Executive Summary

President Trump ushered in a new era of trade policy in the United States over the past three years where bilateral trade agreements and tariffs turned the tide toward a protectionist stance. This was most recognizable in the U.S.-China trade war, with each country steadily increasing tariffs and barriers on the other. Trade tensions also escalated with some of America's key allies, such as the European Union, Canada and Mexico.

President-elect Biden likely will conduct trade policy differently than his predecessor, but we remain skeptical that he will completely revert back to the pre-Trump era of trade policy. We expect that Biden will be slightly more protectionist than President Obama, but we also look for him to be more cooperative and less confrontational, particularly with allies like the European Union, than President Trump. In this report, we discuss which tariffs are currently imposed, how trade policy may shift under President-elect Biden and what this means for trade flows and currencies.

Trade to Remain In Focus

On January 20, 2021, former Vice President Joe Biden is expected to be sworn into office as the 46th president of the United States. But it is looking increasingly likely that President-elect Biden will face a divided Congress. Of course, control of the Senate comes down to the two run-off elections in Georgia on January 5. For the Democrats to gain control of the Senate, they would need to win both of the seats up for grabs, resulting in a 50-50 tie in which Vice President-elect Kamala Harris would cast the deciding vote in favor of the Democrats.

In the event Biden does in fact face a divided Congress, or even in the slim chance that Democrats narrowly take control of the Senate, we suspect it will be difficult for Biden to pass sweeping policy legislation. Instead, we expect Biden will focus on efforts where the executive branch has unilateral power, such as trade policy in which we have seen President Trump take action during his presidency.

On Which Countries Are Tariffs Currently Imposed?

The Trump administration has threatened or imposed tariffs on many of America's trading partners over the past few years. These trade partners include, but are not limited to, China, the European Union (EU), Canada and Mexico, countries which accounted for 60% of total U.S. trade in 2019 (Figure 1).


Perhaps the most economically significant as well as headline grabbing has been trade tensions between the United States and China. Over thepast few years, the Trump administration has imposed multiple rounds of tariffs on imports into the United States from China, while Chinese authorities have imposed retaliatory tariffs against the United States. As a quick reminder, U.S.- China trade tensions began in the summer of 2018 with President Trump placing a 25% tariff on $50 billion of Chinese imports. Multiple rounds of additional tariffs occurred in 2018 and 2019, including a U.S. imposed 25% tariff on $200 billion of goods as well as a 15% tariff on $120 billion of goods (Figure 2). In response, China placed tariffs (5%-10%) on an additional $75 billion of American imports.


The two countries reached an agreement on a Phase I trade deal in late 2019, which dialed back trade tensions. The United States agreed to cut the 15% tariff rate on $120 billion of Chinese imports to 7.5%. In return, China agreed to increase purchases of U.S. products by at least $200 billion, specifically, an extra $78 billion in manufactured goods, $52 billion in energy products, $32 billion in agricultural goods and $38 billion in services. Despite the Phase I trade deal, the United States continues to maintain tariffs on about $370 billion of Chinese imports (80% of the total), while China still has tariffs on just about all imports from the United States.

Source: U.S. Department of Commerce, United States Trade Representative and Wells Fargo Securities

The United States and the EU have also experienced a deterioration in their trade relationship over the past few years. The World Trade Organization (WTO) backed the United States in late 2019 in placing tariffs on $7.5 billion of imported European goods as a result of illegal subsidies given to airplane manufacturer Airbus. But, the WTO also ruled that the United States had also given illegal subsidies to Boeing under WTO law, allowing the EU to raise tariffs on up to $4 billion worth of imports from the United States. President Trump also threatened to place tariffs on European autos and auto parts for most of his administration, which placed added stress on the U.S.-EU trade relationship, even though these tariffs were never formally implemented.

Canada and Mexico were not excluded from tariff and trade uncertainty. In mid-2018, the United States imposed a 25% tariff on imports of Canadian steel and a 10% tariff on imports of aluminum. In response, the Canadian government retaliated with countermeasures, imposing tariffs on slightly less than $3 billion worth of U.S. aluminum products. But the United States and Canada subsequently agreed in 2019 to lift steel and aluminum tariffs and end all WTO-related litigation. In Mexico's case, President Trump threatened tariffs on most imports from Mexico in an effort to control illegal immigration into the United States. Although those threatened tariffs were never implemented, trade uncertainty hovered over Mexico as the risk of these tariffs never fully receded. Ultimately, the three North American countries agreed to the United States, Mexico, and Canada Agreement (USMCA), which was put into effect earlier this year.

