Talking Tariffs
Talking Tariffs
In a speech last week billed as a major economic address, Republican nominee, Donald Trump doubled down on his commitment to new tariffs (taxes on imported goods). Trump pledged to implement 10 to 20 percent ‘across the board’ tariffs on “countries that have been ripping us off for years”. This is in addition to the punitive rate of at least a 60 percent tariff on any goods imported from China. Tariffs have often been a significant tool in foreign policy, but their economic effects have been hotly debated among economists and policymakers.
A brief history
The US has a long history of enacting broad tariff packages and has previously relied on tariffs as a significant source of government revenue, particularly at the beginning of its history. The first major piece of legislation signed by George Washington after ratification of the Constitution was the Tariff Act of 1787. This act imposed a 50 cent per ton fee on goods imported by foreign ships to help protect the country’s emergent manufacturing industry as well as generating additional income for the government.
The US position on tariffs evolved in the early 20th century, with the enactment of the federal income tax alongside the advent of a new consensus recognising tariffs as regressive. This meant they were burdening the working class while leaving much of the income accruing to the wealthy untaxed.
The tariff man
The Democratic National Convention took place this week in Chicago, where Kamala Harris (current Vice-President) was formally recognised as the Democratic nominee for the presidential candidacy. This will now result in a battle for the presidency with former President Donald Trump, who has recently dubbed himself the ‘tariff man’. The US election will be held on 5th November.
Trump famously sparked a trade war with China during his first term in office in 2018 with his decision to implement sweeping tariffs on Chinese exports. The new tariff regime included high-tech components, underwear and even kitchen utensils. In addition, major tariffs were also imposed on Canada, Mexico, and India, amongst other countries. The familiar justification for tariffs is to protect domestic jobs in industries where there are international competitors who can offer their exported goods at lower prices. The objective of a protective tariff is not merely to collect revenue for the government but to incentivise consumers to opt for domestically produced goods over foreign imports.
Trump has argued this week that ‘a tariff is a tax on a foreign country’ and that it ‘doesn’t affect our country at all’. However, some economists have argued against this and have warned that it may not have the desired effect. It is contended that the imposition of tariffs would actually raise prices for American consumers, harm US businesses, and likely provoke retaliatory tariffs. Critics also suggest that the Americans with the lowest incomes are hit the hardest by these measures.
Trade protection is often described as “populist.” If this is the case, then it implies a policy that should deliver benefit to most of the population. However, the reality is that protectionism can often become a cost to the consumer. Taken altogether, Trump’s 2018 tariffs cost the typical American household about $250 a year, according to U.K.-based economists. His regime put a 25 percent tariff on steel and 10 percent tariff on aluminium. The tariffs also arguably destroyed more jobs than they protected, because many more Americans are employed in industries that use steel and aluminium than are employed to make steel and aluminium.
The graph below illustrates the accelerated growth in tax revenues collected by the United States from customs duties, particularly following the inauguration of President Trump in 2017, with a drop in 2019/20 accounting for the emergence of Covid.
Federal government tax receipts: Custom duties
Source: U.S. Bureau of Economic Analysis
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Although a significant portion of our investment commentary centres on the U.S. market, it is essential to acknowledge that the United States is the global economic and equity market leader. Nevertheless, we maintain a vigilant focus on international affairs and developments in our investment considerations.
Scenarios
Ahead of the election, it's helpful to examine the most probable outcomes and their potential financial market ramifications. Recent research as of 16th August shows that the two most likely scenarios currently are either Harris winning with a split Congress or Trump winning with a Republican Senate and House (red sweep).
In the former scenario, we would expect more limited policy changes, leading to a muted impact on financial markets. The hallmark of Harris’ economic plans is based on a broad continuation of Biden’s administration which is to balance trade relations while protecting American jobs. The focus will likely be on resolving trade disputes rather than on unilateral imposition of tariffs. Additionally, Harris is a strong supporter of renewable energy and climate change initiatives – a strong contrast to Trump’s fossil fuel-focused policies. Harris is also expected to increase tax on corporates which would be a hit to company profits.
A red sweep would likely see an extension of the expiring tax cuts introduced in the Tax Cuts and Jobs Act of 2017 with possible further reductions in corporate tax rates. The democrats have often criticised these proposals for their regressive nature, citing the inevitable exacerbation of wealth inequality at the expense of the poorest families. Equity markets would likely welcome lower tax rates and reduced regulation but concerns about the inflationary and economic costs of higher tariffs and trade wars could partially offset these gains and introduce a degree of uncertainty.
Whilst we maintain a close eye on the electoral outcome, it is important to note that portfolio construction should be an apolitical process and investors should refrain from making decisions in anticipation of hypothetical events.
Yuval Peshchanitsky
Portfolio Analyst
Important Information
All expressions of opinion reflect the judgment of Artorius at 23rd August 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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