The Strategist

What if? Trump presidency 2.0 would intensify protectionism and accelerate global trade fragmentation

Polls on the US election continue to show a close race. What consequences would a Trump or Harris victory have for the global economy? Donald Trump's proposed tariff policy aims to strengthen American manufacturing by imposing high import tariffs, particularly on Chinese goods, which could affect consumer prices and global trade. Kamala Harris, on the other hand, would pursue a targeted trade policy focused on national security and green technologies.

Date
Auteur
Tina Jessop, Senior Economist, LGT Private Banking
Temps de lecture
10 minutes

Strategist Trump tariffs
© Shutterstock

With the US election just 13 days away, the outcome of the race is still anyone's guess. We see five key areas of diverging policy direction between the two candidates: taxes, immigration, social security, climate and foreign trade policy. 

In past publications and client events, we have highlighted that we expect a Trump presidency to be slightly more positive for GDP growth and equity markets, but also more inflationary than the Harris policy agenda. We expect both candidates to run massive fiscal deficits, if Congress allows.

Today’s Strategist delves into the economics of Trump tariffs. Making American manufacturing great again is one of Trump’s key policy priorities; and tariffs will be utilized as a key tool to revive the US industrial base. While imports from China will likely bear the brunt of the tariffs with rates of up to 60%, Trump has floated the possibility of a universal tariff of 10% or 20% on all goods imported from across the globe. 

Trump tariffs: not if, but to what extent

Tariffs fall within the scope of presidential executive orders. Thus, if elected president, Trump can raise tariffs unilaterally, without congressional approval. This means that, unlike full-scale tax-cut extensions or ending taxes on social benefits, a Republican sweep is not a prerequisite for tariff policy. 

We cannot predict the scale nor the scope of potential Trump tariffs, but we have high conviction that Trump would deliver something, most likely starting with China, and possibly starting with targeted measures that affect certain goods, before broadening the scope of the tariffs. Some pundits believe Trump would target countries that do not have free trade agreements in place, or that he would use tariff threats as a negotiating tool against countries that he believes are either undermining US manufacturing through unfair practices or failing to meet the NATO defence spending requirement of 2% of GDP. 

Consumer goods most affected, with some intermediate goods

The product categories most affected by tariffs on Chinese goods are consumer electronics, computer products, household appliances and goods, furniture, apparel, footwear and toys. The US sources a substantial share of consumer electronics, including smartphones, laptops, televisions and tablets from China. In addition, many US manufacturers rely on Chinese imports for parts and machinery. Should European exports fall under the tariff umbrella, the cost of machinery and transport equipment, chemicals and manufactured goods would rise as well. 

While the US is a fairly closed economy, with goods imports amounting to 11% of GDP and goods exports amounting to roughly 8% of GDP, the sheer size of its economy makes the US one of the top three trading partners for many countries around the globe, including Canada, Mexico, China, Japan, Germany, and the UK. US tariffs and potential countermeasures would thus create notable uncertainty.

Trade policy under Harris

Trade policies would look different under Harris, but we expect her to maintain the current stance on China. The 2018 Trump tariffs have endured the Biden / Harris administration and have even been expanded. Under Harris, we anticipate additional but targeted trade restrictions between the US and China, largely driven by national security considerations and Harris's goal of building US capabilities in green tech.

Impact on growth, inflation and central bank policy

Tariffs translate into downside risks to growth. Levies are applied at the point of entry, i.e. at the cost of the importing party. Typically, these costs are passed on to consumers and inflation rises as a result. Based on a simplified calculation, that excludes potential retaliatory measures, we believe the Trump tariffs could lift inflation by up to one percentage points, with the impact mostly felt in the first year of implementation. 

On the growth side, higher prices and trade uncertainty weigh on private consumption and investment spending. Employment in affected sectors typically falls and GDP suffers. The first round of US import tariffs on China affected only 2-3% of total US consumption. Its adverse effect on growth was offset by broader economic momentum. We expect a new round of tariffs to have more far-reaching consequences (although this should be offset by the positive impetus from tax cut extensions), especially as the US would likely clamp down on third-country circumvention, as has happened in recent years via Vietnam and Mexico.

Higher inflation would complicate the Fed’s monetary policy setting. However, trade tariffs are a one-off. The Fed’s rate cutting trajectory would likely slow, but not be derailed altogether as tariff-induced inflation is not a supply-demand issue.

A final word

Broader US tariffs could create additional headwinds for global trade, but they are just another ingredient in the theme of global trade fragmentation that has been unfolding over the past few years. Regardless of the outcome of the US elections, we expect global trade flows to continue to adjust as geopolitical tensions linger and countries revert to industrial policy and protectionism to build and maintain domestic capacity. 

LGT Navigator Yield increase dampens record chase on Wall Street Tous les articles LGT Navigator Treasury yields rise amid Fed rate cut uncertainty
Prendre contact
inspiré par l’avenir depuis des générations
Nos newsletters - automatiquement up to date

Les newsletters LGT vous informent régulièrement sur les insights et les nouveautés dans les domaines de l'économie, de la finance et bien plus encore.

Inscription à la newsletter
Follow us
Scaling impact LGT Venture Philanthropy