Trade talks—or lack thereof
July's Democratic presidential debates covered a wide array of subjects, including lengthy discussions on healthcare, immigration, and climate change. However, the topics of international trade and commerce received comparatively little attention from the field of candidates, despite their importance to the US economy and their geopolitical implications.
The initial set of debates in June saw very little discussion on trade, as only three candidates were able to discuss the topic before being interrupted for a commercial break. Trade was given more airtime during the second set of debates, but most of the candidates appeared reluctant to categorically oppose the use of tariffs on imported goods from China, choosing instead to criticize the manner in which the Trump administration conducts its trade negotiations.
The dearth of discussion on trade—at least thus far—is revealing and attributable to the fact that most of the Democratic field is more or less aligned with the general thrust of the current administration’s trade policies.
Seven years ago, when Mitt Romney opposed Barack Obama for the presidency, his platform rested on a traditional GOP foundation built on conservative social values, fiscal restraint, and a muscular foreign policy. He never abandoned the concept of free trade during the campaign, opting instead to focus on China’s purported currency manipulation. Mitt Romney lost the election. Donald Trump’s subsequent campaign for the presidency upended Republican orthodoxy in more ways than one, but his opposition to multilateral trade agreements was among the most prominent. And he won.
Participants in the second round of Democratic debates1
Candidates on stage on 30 July and 31 July
The expected impact of escalating tariffs
It didn’t take long for the new administration to leverage the US position as the world’s biggest consumer, approving tariffs on washing machines and solar panels in January 2018. And, using protectionist trade policies as a core component of foreign policy—a development that harkens back to the Cold War—the president announced the imposition of a 25% tariff on steel imports and a 10% tariff on aluminum imports in March 2018, citing national security concerns.
Completing the tariff trifecta a month later, the US Trade Representative published a proposed list of products imported from the Peoples Republic of China (PRC) that would be subject to additional tariffs.2 Subsequent negotiations with China collapsed, leading to an escalation in the dispute and broad tariffs on both sides, including the president’s recent announcement on 1 August 2019 of his intention to impose a new 10% tariff on an additional USD 300bn of Chinese goods.
How might voters react to tariffs?
There is a striking paradox in the way that citizens of advanced economies view global trade. On the one hand, they generally agree that international trade is good for their respective countries. However, when asked in a recent Pew Research Center study whether trade creates jobs, only 36% of US respondents agreed with the premise. And even fewer, just 31%, believe that trade increases wages.3
President Trump’s use of tariffs to restrict access to the US market poses a challenge to faster US economic growth. But here again, he appears to have tapped into a deep well of skepticism among voters regarding the impact of free trade on their own well-being. While the tariffs may have already increased the cost to US households, voters may not react as negatively to their imposition as one might expect.
Globally, citizens back trade in principle, but many question its benefits
Trade’s role in the 2020 presidential election
The Democratic candidates are keenly aware of the mixed feelings that global trade generates in the American heartland and in particular among voters in pivotal Midwestern states. We are inclined to believe that the challengers will continue to focus on the abrupt manner in which the president has imposed the tariffs, rather than the substance of the policy. We expect some of the Democratic contenders to criticize the president’s preference for unilateral action on trade, often through tweets, in lieu of any overt support for free trade. Of course, that approach could change if the US economy slows appreciably in the months ahead. But for now, this is an area that the Democratic field has largely ceded to the incumbent.
America’s two political parties are now more aligned on the issue of global trade than is widely appreciated. President Trump often focuses on fairness and a preference for bilateral negotiations. His Democratic opponents, meanwhile, are apt to emphasize the importance of demanding higher wages and improved working conditions overseas. Both parties are now more skeptical of treaties that might jeopardize American jobs. The dynamic is relatively new, which suggests that our trading partners may not find themselves in a better position even if there were a change in control of the White House in 2020.
We believe President Trump would welcome the opportunity to execute a trade pact prior to the next election. But absent an economic incentive stemming from a slowing economy, the politics of the moment suggest that the president’s hard stance on trade is still resonating with voters and posing a conundrum for his Democratic opponents.
With President Joe Biden inaugurated and the 2020 election cycle complete, our focus now turns to the new administration’s policy agenda and what it means for investors’ portfolios. For our current views throughout this presidency, visit ubs.com/cio-potus46.
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