Why U.S. trade policy matters this election both domestically and abroad

Chris Kushlis

Where the economics of tariffs gets more complicated is who bears the cost? Is it the end consumer or is it the company that exports the good.

Ritu Vohora

Tariffs, a trade war, further deglobalization? What could this U.S. presidential election bring on trade policy. Welcome to ‘The Angle’ from T. Rowe Price — our podcast on the forces shaping financial markets.

I'm Rita Vohora, a global capital markets investment specialist, here at T. Rowe Price Associates and your host on this special series on the U.S. presidential election. Joining me today to discuss this critical topic of trade policy are Chris Kushlis, chief emerging markets macro strategist at T. Rowe Price Associates, and Gil Fortgang, who is a Washington analyst for T. Rowe Price Investment Management.

Welcome Chris and Gil.

Chris Kushlis

Hi Ritu, lovely to be here today.

Gil Fortgang

Pleasure to be here, Ritu. Long time listener, first time caller.

Ritu Vohora

Right. Well, there's certainly lots to discuss, so let's dive right in. Gil, perhaps I could start with you to set the scene for our listeners. What's the current state of U.S. trade policy?

Gil Fortgang

Thanks Ritu. That's a great question to kick us off. But I think in order to understand where

U.S. trade policy stands today, we have to take a little bit of a look back at the last decade as there's been a marked change in the direction of U.S. trade policy with a move towards more protectionism. This started during Donald Trump's first term as president.

He started talking very differently about trade, made some pretty critical changes. A few come to mind. Tariffs, firstly, which are effectively a tax imposed on goods and services imported from another country. So those tariffs were imposed on a range of Chinese imports, which kicked off a trade war between the two countries. Around $300 billion worth of goods were eventually targeted.

The second thing is that Trump withdrew from the Trans-Pacific partnership, the TPP agreement, which was a proposed trade agreement with 12 Pacific Rim countries.

Third, he renegotiated NAFTA, the free trade agreement with Mexico and Canada. And lastly, he introduced tariffs on steel and aluminum imports from Europe.

Biden's election in 2020 brought in a new party into the white House.

But what's been interesting is that a lot, but not all, of Trump's trade policies were largely kept in place. It's important to point out there was a distinction for strategic allies. Tariffs on Europe, for example, were paused during Biden's first term. The ones levied on China remained in place, however, even as U.S. inflation hit multi-decade highs and there were some calls for them to be removed to help ease price pressures.

Even more to the point. Biden's presidency continued to take targeted actions driven by security considerations and pursue efforts to strengthen domestic industry. For example, earlier this year, tariffs were raised again on around $18 billion worth of select Chinese imports, including electric vehicles and semiconductors. So, in all, there's been a paradigm shift towards protectionism this past decade in the approach on trade policy.

Chris Kushlis

And actually, if I could just make a point here, this is not something we're only seeing in the

U.S. This is a broader trend more globally. What with the coronavirus pandemic and the war in Ukraine, countries around the world are having to think harder about the security of their supply chains and who they trade with.

Ritu Vohora

Ah that's a great point to make, thanks so much, Chris. We've certainly seen, I guess, a rerouting of supply chains and the trend towards protectionism in other places, too. As you highlighted, Gil, in recent years, both parties have shown a commitment to protect domestic manufacturing and grow the strategic rivalry with China. But of course, how they approach this will likely diverge.

So, Gil, what are the key issues we should be looking out for on trade policy in this election cycle?

Gil Fortgang

So just to name a few issues, the markets are watching and following. And I should add, I think the markets are watching these largely because the difference between the two candidates could be pretty drastic.

First, any change in US-China trade relations.

Second, the future of USMCA, the United States-Mexico-Canada Trade agreement. This is up for review in 2026, which will be during the term of the new president.

Third, what happens in Europe, with tariffs currently paused until March 2025.

Fourth, and lastly, how the new president views strategic allies as there appears to be potential for different approaches here. For example, Trump has shown in the past he has no issue slapping tariffs on Europe while Biden administration paused those tariffs.

