If Donald Trump is re-elected as US President, a big change in trade policy could happen. Trump wants to impose a 60 percent tariff on Chinese goods, causing economists to worry about a new “Trump Trade War 2.0” and higher inflation. This would likely end any chances of lower interest rates.
Trump plans to put a minimum tariff of 10 percent on all imported goods and a 60 percent tariff on goods from China. Economists and investors believe this will increase inflation and slow down both US and global economic growth.
Trade wars boost inflation
This is worrisome because central banks are currently trying to reduce inflation. Trade wars usually cause businesses to invest less money, which was seen during the first US-China trade war in 2018. Rogier Quaedvlieg, a US economist at ABN Amro, said even a 10 percent tariff could raise inflation by 1.5 to 2 percent.
Industries that rely heavily on imports, like manufacturing, will be most affected. Quaedvlieg thinks that if another trade war starts, the Federal Reserve may have to keep interest rates high for a longer time to control inflation.
Higher tariffs, lower income taxes
Investors should note that Trump’s proposed tariffs are much larger than those in the previous trade war. Earlier tariffs affected about 10 percent of global imports to the US, mainly from China. Now, the tariffs would cover all imports. The last trade war caused US stock market values to drop by $1.7 trillion and share prices of nearly 3,000 companies to fall by 6 percent, according to the Brookings Institute.
Trump also plans to cut taxes significantly. He has talked about reducing or even abolishing income taxes, which make up half of the US government’s revenue. To make up for this, he wants to change US trade policy by revoking China’s “Most Favoured Nation” status and phasing out all Chinese imports of essential products over four years.
Biden embraced Trump’s earlier tariffs
Trump has a history of starting trade wars. In 2018, he increased tariffs on Chinese goods from 3 percent to nearly 20 percent. The Biden administration has kept most of these tariffs and added more on steel, aluminum, medical devices, lithium-ion batteries, and solar cells.
Despite the negative effects of protectionist measures on global growth, Trump’s first term saw the S&P 500 rise by over 28 percent in 2019. The Bloomberg Global Aggregate Bond Index went up by 8.9 percent, and the US dollar grew by 5 percent. However, the S&P 500 did fall by more than 6 percent in 2018 due to the trade war.
Long-term pressure
Kristina Hooper, chief strategist at Invesco, predicts that the proposed tariffs will put long-term pressure on the economy, especially affecting productivity. However, she believes the market might adjust more quickly this time because it is more used to trade wars.
“In the coming months, we will see how these plans develop and what the real impact will be. Investors should prepare for possible market volatility and higher inflation,” Hooper said.