Don’t Overrate Election Year Trade Politicking

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How do you know when you are in a US election year? When politicians start talkin’ tough on China. President Biden ticked this particular box yesterday, announcing he plans to ask US Trade Representative Katherine Tai to triple tariffs on Chinese steel and aluminum. The move generated oodles of headlines, but we think the economic and market impact is pretty much nil. While markets overall prefer freer trade to protectionism, the scope is small, and markets moved on from steel and aluminum tariffs years ago.

Tariffs are sort of like tax policy: They start under one president, much to the opposition’s ire, then when the opposition party gets in power they mostly adopt those policies as their own. We saw it with the Bush tax cuts becoming the Obama tax cuts a decade later, when his administration and Congress made most of them permanent to dodge the so-called fiscal cliff. More recently, we have seen many Democrats talk up the need to make most of 2017’s individual income tax cuts permanent. And on the trade and tariff side, Bill Clinton signed NAFTA after campaigning against it, Obama finalized free-trade deals the Bush administration negotiated, and Biden has largely taken former President Trump’s trade policy and run with it.

That policy includes the steel and aluminum tariffs adopted in 2018, which slapped a 25% tariff on imported steel and a 10% levy on imported aluminum from every country save Mexico and Canada. Biden added the EU to the list of exemptions in 2021, but otherwise, they have stayed in place—along with the parallel tariffs on China specifically. Biden’s latest move merely extends the 25% levy to a broader range of steel and aluminum products previously taxed at around 7%, which administration officials say is a preventative measure to guard against a potential flood of subsidized exports.

That language is a clue as to the actual impact here. You see, the US doesn’t currently import much steel and aluminum from China. According to the American Iron and Steel Institute, Canada is the US’s top supplier, responsible for 24.5% of imported steel mill products last year.^[i] China was only the seventh-biggest, supplying a paltry 2.1% of US steel imports.^[ii] China’s aluminum role is similarly small, supplying only 3.6% of US imports last year.^[iii] Neither of these figures is large enough to materially raise raw materials costs here. More likely, they are an incentive to extend the shift away from China that started with Trump’s 2018 tariffs.

Trade flows adjusted a-ok to those levies. Inflation didn’t surge in 2018 and 2019. GDP didn’t stumble, and raw materials weren’t in short supply. Stocks didn’t have a grand time in 2018, with a late-year selloff putting full-year returns in the red, but that had more to do with some idiosyncratic problems at hedge funds forcing stock fire-sales in December, and stocks bounced fast and high starting around Christmas. So if tariffs weren’t some massive problem when we actually bought more raw materials from China, we doubt they do anything now.

To us, this move is symbolic and political, as most trade policy announcements in an election year tend to be. Trump’s protectionist policies were popular with some swing-state voters—the same voters he and Biden are trying to court now. The fact yesterday’s announcement happened in Pittsburgh, Pennsylvania—former home to many steel mills and a key area in a swing state—is no coincidence. Talking tough on China has been an election year rite of passage for as long as we can remember. It is right there on the BINGO card, along with shaking hands, eating hamburgers, giving awkward speeches and kissing babies—a grand bipartisan tradition. But for new tariffs to wallop a bull market, they would have to be much bigger and broader than a tiny change on a bunch of things we don’t buy much of anyway.