In a rare example of bipartisanship in this challenging political environment, most voters and lawmakers—on both sides of the US political aisle—agree that China is a geopolitical and economic rival, and support the Trump administration's goal of "fair trade."
Even so, support for President Trump's tactics will likely be contingent on the health of the US economy and the perception that the strategy is working. We estimate that a 25% import tax on all Chinese goods would represent a 0.75–1% hit to US GDP; result in 3% lower S&P 500 EPS growth than our base case; and have a particularly acute impact on a handful of US sectors, including the politically sensitive agriculture, heavy machinery, and aircraft industries.
If the perception does shift, President Trump could face a challenge either from the right or from the left.
First, let's look at dynamics in the president's own party. The principle of free trade has long been a feature of the Republican Party's policy platform, but trade has often been treated on a caseby- case basis. Virtually every modern US administration—regardless of party— has considered the threat of trade tariffs and quotas as part of their policy toolkit when responding to trade practices that they regarded as unfair.
So far, President Trump's sky-high approval rating among Republicans has remained unaffected by headlines warning of the adverse impact of a trade war. There is a wing of the Republican Party that disagrees with the specific use of tariffs to resolve the US-China trade dispute, but the president is on solid political footing on the broader issue of whether China should be challenged on its practices.
Working-class Americans are a vitally important voting bloc for the Democrats. Although the Democratic Party has often embraced free-trade agreements —for example, NAFTA under President Clinton and the 12-country Trans-Pacific Partnership under President Obama—it also has a long history of advocating a tough approach on trade.
So far, Democrats have been fairly supportive or at least acquiescent of the Trump administration's approach on the negotiations. Senate Minority Leader Chuck Schumer told President Trump to "hang tough" and added "strength is the only way to win with China."
Democratic candidates are now focused on mobilizing labor union support to gain an edge in the Democratic primary and they have little to gain in making trade a major campaign issue for the moment. It would be difficult to appear tougher than the president on trade, and a "soft on China" perception could be fatal at the ballot box. Case in point, former Vice President Joe Biden expressed doubt that China is an economic or geopolitical threat to the US, prompting President Trump to quickly jump on the opportunity, suggesting that the Chinese may be dragging their feet on a deal because they are "dreaming" of Democratic victory in 2020.
As long as playing tough with China resonates positively with voters, we doubt that primary election politics will play a meaningful role in USChina negotiations. However, time and perception are important factors. If trade talks drag on too long, or produce a weak agreement or heavy economic toll, Democrats will pounce on that failure.
Author: Justin Waring, Investment Strategist Americas