The approach and tone of President-elect Biden's trade policy will likely be more collaborative and targeted, and, most important for markets, less volatile than President Trump’s. (Keystone)

But while there is a risk of escalation ahead of President-elect Joe Biden taking office, we expect a more conciliatory and multilateral approach from the incoming administration, reducing a major source of market instability during the Trump presidency. We see three main scenarios on trade:

1. Our base case is for a nuanced and multilateral trade policy. The approach and tone of President-elect Biden will likely be more collaborative and targeted, and, most important for markets, less volatile than President Trump’s. He may be more reluctant to use tariffs as a trade policy tool, and seems likely to take a more globalist approach to addressing cross-border issues. As long as tariffs don’t rise, we see little reason to expect a significantly negative economic impact in the near term. We see this scenario as having a roughly 60% probability.

2. Our upside case is for a further easing of tensions and tariff rollback accelerating the growth upswing. The president-elect could look at relaxing the US blacklist against Chinese tech companies, or implementing early tariff reductions with China, having called President Trump’s use of tariffs “self-defeating." We assign a roughly 20%probability to this scenario emerging.

3. Our downside scenario is that renewed global trade tensions hurt growth. President-elect Biden's economic proposals include an array of protectionist policies such as preferential treatment for US- made goods, a long list of subsidies to domestic industries, and a ban on foreign companies from government procurement. While he has said his administration will operate within the rules of current trade agreements, if it goes too far it could lead to an escalating subsidies war with US trading partners. We assign a roughly 20% probability to this outcome. To read more on protecting against such downside scenarios, click here.

Despite the downside risks, we see a high probability that trade policy will fade as a source of volatility under a Biden administration, which supports our view that investors should diversify for the next leg up. For more detail on trade and other scenarios, read our latest global Risk Radar report, 2021: A calm after the storm?

Main contributors - Mark Haefele, Christopher Swann, Dirk Effenberger, Daniel Trum, Daniil Bargman

Content is a product of the Chief Investment Office (CIO).

Original report - Expect more stability from Biden trade policy, 13 November 2020.