Ritu Vohora

Yeah, and I guess there's also the risk that those tariffs are expanded to other countries or new industries are targeted. So Chris, what about from a company perspective?

Chris Kushlis

That's a good question Ritu. Since 2016, there's already been a reordering of international supply chains that companies have been conducting. So, for example, if we take some Chinese companies, they've been rerouting goods through places like Mexico or setting up factories for final assembly in Southeast Asia. And that way they can ship goods to the United States not subject to tariffs.

This has led to a second round of debate in the U.S. about then how do we deal with that? Could the loopholes be closed? And companies, I think, are watching these kinds of debates very closely.

Ritu Vohora

Okay. So, it's really these so-called rules of origin that will be important for companies, which for our listeners, these are the criteria used by the government to determine the national origin of a product. Would you agree to that Chris?

Chris Kushlis

Yeah. Any changes to those rules of origin are going to be followed very closely by the companies because they have implications for where they set up production.

Ritu Vohora

Great, and so, coming back to you now, Gil, you know, how could trade policy evolve after the election?

Gil Fortgang

The potential range of outcomes is actually quite wide. Let's take a look at at Trump first. The direction or orientation of his views on trade, is quite clear. But the details may be less so. During this election campaign, he's been quite vocal on raising tariffs on China as high as 60%.

And even threatening to introduce a universal tariff on everyone else. He regularly talks about targeting countries where the U.S. has a large trade deficit, as in where imports of goods exceed the number of exports. So that could be a focus on that as well, which, as we

mentioned before, could actually include allies. How much of what he says that could materialize if he wins is unknown at this point.

And we should remind ourselves that at this point, it's mostly rhetoric.

Ritu Vohora

That's a really important disclaimer. What's rhetoric and what actually materializes could be a very different story. But that does raise the question, you know, how could Trump put these tariffs in place in practice?

Gil Fortgang

It’s another good question. And I'm not a lawyer. So, this is not legal advice.

Ritu Vohora None taken.

Gil Fortgang

Looking at Trump's first term, as some precedent. A section 301 tariff, which can be used against countries whose trade practices restrict the U.S. commerce. Which was used in the first administration to implement tariffs on China. That could easily be used again. But it's only on a country-by-country basis. So, for the universal tariff, that's likely a lot more complicated. Congress does have primary authority over trade policy, though some powers have been delegated to the executive. But the legal authority for such a large move, like 10%, could be murky.

Turning to the Democratic nominee, Kamala Harris, less is known about her views on trade, but she has served as vice president under the Biden administration, and there's an expectation that current policies maintained where tariffs on China remain in place. While the trade truce with strategic partner Europe is extended.

Ritu Vohora

Okay, so potentially more of the same from Harris with tariffs driven by security considerations and support for key industries. And she's certainly been a proponent of export controls on areas like advanced semiconductors. As well as you're saying, you know, placing distinction for strategic partners.

In all it seems unlikely that under either candidate, there will be a rollback of protectionism.

Chris Kushlis

Yes. Feels like a floor is really now set under trade policy with both candidates. Neither are likely to roll back tariffs in place or seek new free trade deals. And I think what history has shown us that it's very difficult to roll back tariffs once they've been introduced. The industries that receive the benefits of the tariffs get used to them and lobby for them for staying in place.

One of my favorite examples of a tariff that stayed in place for decades is the so-called chicken war between the U.S. and Europe in the 1960s, where the Europeans tariffed U.S. imports of poultry and U.S. in response tariffed exports of light vehicles.

Ritu Vohora

Chicken war I was going to ask you, please elaborate on that. That's absolutely fascinating. Thanks for that anecdote, Chris. So now let's move to what are the potential response mechanisms by countries and companies to tariffs, Chris.

Chris Kushlis

So, I think there's typically three responses that countries engage in when they're hit with tariffs. So, the first is they can respond with retaliatory tariffs of their own. For example, Europe responded with tariffs on select U.S. goods back in 2018. This is also what China has done. China tried to respond initially one for one with the tariffs that the U.S. imposed in 2018.

