How We See 2024’s Bipartisan Tariff Tout

Editors’ Note: MarketMinder prefers no candidate nor any party. We assess developments for their potential economic and market impact only.

Less than two months to the election, and tariffs are stealing many headlines as one of two economic policy initiatives both presidential candidates seem to agree on (the other being tax-free tips). Economists aren’t too pleased, warning of the inflationary effects and other consequences of higher import taxes. Headlines, meanwhile, are trying to parse whether former President Donald Trump or Vice President Kamala Harris’s trade policies would bring more of a headache. From an investment standpoint, though, we think it is too early to do anything beyond watch and listen.

Generally speaking, markets prefer freer trade. Tariffs add costs and hassle for businesses that import goods, including manufacturers (which import components and raw materials) and retailers (which may sell finished goods from abroad). These costs ultimately get passed to the end user, making things more expensive for all of us. Plus, rare is the tariff that doesn’t invite retaliation. If country A slaps a tariff on country B, then country B probably slaps one on country A. Overall, it is a lose-lose.

Politicians don’t see it this way, of course. The free-trade argument is a tough sell politically, because it is so easy to look at closed factories and hollowed-out industrial towns and blame international competition. It is an easier scapegoat than the other culprits, which can include automation, lack of investment, location (proximity to customers or major transit hubs), regulatory headwinds, structural economic changes and a host of others.

This also opens the door for politicians’ main selling point, which is that US tariffs are meant to prod American customers toward American suppliers, making it easier for local businesses to compete—theoretically, a tariff prevents them from being undercut by an international competitor’s subsidies and cheaper labor. But in practice, as the auto industry has proven time and again, the tariff-affected price becomes the new baseline for domestic producers. Prices across the board usually go up, not down, while imports continue flowing as the market demands.

Tariffs make investors extra nervous because of the big role the Tariff Act of 1930 (aka Smoot-Hawley) and the global blowback to it played in the Great Depression. Global trade’s plunge contributed hugely to the deep economic contraction during that period, which the stock market’s decline likely reflected. Hence, any whiff of tariffs sparks fears of trade wars wrecking the global economy and markets now.

And yet, even with all of this—and Trump and Harris touting tariffs on the campaign trail—it isn’t a foregone conclusion that stocks are in for a world of trade-war hurt after November. For one, as we covered a few weeks ago, campaign talk often doesn’t become policy. Sometimes it requires Congressional approval and Congress won’t play ball. Sometimes the new president drops the idea entirely. Or sometimes things get enacted but are less sweeping than hoped or feared. A lot will depend on the reality of trade policy versus expectations for trade policy.

We don’t know what reality will be. It is just too early. For instance, Trump has talked of an across-the-board 10% tariff on all imports. The president has a lot of latitude, under various pieces of legislation, to apply tariffs to individual products without Congress’s approval. But most are on national security and/or dumping grounds. It is hard to see how a new, blanket 10% charge fits either one. It would probably require legislation unless a hypothetical Trump administration used existing laws as cover for a zillion 10% tariffs on a zillion products against every country worldwide, which would likely face myriad legal challenges. If Trump were to win, would he have a Republican House and Senate? With big enough margins to overcome opposition from Republicans from the party’s old free-market vanguard? That is totally unclear today.

As for a potential President Harris, we know she has talked warmly of tariffs and industrial policy while denouncing Trump’s blanket 10% plan, but she hasn’t released specific trade proposals. Hence, trying to navigate around her trade policy now, should she win, is beyond speculative. Markets move on probabilities, not possibilities, and it is impossible to assign probabilities to this for now.

We can, however, make some observations about sentiment and recent history. When Trump won in 2016, trade war fears were off the charts. But reality went better than expected. NAFTA got rewritten, not ripped up, preserving free trade among the US, Canada and Mexico. He did slap tariffs on China, but businesses mostly avoided them by trans-shipping through Vietnam. More hassle, but not as costly as paying tariffs. The economic expansion continued until COVID lockdowns, as did the long 2010s’ bull market.

Since then, the Biden administration has kept Trump’s tariffs and added a few more, yet GDP continues growing and the bull market that began in 2022 marches on despite the slew of new tariffs announced this spring (which mostly applied to China and goods the US doesn’t import from that nation). Europe has also become more enamored of tariffs, applying them to Chinese electric vehicles, and China is retaliating with … investigations of illegal subsidies on cheese, which would be a precursor to retaliatory tariffs on some foodstuffs from the EU. In our view, this isn’t a trade war at this scale. It is a squirt gun fight.

The upshot of the last eight years: The global economy and markets have gotten used to tariffs and more state intervention in economies. We aren’t saying we love this, but industrial policy is kind of the norm worldwide now. In our view, it creates winners and losers and risks channeling capital to less productive endeavors, just as tariffs raise costs for all of us and devote more resources to avoiding them. But markets seem to have gotten used to it all and adapted. New tariffs haven’t been any more bearish than free trade deals have been bullish. They end up fading into the structural backdrop, not radically altering cyclical economic drivers.

This is kind of a double-edged sword. The potentially good aspect is that for tariffs to whack the global economy and markets, they would have to be on a much grander scale than we have seen thus far … and probably a much grander scale than both candidates have proposed. And even then, it is probably a stretch to say sweeping new tariffs guarantee a deep contraction and bear market. In the early 1930s, tariffs conspired with a deep monetary contraction—they were far from the only negative hitting the economy and stocks.

However, the thing to watch is that the economy and market’s resilience to prior tariffs—and society’s general acceptance and even affection for industrial policy and tariffs—risks creating some complacency. We could get to a point where everyone shrugs off new tariffs and overlooks the potential for harm. This is just one part of sentiment, but we think it is worth watching closely.

Yet, once again, this is an after-the-election issue. A thing to scrutinize when we have clarity on the winner, Congress’s makeup, and which campaign proposals the winner actually intends to pursue—and which end up being campaign marketing fluff or international negotiating tactics.