Protection at any price?

In both Europe and the US, a cry has gone up in this year of elections – protect us! Against what, depends on who is talking – inflation, immigration, foreign meddling, wokeism, racism, war, change, downgrades, etc.

In the US, the Republicans are particularly preoccupied with this cry. Rowing back on the liberalism of the Reagan era, a new type of protectionism is on the rise, against both immigration and international competition – from China in particular. The Trump programme is very clear on this issue, if the Agenda47 on his website is to be believed (Deutsche Bank has published a particularly interesting analysis of this). This programme proposes: a 10% baseline tariff on all imported goods and services; an increase in import tariffs for countries that apply tariffs to US imports, up to the exact same rate; revocation of the Most Favoured Nation status for China and the introduction of new import tariffs that will typically reach 50-60%; the reintroduction of tariffs on steel imports; and new tariffs on European products such as cars, in particular from Germany.

Even if it proves difficult to pass all of these measures through Congress, some of them could be implemented, particularly as they fit neatly with those adopted under the Trump presidency in 2018-2019.

What will the impact be on US citizens, and the knock-on effect for the global economy?

On the plus side, the US can expect a trend to reshoring for some industries and services, which would automatically become more competitive if located domestically. This is the main electoral argument – more domestic industries and therefore more jobs. There would also be an automatic increase in federal revenue. This argument carries a lot of weight, against the backdrop of the chronic budget deficit and high interest rates. The Tax Foundation estimates that USD 300 billion of additional tax revenue could be generated each year.

But there’s no such thing as a free lunch – it would be impossible to avoid the downsides of such protectionism. In the first instance, higher inflation would be inevitable, as a result of tariffs on imported goods and services. US producers that rely on imports and consumers buying imported goods would both suffer the impact of this price inflation. In addition, domestic producers would have greater leeway to raise their prices, as penalising foreign companies would reduce competition. And they may have little choice but to do this, since US labour costs are significantly higher than for most of the country’s trade partners. And of course, the countries targeted by these tariffs are likely to react. They could introduce their own import tariffs, which would undermine US exports and fuel the inflationary spiral. Lastly, the US dollar could strengthen as the flow of dollars out of the country would, in principle, fall. There would also be an impact on US exports, although these are not a significant proportion of GDP.

These projections suggest that the implementation of Trump’s programme would have a profound impact on the global economy. Of course, any reshoring of parts of the economy could favour US workers, although they have no particular need of a life raft currently, given low unemployment rates. Most importantly, as a nation of consumers, the country would be confronted with more inflation, and would likely see its own exports penalised. Lower growth and higher inflation – the cost of protectionism is far from negligible. Are electors willing to pay this price? Tune in on 5 November 2024 for the answer.

Final version of 31 May 2024 – Alexis Bienvenu, Fund Manager