But they quickly ran out of room because they have a large trade surplus with the U.S. And, so, as a result, China's approach has continued to evolve.

A second response countries can do is simply to weaken their currencies to help offset the impact of the tariffs.

And then lastly, they can do what I've mentioned before, which is encourage their companies to set up shop in third countries to reroute the goods, to try and get around the tariffs that way. What's important to mention here is that these retaliatory tariffs could be tried if it's a single industry or country targeted. But if the U.S. imposes a universal tariff on all imports coming in, it's a lot harder to reroute through third countries. So that may become a limit to the response, if indeed that policy comes into place.

Ritu Vohora

That's a really important point, thanks, Chris. So, I guess, you know, understanding companies exposures to those overseas supply chains and their potential to increase prices in response to rising costs will be important. And that brings us to the last area I wanted to touch on, here, which is what are the potential broader implications of U.S. trade policy Gil?

Gil Fortgang

So, the U.S. is the largest importer of goods in the world. In 2022, goods imports totaled $3.2 trillion. As, economics Professor Michael Pettis aptly calls it — the U.S. is the consumer of last resort.

The sheer size means there's potentially broad ripple effects for consumers, companies, industries, and governments alike, both in the U.S. and outside if tariffs are increased or

expanded to new countries. I'll pass it over to Chris to touch on some of the macro implications.

Chris Kushlis

Alright, thanks, Gil. The economics of tariffs are fairly straightforward in a textbook sense. The currency of the country that imposes the tariffs should appreciate, while the currency of the country that receives the tariff should depreciate to offset the loss of competitiveness from the tariff. Tariffs are also typically inflationary for the country imposing them and deflationary for the country receiving them.

Where the economics of tariffs gets more complicated is who bears the cost? Is it the end consumer or is it the company that exports the good. Literature from the 2016 tariff episode, when the U.S. imposed tariffs on China, generally concludes that the U.S. consumer bore most of the cost as the Chinese companies were able to pass through almost the entire cost to the end buyer.

That's not always the case, because it really depends on how reliant the consumer is on certain suppliers. And if it's relatively easy for them to shift to new suppliers to avoid that cost.

So, in all, as Gil has mentioned with the U.S. as a consumer of last resort, and it plays a critical role in the global economy, there's some pretty meaningful impacts from tariffs if they get imposed, particularly if the U.S. goes down the route of imposing a universal tariff.

So, even if countries respond by devaluing their currencies, economists would expect some type of negative impact more broadly on growth in these countries. Some of that comes from uncertainty effects. And there's a lot of debate about how much that could potentially be.

And whether it depends on the economies that are receiving the tariff are relatively open and trade dependent, or whether they're relatively closed, and trade is a relatively small part of their GDP.

There's also an expectation from economists of more inflation in the U.S., and potentially more deflation in the rest of the world. And that could have knock on effects for the relative paths of monetary policy between the U.S. and the rest of the world.

And finally, just to conclude or make a last point here is the potential implications for growth and inflation are far reaching and they go far beyond just impacting the U.S.

Ritu Vohora

Well, thanks for that, Chris. That's a good place to wrap up. It seems that trade policy and how it evolves post-election could matter for all of us, particularly if we get those universal tariffs. With broad ripple effects potentially impacting everything from growth and inflation

that you outlined to consumers, companies, industries, and governments alike, both in the

U.S. and abroad.

Thank you so much, Chris and Gil, for your time today. It's been an absolute pleasure.

Gil Fortgang

Thanks. This has been great.

Chris Kushlis Thanks, Ritu.

Ritu Vohora

In our next episode will be delving into how energy policy could evolve under each candidate— will it unplug or charge up the energy transition? Tune in to find out. Thank you for listening to ‘The Angle’. You can find out more information about this and other topics on our website. Please do rate and subscribe wherever you get your podcasts.

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This podcast episode was recorded in September 2024.

The source for the size of U.S. goods imported in 2022 was the Office of the United States Trade Representative.

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