With just days to go until the US Presidential Election, markets around the world are bracing themselves for the global economic ramifications of either a Donald Trump or Kamala Harris administration. While Trump has fought a campaign vowing to further expand tariffs, Harris has adopted a different, yet still relatively protectionist, approach, pledging to subsidise American industries to lower American reliance on imports. We take a look at both in detail below.
But first, what are tariffs? And who pays the price?
A tariff is an additional fee paid by an importing company when purchasing a product from an international supplier. For simplicity’s sake, let’s imagine Huawei were selling phones to Walmart for $100 each for resale in America. If there was a tariff of 20% on all Chinese imports into America, then Walmart would still have to pay Huawei $100, but on top of that, they would also have to pay the federal government $20. Walmart would therefore be paying $120 for each phone rather than $100. This price would almost certainly be passed onto American consumers who would shoulder the price increase when Walmart attempted to resell the phones.
But why do this? The main reason for imposing a tariff is to increase the competitiveness of domestic producers, disincentivising imports from abroad by increasing their price. For example, let's say that Apple (imagining that they produce their phones in America) were selling phones to Walmart for $110 a pop; a higher cost than Huawei due to higher American manufacturing costs. Despite the lower base cost, Huawei phones would still end up being more expensive as a result of additional tariff fees. Walmart would therefore likely opt to purchase more phones domestically from Apple. In this way, tariffs can increase and protect domestic production by raising demand and revenue, which in turn protects American jobs in industry and improves America’s balance of trade.
But it is important to note that tariffs also cause inflation by driving up costs for domestic businesses when buying supplies, and also for consumers, who in most cases shoulder the burden of these extra costs.
What is the current situation under Biden?
When Joe Biden entered the White House in 2021, he was expected to repeal some of the tariffs previously placed on China by Donald Trump. After all, Biden had been heavily critical of the tariffs arguing that they were driving up inflation and instigating a detrimental trade war for America. Biden accused Trump of not understanding the basics that ‘any freshman econ student could tell you’. However, upon taking office Biden not only kept Trump’s tariffs but built on them - in May 2023, he then announced new tariffs on $18 billion worth of Chinese imports.
What tariffs does Trump want?
Trump’s economic policy is built around tariffs. He has even gone as far as to suggest that he might abolish federal income tax and replace it with revenue gained from tariffs.
Trump views China as a threat to America’s security and economy and has consistently taken a bullish and confrontational stance toward Beijing. Claiming that tariffs are ‘the greatest thing ever created’, he has promised to place a minimum 60% tariff on all Chinese imports, as well as tariffs between 10- 20% on imports from everywhere else in the world.
What would be the impact of Trump’s tariffs?
Let's return to Huawei. If Trump had his way, that phone would now cost $160 for Walmart to import, which would lead to the further collapse of international competition. This would enable domestic manufacturers like Apple to raise their own prices, further pushing up inflation. Of course, this is an overly simplified version of the intricacies of what constitutes an economy and inflation, but you get the idea - as well as the potentially grave consequences for the American economy.
However, there are other potential flaws with high tariffs, namely that domestic production may be incapable of replacing foreign supply. Let’s look at a real life example in the form of Taiwanese semiconductors. Taiwan is the world’s leading producer of semiconductors - producing over 90% of the world's supply of the most advanced chips - and Trump has recently accused Taiwan of stealing the US chip industry. Semiconductors appear in a host of white goods such as washing machines, smartphones and in some cars like Teslas, and they are remarkably expensive. To give you an idea, a 2023 study found that 54% of an iPhone’s manufacturing cost is related to the price of the semiconductor.
Therefore, a 20% tariff on semiconductors from Taiwan would dramatically increase the price of many essential goods for American consumers. Supporters of Trump may well argue that American semiconductor producers would increase their productive capacity to pick up the slack, but the reality is they cannot. A US Government economic paper highlighted how due to ‘capacity constraints’ the US production of semiconductors could grow only by a maximum of 5%, forcing American consumers and businesses to take on the cost of the tariffs. While semiconductors are merely one product, it exemplifies the complexity of the global market and supply chains, as well as the potential for unintended consequences to arise from tariffs.
What are Harris’ trade policies?
While Trump proposes escalating America's trade war with China and the rest of the world, a Harris administration offers a continuation of Biden’s trade policy of ‘de-risking’ from China and encouraging domestic production through subsidies and the provision of tax credits to stimulate private investment. Harris does not appear to want to raise tariffs any higher than their current level - which are currently raising the cost of living for the average American household by around $300 a year - but neither does she want to lower them.
Harris is also likely to continue the work initiated by President Biden by finalising multilateral trade agreements like the Indo-Pacific Economic Framework. This contrasts to Trump’s preference for bilateral agreements.
While Harris’ trade policies are not nearly as protectionist as Trump's, they still take the US down that more restrictive path. Despite their contrasting plans Harris has had to increasingly adopt a protectionist stance in order to compete with Trump in courting the all important swing states - and in particular the Rust Belt - which have suffered the most from deindustrialisation.
In this way, Trump has shifted the Overton window when it comes to US trade policy. The Overton window refers to the spectrum of acceptability of government policies in the public imagination. As Trump has become increasingly protectionist, Harris has had to react in a similar manner so as not to lose ground amongst voters who not only expect protectionist policies but support them.
What will this mean for global trade?
The effect of a Harris presidency would be hard to notice for the UK or Europe as a whole. Though her economic plan is protectionist, it acts as a continuation of a status quo which has delivered strong economic results, with America’s economy growing at the heady heights of 2.9% a year since the start of 2023. (By comparison, the UK's economy grew by 0.3% in 2023.)
The same can’t quite be said about her opponent, whose economic plans are almost certain to hurt both global trade and America’s economy.
If Trump grasps an orange hand around the keys to the White House then the economic effects will be felt much more profoundly. China will be forced into a more bullish approach to European markets, including the UK, if their exports to America fall as expected under a Trump administration. The products produced in China for the American market will need to be sold elsewhere and as a result, we could expect to see more trade spats between China and the EU. Take the recent EV row as an example. These disputes are caused by the undercutting of European or British producers by their Chinese counterparts who can manufacture goods at a fraction of the price. If Trump was to place a 60% tariff on Chinese goods, vastly lowering the demand for such goods in America, then Chinese manufacturers would likely lower their prices to raise demand in Europe to compensate.
Under a Trump presidency, all UK and European exports to the US would be subject to tariffs of between 10-20%. The UK exported $71.9 billion of goods to America in 2023. If we were being conservative with our estimate, let’s imagine the 10% minimum tariff is imposed on all British goods and that this suppresses demand by around 5%. In this scenario the value of British exports to the US would fall by $3.6 billion. While this is far from a precise forecast, the net result of a Trump presidency for UK trade is clear: a suppression of demand for UK exports in the US, which our country increasingly relies on post-Brexit.
What does this mean for the UK’s relationship with Europe?
While we can hope for Harris, we must prepare for a protectionist Trump presidency. The UK must strengthen its trading relationships with the EU to insulate itself from such an event. The EU remains our largest trading partner and at a time of such instability in geopolitics, a closer relationship with our European neighbours is critical. Given the enormous cost of Brexit, which has exacerbated Britain’s stagnant growth and poor levels of investment, the UK must do more to align with the EU on trade. Not just to begin to reverse the cost of Brexit, but to insulate and protect our economic interests from the threat of incoming American protectionism.