US voters were sick of the economic status quo but Donald Trump's trade policies could be dangerous

The soul-searching may be in full swing within America's Democratic Party after Donald Trump trounced them in the US election last week.

So far, though, few have failed to grasp the enormity of what went wrong.

Should Biden have stepped aside earlier, giving Harris a clear run? How could the messaging be improved next time around?

The idea that a decisive majority of the electorate preferred a convicted felon over Harris was a bitter pill for many to swallow and inconceivable to the party leadership.

Perhaps they'd do best to cast their minds back a few decades, back to 1992 when James Carville, an adviser to Bill Clinton, coined the phrase: "It's the economy, stupid."

Back then, the global economy was only just starting to emerge from a nasty recession caused by a punishing round of interest rate hikes designed to smash an inflationary outbreak that threatened to replicate the events of the 1970s.

Sound familiar?

During the past three years, workers across the developed world have been smashed by the recent round of rate hikes.

They've largely done the job, helping to restrain the speed of consumer price rises.

Now, the political price is being paid.

But there's a world of difference between the events of the 1990s and those of now.

What occurred last week wasn't merely an electoral backlash to a cost of living crisis, although there's no doubt that was a factor.

Trump's re-election, rather, was a revolt against economic policies that have fundamentally reshaped the global economy during the past 40 years, and that have left millions disenfranchised and uncertain about their place in the world.

The president-elect first tapped that rich vein of discontent in 2016 and although his shambolic first administration failed to address, let alone fix, the problem, the decisive nature of his re-election is proof that American attitudes have only hardened since then.

Revenge of the nerds

Who would have thought that an entirely academic and seemingly innocuous concept could generate so much rage.

With a textbook theory that decrees "everyone's a winner" if trade is totally free and regulations are abandoned, when economists were let loose at the controls in the 1970s, they went all in convincing governments of the merits.

Within 20 years, they'd set the wheels in motion and over the course of the next 20, heavy industry migrated away from the West and towards low-cost countries like China.

Tariffs were abandoned and free trade agreements were being signed almost every month by triumphant politicians.

Rising tides and sinking boats

Now, suddenly, they're political poison.

Why? Because as American workers discovered, the rising tide from the era of globalisation and free trade didn't lift all boats. While it was true that America became wealthier as heavy industry shifted offshore, the spoils weren't equally shared.

What the economic models and the vast mathematical equations that supported the theory didn't incorporate was the idea of wealth distribution.

In an era of deregulation and lower taxes, wealth was supposed to "trickle down".

Instead, it was the financiers who became rich as corporations moved operations to China, Mexico and other developing nations.

Once well-paid manufacturing jobs disappeared and entire regions across the American industrial heartland withered.

True, the price of everything from clothing to cars dropped as cheap imports flooded the market, but many struggled as work dried up and wages in service industries didn't match their old jobs.

Then came the global financial crisis, exacerbated by the removal of regulatory oversight on financial markets, and vast numbers of Americans found themselves homeless and out of work.

And just to rub salt into the wounds, in a desperate bid to stave off economic destruction, a Democratic government led by Barak Obama bailed out Wall Street while those who orchestrated the collapse walked away scot-free.

How much further will Trump go?

Trump's first presidency may have been chaotic, but it permanently shifted the direction of America's relationship with the rest of the world.

He retreated from the ideal of a globalised economy and free trade and instead pointed the US back to its historically familiar stance of isolationism and protectionism.

The backlash to globalisation was already underway across the developed world when Trump first came to power.

The UK voted to sever ties with the European Union just months before Trump's ascension, and European voters, disillusioned by the hardship of the global financial crisis, had swung back to nationalist leaning leaders.

In his first term, the rookie president imposed tariffs on solar panels, washing machines, steel and aluminium before ramping up his protection efforts against China.

Even if you ignore the vaudeville act of leadership style, his disdain for the institutions of power and his threats of autocracy, when it comes to trade, Trump this time promises to go much further with a retreat that will have widespread ramifications for the rest of the world.

If he acts upon his threats to deport millions of immigrants and slap massive tariffs on China — at around 60 per cent — with smaller penalties of 10 per cent on all other imports, America risks an inflation outbreak because American consumers will pay for the tariffs through higher prices.

For Australia, it is the impact on China that is most concerning.

Already, iron ore prices have begun retreating as traders assess the potential damage from Trump's plan.

China's economy is already struggling to arrest a five-year-long property crash that has now spilled over into broader society.

Youth unemployment is at record levels, government revenue is shrinking, growth is slowing and debt is rising as it grapples with a declining and aging population.

Just as in the previous Trump administration, China would be almost certain to retaliate with trade restrictions of its own.

All this is likely to limit global trade, crimp growth in the world's two biggest economies and push debt and global inflation higher.

The good old days may be gone

There's an old cliché employed by travel writers; It's not so much the destination as the journey.

The same goes for economics.

The idea of trade liberalisation and deregulation only ever considered the benefits.

The costs were either ignored or assumed away as those cast aside became roadkill for the greater good.

Returning to the past may sound romantic but shifting back to a heavily protected world, particularly at the speed with which Trump is pushing, is an avenue equally filled with danger.

If he imposes tariffs at minimal levels, global growth will slow.

If he resorts to the strategy he was threatening during the election, we could see a return to stagflation; a deadly combination of inflation and recession. Either way, it may not be pretty.

And there's no guarantee it will significantly lift employment. Modern factories use robots, not muscle.

That this is all taking place against a backdrop of a huge escalation in US government debt doesn't auger well.

America's debt is already north of a record $US35 trillion ($53.16 trillion) and, compared to the size of its economy, is now sitting at World War II levels.

The interest on that debt is now the government's second-biggest expense after social security.

Blowing that debt out further, particularly with massive tax cuts and a big lift in defence spending, threatens to undermine the stability of the American economy and the US dollar's role as the global reserve currency.

At some stage, if the trend continues at this pace, investors will no longer consider US government debt to be the safest in the world and will demand a premium to continue lending.

If the Democratic Party ever wants to return to power, it may want to think how best to run America's economy, to look after the interest of ordinary citizens and perhaps consider how it lost its way over the past three decades.

And perhaps remember Carville's advice to Clinton.