Possible Trade Policy Changes in the Biden Administration

As mentioned previously, the president has a substantial amount of authority and influence over trade policy in the United States. President Trump did not need congressional approval to impose tariffs on American trading partners and withdraw the United States from the Trans-Pacific Partnership (TPP). Therefore, there could be a new direction for American trade policy if, as seems likely, Joe Biden becomes president on January 20. That is not to say we expect to get a full return to policy before President Trump took office; however, we believe it is likely that more conciliatory and less protectionist trade policy returns under a Biden administration.

One of the key pillars of Biden's proposed policy is to strengthen trade relations with American allies via a multilateral approach to trade, rather than the bilateral approach pursued by President Trump. On the campaign trail, Biden hammered home his view of building closer ties with one particular trade partner: the EU. In our view, this could mean an attempt at restoring EU relations back to the pre-Trump era. Tariffs on the $7.5 billion in EU products could wind up being removed, while the threat of future tariffs on European autos and auto parts could also diminish under the Biden administration. Similarly, the Biden administration likely would not threaten to impose levies on Canadian and Mexican goods, and it likely will continue to honor the USMCA trade agreement.

During the campaign, Biden stressed a "hard line" approach towards China to change its behavior. Although Biden's China strategy sounds similar to President Trump's, Biden has not been clear on whether he would use tariffs as a way to incentivize behavioral change from China. In that context, it is difficult to know whether Biden will roll back some, all or none of the Trump administration tariffs. However, we believe an immediate reversal of the Trump administration's China trade policy is unlikely. But Biden has stated explicitly that a multilateral approach against China may be the optimal tactic. Instead of using harsh rhetoric and threats of bilateral action, Biden has said that he plans on using a more coordinated approach, utilizing the EU specifically, as well as other countries to pressure China for reforms.

Implications for U.S. Trade Flows

So what does the possible shift in trade policy mean for U.S. trade flows going forward? Weak demand and necessary business and manufacturing closures to curb the spread of COVID caused trade flows to dry up early this year. Indeed, U.S. real exports and imports both fell at a record pace in the second quarter, although some rebound occurred in Q3 (Figure 3). But with virus cases on the rise again and renewed restrictions being put in place, U.S. trade could be subject to further disruption in the near term. Therefore, looking past the virus-induced slowdown is necessary.


Source: U.S. Department of Commerce and Wells Fargo Securities

The trade policy of the Biden administration could have implications for trade flows in a post- COVID world. For example, China slipped below the EU in 2018 as America's most important trading partner as the trade war between the United States and China began to ramp up and weigh on trade between the two economies (Figure 4). Although total U.S. exports peaked in 2018, exports to the EU continued to rise until the onset of the COVID-crisis. If Biden does indeed take a hard line approach toward China and relaxes restrictions on the EU, the latter could continue to gain as America's largest trading partner.


Capital goods represent the largest share of American exports to the EU at nearly 40%, followed by industrial supplies and consumer goods that account for about 23% each. Exports to the EU represents 16% of total U.S. capital goods exports and a quarter of total U.S. consumer goods exports. We would expect exports to the EU, particularly in these three export categories, to grow as restrictions are relaxed. Similarly, the expected cooling in tensions with the EU would be a positive for import growth from that region. Less uncertainty around trade with Canada and Mexico should also support of U.S. trade flows with its North American neighbors. On the other hand, however, we would expect American exports to China to remain restrained if the United States and China maintain tariffs on each other. In that regard, capital goods represent the largest share of exports to China at 40%, followed by industrial supplies at 30%. Additionally, we would expect American imports from China to remain under pressure if tariffs remain in place.

