called “special relationship” between the two countries, meaning that the UK will need to seek out other allies.“It’s difficult to find either a conceptual area in ­international relations or a particular geographical area where our interests are really converging at the moment,” Nigel Sheinwald, the ­ambassador from 2007 to 2012, told a ­parliamentary committee.“On more or less any big ­foreign policy issue that we’re dealing with today, we don’t agree with the United States… whether that is the Middle East, whether it’s Iran, whether it’s climate change, China, but above all on Europe itself,” Sheinwald said. 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