The next US president's election is a key source of uncertainty for the global economy. While the United States accounts for only 5% of the world's population and 15% of global value added, its influence on the global economy is unparalleled.
The upcoming election has garnered significant attention from international observers, economists, and policymakers alike. The outcome of this pivotal race will not only shape the domestic landscape of the United States but will also have far-reaching implications for global trade, diplomatic relations, and economic stability. As the world's largest economy and a major player in international affairs, the United States wields considerable influence over global markets, geopolitical dynamics, and multilateral institutions.
Given this, the trade policies of the future administration, whether led by US Vice President Kamala Harris or former President Donald Trump, will undoubtedly have far-reaching consequences.
We know what Trump is going to do: raise US tariffs on Chinese goods to 60%, while imposing a 10% duty on all other imports. These policies would mostly harm Chinese exports to the United States, but many other nations' US exports would also suffer, with the exception of a few - those supplying alternatives for Chinese goods - who may benefit.
Economies that rely on supply chains involving China would also suffer. Many South Korean and Japanese companies export parts and components to China, where they are integrated with Chinese-made parts and components and maybe assembled into finished products for export to the United States and other markets.
This suggests that any decrease in Chinese exports to the United States would result in a decrease in exports from Japan, South Korea, and other similar countries. Attempts to avoid the problem by relocating supply chains to India, Vietnam, and other locations may partially counteract this effect, but such solutions are likely to be both expensive and insufficient.
The potential disruption to global supply chains has raised concerns among economists and business leaders worldwide. Many industries, from electronics to automotive manufacturing, have become deeply intertwined with Chinese production networks over the past few decades. A sudden shift in trade policies could lead to significant disruptions, potentially causing shortages, price increases, and economic instability in various sectors. Moreover, the ripple effects of such changes could extend beyond immediate trading partners, affecting smaller economies that rely on exports to larger markets.
The Trump trade shock would have far-reaching consequences. If tariffs slow China's growth, Chinese demand for imports may diminish, inflicting another damage to economies where China is a major trading partner, such as Japan, South Korea, and Southeast Asian countries.
Trump's planned tariffs would also have two less obvious consequences, neither of which are beneficial for the United States. First, they would reduce US exports to many nations, because the total US trade imbalance is controlled less by American trade policy than by a lack of US national savings relative to investment.
Given that Trump's planned tariffs are unlikely to considerably increase US savings, any fall in US imports would be offset by a decrease in US exports. This would reduce America's relative importance as a commercial partner for many countries.
Second, Trump's tariffs would destabilize the global economic system that the United States helped to create. The Trump policies would go against America's legal responsibilities under the World Trade Organization (WTO).
However, with the US having spent years eroding the WTO's dispute-resolution mechanism, the organization is unlikely to be able to restrain Trump's protectionism.
This would perpetuate the perception that the United States does not play by the rules, encouraging other countries, particularly those dealing with high levels of inequality, to impose retaliatory tariffs or other protectionist policies. (Populist politicians frequently propose trade barriers as a remedy to inequality.)
The potential erosion of trust in international institutions and agreements could have long-lasting effects on global cooperation. The post-World War II economic order, largely shaped by American leadership, has relied on a system of rules-based trade and multilateral cooperation. A shift towards unilateral action and protectionism by the United States could encourage other nations to follow suit, potentially leading to a fragmentation of the global economic system. This could make it more challenging to address shared challenges such as climate change, pandemics, and financial crises, which require coordinated international efforts.
The contours of Harris's proposed trade strategy are less clear. One might envision her supporting US President Joe Biden's approach to trade, which is marginally less unpredictable than Trump's but nonetheless a stain on Biden's economic-policy record.
In reality, continuing Biden's policies will accelerate America's relative slide as a trading country, albeit not as swiftly as Trump's tariffs.
But there's another chance. Harris, inspired by two other recent Democratic presidents, Barack Obama and Bill Clinton, may seek to reestablish US leadership in global trade, including re-joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
The CPTPP emerged from the Trans-Pacific Partnership, which Obama led but was never ratified due to Trump's 2017 decision to withdraw from it. The CPTPP was ratified the next year, thanks to Japanese leadership.
Aside from increasing market access among member countries, the CPTPP sets institutional constraints governing the behavior of state-owned enterprises (SOEs), government procurement, and subsidy regulations. Given its ability to encourage institutional reform among member nations, the CPTPP might be viewed as a kind of WTO plus.
The CPTPP may even encourage reform among prospective members. Though China does not yet match the agreement's standards, it has sought to join, indicating a commitment to reform state-owned enterprises and gain market access. A CPTPP that includes China but excludes the United States is unlikely to benefit the latter.
The potential reengagement of the United States with multilateral trade agreements like the CPTPP could signal a shift towards a more collaborative approach to global economic governance. Such a move could help rebuild trust in American leadership and provide a counterbalance to China's growing economic influence in the Asia-Pacific region. Furthermore, it could offer American businesses new opportunities for growth and expansion in rapidly developing markets, potentially boosting job creation and economic growth at home. However, any such move would likely face domestic political challenges, as concerns about job losses and economic inequality continue to fuel skepticism towards free trade agreements among certain segments of the American public.
A Harris government may also overturn previous administrations' taxes on Chinese imports, which are essentially a levy on US consumers, particularly middle- and low-income households. Harris must be able to convey to the American people why tariffs are counterproductive because they raise the cost of living while not producing new jobs for Americans.
There is no guarantee that Harris will select the appropriate trade advisers or resist protectionist forces within her party. However, if she succeeds, and combines a relatively open trade policy with domestic redistribution, she may usher in a global trade revival that benefits the US economy and strengthens US global leadership.
With Trump, however, there is no reason to expect anything more than another negative shock to global trade, with much more losers than beneficiaries.
