At Davos, Trump will face a less friendly brand of billionaire – but their dominance is waning | Larry Elliott

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Hollywood would struggle to come up with a better plot. On Monday, as Donald Trump returns to the White House, the World Economic Forum’s (WEF) annual talk fest kicks off in Davos. The arch protectionist v the spiritual home of globalisation. The man who says “tariff” is “the most beautiful word in the dictionary” being sworn in for a second term just as the high priests of free trade assemble 5,000ft up in the Swiss Alps.

The Davos elite have a love-hate relationship with Trump: they despise him, but when he showed up at the WEF as president he was the hottest ticket in town. This year, the billionaires will have to make do with a video link appearance, but even from the other side of the Atlantic, Trump will dominate events. That’s not surprising. Most of the WEF attenders have grown up believing that trade barriers should be torn down, not erected. As such, they see Trump’s support for protectionism as a dangerous heresy.

Mainstream economists believe countries should specialise in what they do best (or what they are least bad at), and to do otherwise comes at a cost: feather-bedding inefficient producers and preventing consumers from having access to better, cheaper imports.

This is about more than a dry debate over the theory of comparative advantage. For a start, there’s the possibility of a global trade war. Then there’s the risk that a battle for supremacy between the US and China could turn nasty. There is the threat of global economic fragmentation if Trump picks fights not just with countries seen as strategic rivals, but with those hitherto seen as close allies.

Historically, countries have become keener on removing trade barriers once they become the world’s most powerful economy. Trump is different in that respect. His tariffs are a response to the rapid growth of China and the threat it poses to continued US economic hegemony. So, without question, Trump’s return to the White House could spell big trouble – and not only for the US. If he does impose tariffs on the scale proposed when he was on the campaign trail, the effect will almost certainly be higher prices for imports into the US that will add to costs for business and consumers.

Even if, as seems likely, he scales back the tariffs or uses the threat of them as bargaining chips to bully countries into doing what he wants, there is still a potential cost. Tariffs will mean higher prices and any increase in inflationary pressure will make the US’s central bank, the Federal Reserve, less willing to cut interest rates. Higher borrowing costs will make it more expensive for the US government to service its debts and, because what happens in the US affects the rest of the world, it will make life more difficult for other countries as well. The upward pressure on US inflation will be amplified if Trump also goes ahead with proposed tax cuts.

Given all that, it’s not hard to see why Rachel Reeves awaits Trump Mark II with some trepidation. The chancellor badly needs the Bank of England to speed up the pace of interest rate cuts. Yet a quick look around the world shows that Trump is not a lone voice. Joe Biden’s Inflation Reduction Act – which provided open-ended subsidies for the production of green technology in the US – was clearly protectionist. The EU’s decision to slap a tariff of up to 35% on Chinese electric vehicles was designed to protect the German car industry. India is one of the fastest-growing and most protectionist of the world’s major economies.

What’s more, few countries have ever industrialised successfully without protectionism. Britain certainly didn’t and nor did the US. Trump can trace US government support for domestic manufacturers all the way back to Alexander Hamilton, the first US treasury secretary, who came up with the idea of supporting “infant industries” in the 1790s. Hamilton rejected Adam Smith’s notion that the US should concentrate on agriculture and leave manufacturing to Britain. Nor is Trump the first occupant of the White House to be a staunch protectionist: Abraham Lincoln held similar views.

Today, globalisation is in retreat and the body set up to pursue the cause of free trade, the World Trade Organization, can neither broker new multilateral deals to reduce tariffs nor effectively police existing agreements. Voters have lost what little faith they had in the trickle-down theories of the Davos crowd and expect more of their governments than a hands-off, laissez-faire approach.

Britain is something of an outlier. It has a highly competitive service sector that generates sizeable balance of payments surpluses, but a much weaker manufacturing sector that has been running trade deficits since the early 1980s. Services do not need protecting, but if there is to be any real future for manufacturing, Britain could happily learn some lessons from the rapid industrialisation of east Asia.

None of the “tiger economies” of that region would have developed so rapidly had they allowed their fledgling companies to feel the full blast of competition from more advanced industrial countries. Only when they felt their manufacturers were able to stand on their own feet did Japan, South Korea and Taiwan start to reduce state support. They judged that free trade was not the best way to grow their economies and their experience shows that, in the right hands and in the right circumstances, protectionism is an effective tool. But it has to be used with care and discretion. It goes without saying that these are not words normally associated with Trump.