Outside of specific trade relationships, addressing supply chain risk will be another factor at play in the coming trade environment. COVID has revealed vulnerabilities in international supply chains, and the pandemic may cause a shift toward reshoring. Although a complete on-shoring of supply remains unlikely, we expect part of the focus in the post-COVID recovery will be a rethinking of key vulnerabilities in supply chains, which has the potential to weigh on import growth. Although the cost of diversifying and/or stockpiling certain goods are high and can impede growth, some shift in supply chains will likely result from the virus. In that regard, Biden has articulated a push for ‘Buy American' legislation, which supports a less reliant America in support of some supply chain reorientation.

Currency Implications

Over the past few years, financial markets have reacted sharply to both negative and positive headlines on global trade. Tariffs and other escalations in trade tensions between the United States and China rattled financial markets and pushed volatility higher, while temporary "cease-fires" and the signing of the Phase I trade deal resulted in a risk-on tone across global financial markets (Figure 5). If, as we believe, Biden alters the direction of U.S. trade policy, then it is possible financial markets will pay just as close attention to trade-related headlines in 2021 as they did over the past few years.


Source: Bloomberg LP and Wells Fargo Securities

In the event the Biden administration is successful at implementing a less protectionist trade agenda with the EU, Canada, Mexico and other trade partners, we believe financial markets, in particular currency markets, could adopt a risk-on stance. In that context, we would expect currencies such as the euro, Canadian dollar and Mexican peso to rise, while other risk-sensitive G10 and emerging market currencies could also experience some upside. On the other hand, typical safe haven currencies such as the U.S. dollar, Japanese yen and Swiss franc could broadly depreciate as risk-taking comes back into the marketplace.

However, Biden's approach to China could play out a few different ways in markets. Post-election, market participants broadly believe Biden will ultimately look to ease trade tensions with China as rhetoric and threats are likely to dissipate. While we tend to agree with this assumption, it is possible Biden's approach to China turns out to be not all that dissimilar from President Trump. As mentioned, Biden's stance on tariffs is somewhat unclear and we do not think an immediate snap back to pre-Trump policy is likely. This could mean tariffs stay in place for longer than markets are expecting, while a coordinated approach against China turns more hostile as the Chinese government digs in not only against the United States, but the EU and other powerful, influential countries.

Although this scenario is more of a tail-risk at this point, financial markets would probably adopt a risk-off stance, and risk-sensitive currencies could sell-off rather sharply. In this scenario, emerging market currencies broadly would depreciate, with commodity and China-linked currencies the most impacted. Currencies such as the Australian and New Zealand dollar would likely come under pressure, while the Chinese renminbi, Mexican peso, Brazilian real and most emerging Asian currencies would also come under pressure. We would expect the U.S. dollar to rally on safe haven capital flows as uncertainty builds and the path of the global economy and recovery from the COVID-induced slowdown becomes more unclear.

In the event Biden's multilateral approach to China is successful and tariffs are rolled back, a Phase II deal is made or some other tension-easing developments are finalized—which seems more probable than our tail-risk scenario above, though still not our base case—we would expect foreign currencies to rally. In this scenario, high beta emerging market currencies such as the Mexican peso, Brazilian real and South African rand could outperform. Tariff related pressure would be lifted off the Chinese economy and the renminbi would likely strengthen, while emerging Asian currencies and G10 currencies with the strongest trade linkages to China would strengthen as well. This scenario may be the most negative for the U.S. dollar and Japanese yen, as market participants would have limited rationale for deploying capital towards safe haven assets or seeking exposure to traditional safe haven currencies.


U.S. trade policy will shift gears under President-elect Biden, although a complete reversal to the pre-Trump era of trade remains unlikely. We expect Biden's priority when it comes to trade policy will be to mend relations with America's allies such as the EU, Canada and Mexico. This will likely result in a rollback of existing tariffs or the quelling of tariff threats.

Further, although Biden will likely continue a hard line approach towards China, his exact strategy vis-à-vis that country remains unknown. In our view, Biden will likely seek a coordinated approach against China and work closely with allies such as the EU rather than continue the bilateral approach under President Trump. Although we expect American trade flows to pick up again as the pandemic-induced global recession comes to an end and as trade tensions with allies subside, the COVID shock could lead to some reorientation of supply chains. A general relaxation in trade tensions likely would lead to some downward pressure on the dollar, although the greenback could find some safe-haven support if trade tensions with China were to take center stage again.

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Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.

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