Tariffs of the trade: Outlook for trade policy amid the 2024 election

Summary

Many of the tariff policies enacted during the 2018-19 trade war remain in place today. Looking through pandemic-related effects, tariffs have increased costs for domestic importers and led to a diversification away from Chinese imports. The president has nearunilateral power when it comes to trade policy, and as such, we expect it to come into greater focus headed into the 2024 election. In this note, we recap current trade policy and its impact on economic growth, as well as offer some guideposts on the trade outlook in the context of a Trump or Biden presidency.

The Trump administration took a protectionist stance on trade policy. Most tariff policy put in place in 2018 and 2019 remains in effect today. The Biden administration has made only minor changes. Countries have retaliated with tariffs of their own, but we focus on U.S.-imposed tariffs and their effect on imports and domestic demand in this report.

The U.S. trade-weighted average tariff rate on merchandise imports from the world remains elevated today compared to where it was before the trade war began, mostly due to the high tariffs on Chinese goods. Tariff costs have largely been absorbed by domestic importers and, although bumpy due to the pandemic, have led to a diversification away from dutiable goods.

U.S. goods imports from China have retreated more sharply than from other Asian countries (South Korea, Singapore, Taiwan, Vietnam). With overall imports higher today, tariffs have ultimately led to a movement away from China to suppliers in other countries rather than a surge in domestic production.

Importers still face higher costs and have passed on some of these costs to households in the form of higher prices. While tariffs can be inflationary, the overall inflationary impact of the trade war in the context of the broader U.S. economy has been rather minimal, particularly in the wake of the pandemic.

Given the president has near-unilateral power through the executive branch when it comes to trade policy, the trade environment may garner more attention come the 2024 election, particularly in the event of a divided government (i.e., Democratic president and Republican-controlled Congress or vice versa), which typically leads to political gridlock and only incremental policy changes from Congress.

We expect more pronounced changes if the Republicans secure the White House. If former President Trump is re-elected, we may see an escalation in tariffs; he has proposed a 10% baseline tariff and increasing the current tariff rate on China to 60%.

A re-elected President Biden would likely stay the course on trade policy. The status quo is notable in itself, however, as it demonstrates both candidates have similar objectives for the country's trade relations with China, at least to some degree.

A continuation of protectionist policy, or potential escalation, can add fodder to ongoing deglobalization. The inflationary impact of additional tariffs could be partially absorbed in the near term because suppliers' margins are elevated and diversification away from already tariff-exposed product is in train. But if consumer goods are directly targeted, we would expect to see some price pressure as retailers' margins are lean, leaving them less nimble today in a rising cost environment.

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