Global economic outlook July 2022

US election: its impact on US-China trade

  • EIU’s current forecast assumes that Joe Biden, the incumbent US president, will retain the White House in November 2024. However, the high risks associated with this call mean that companies, policymakers and other stakeholders should consider the considerable possibility that Donald Trump, Mr Biden’s predecessor, may return to office.
  • We already expect a sustained worsening in economic and diplomatic ties between China and the US over the 2020s, regardless of the election outcome in the US. Either president will pursue policies aimed at exerting further pressure on China’s technology sector, while also justifying future trade and investment restrictions based on national security concerns.
  • In his second term, we expect Mr Biden to continue to work with “like-minded” governments. This multilateral approach will aim to maximise the efficacy of US policy actions while also minimising any potential trade or supply-chain blowback in response to US trade policy. Nevertheless, the primacy of US security and economic goals in Mr Biden’s diplomatic agenda will still ensure a degree of collateral damage to economies that have deep trade and investment linkages with China.
  • By contrast, we would expect Mr Trump to take a much more antagonistic approach to US‑China ties. This would return bilateral diplomatic and trade relations to the state of volatility that characterised his first term. A more “America first” approach would include less sensitivity to the risks of trade policy blowback on third markets, and the risk of collateral damage to third markets will be higher. There is an increased chance that shallower legal and technical co‑ordination between the US and other markets, on measures including investment restrictions and export controls, will reduce the efficacy of many US trade policy actions against China.
  • In the long term, we do not expect trade policies pursued by either Mr Biden or Mr Trump to reduce China’s role in international production networks significantly. Instead, we expect the extension of China-linked supply chains, to the benefit of capital-hungry markets in Latin America and South-east Asia. These same dynamics will ultimately make many of these emerging markets vulnerable to an escalation of trade hostilities with the US.

Our current forecast still expects Mr Biden to retain the presidency. However, the high risks to this call illustrate the necessity for companies—and governments—to prepare for what a return to the White House by Mr Trump would mean for the global trade landscape. In this article examining the impact of the US election on trade policy, we explore how the two candidates would approach trade and diplomatic ties between China and the US, and what risks companies should prepare for in advance of a potential second Trump term.

We already expect US-China trade tensions to worsen in the 2020s

Our current global economic assumptions are anchored on the expectation of continuity in trade and foreign policy under Mr Biden. US‑China frictions would remain the primary geopolitical risk facing global trade flows. However, continued policy co‑ordination between the US and its key economic partners in Asia, Europe and other regions would constrain some of the worst potential shocks. Mr Biden will remain sensitive to the wider commercial and supply-chain repercussions of trade restrictions such as export controls, and his administration will maintain a multilateral approach over a unilateral “America first” strategy. 

We would expect Mr Biden to preserve the goal of keeping “guardrails” on the US-China relationship, in order to prevent a sudden worsening in bilateral economic or political ties. However, his concerns over the efficacy of current measures—particularly in regard to stemming China’s recent advances in semiconductors—will ultimately ensure a tightening of these US trade and investment restrictions over his second term. His administration’s linking of this issue with economic and national security will overshadow other US diplomatic considerations, even as Mr Biden seeks to cushion the fallout of these moves on key trade partners and allies.

Although the US will move cautiously, we would still expect a degree of collateral damage to markets with deep economic linkages with China—particularly those in North-east and South-east Asia, all of which have significant supply-chain exposure to the country, but also European countries, such as Germany, which still rely heavily on Chinese demand. The idea of third markets having to “choose a side” between the US and China will continue and intensify under Mr Biden, particularly as his administration seeks to refine and plug legal loopholes in existing trade and investment restrictions.

How Mr Trump would approach China

A Trump administration would re-introduce significant uncertainty into the global trade landscape by returning the US to a more aggressive “America first” trade policy, but his overall strategy would, in many ways, overlap that of Mr Biden. Potential trade actions would disproportionately target China, focusing on sectors such as automotives, information technology and renewable energy. Semiconductors and electric vehicles would remain squarely in the crosshairs of US trade officials, with a high likelihood of protectionist actions bleeding into other sectors, like steel and pharmaceuticals.

We would nevertheless expect Mr Trump’s tactics to differ significantly from those of Mr Biden. The current president’s aim of preserving “guardrails” in the US‑China relationship would not be a feature of Mr Trump’s foreign or trade policies. Instead, Mr Trump may feel more emboldened by a second term to adopt a much more hawkish stance on China, which could yield more radical policy decisions than under his previous term. Among the biggest risks would be his removal of China’s “most favoured nation” designation (or, more specifically, the US revoking “permanent normal trade relations” with China), an action that could include raising tariffs on all Chinese goods by up to 60%. Mr Trump would probably cite China’s failure to meet its agreed purchase targets under the first-phase US-China trade deal to justify the expansion of US trade restrictions. We would not see any increase in China’s imports from the US as sufficient to convince Mr Trump to dial down these tariff threats, or to remove the existing “301” tariffs. In addition, brinkmanship would force a strong response by China’s leaders, who would feel the need to retaliate against any US trade measures.

More critically, Mr Trump’s unilateral “America first” doctrine would not be as sensitive to the potential diplomatic or economic blowback of US trade measures on third markets. The disruption to third markets that we already anticipate under Mr Biden would be magnified under Mr Trump, particularly in relation to US‑China tensions in non-tariff battlegrounds, such as technological competition and national security. Co‑operation via multilateral frameworks, such as the Indo-Pacific Economic Framework for Prosperity or the US-EU Trade and Technology Council, would be deprioritised.

As a consequence of this, a lack of legal and technical co‑ordination between the US and other markets on measures such as investment restrictions and export controls would reduce their efficacy in achieving US policy objectives. The difficulty of enforcing existing trade rules, including by ensuring the “buy‑in” of US allies and trade partners, has already frustrated aspects of the Biden administration’s China strategy. Close co‑ordination with Japan and the Netherlands has been necessary, for example, as part of US attempts to limit China’s ongoing advances in semiconductor fabrication. A more unilateral US approach, eschewing the concerns of the country’s diplomatic partners, would not only struggle to achieve the same type of cohesion, but would also worsen perceptions regarding the “leakiness” of existing measures. This could then set the stage for future rounds of sudden policy tightening, in ways that may be economically and commercially disruptive.

Where Mr Biden and Mr Trump agree

China’s sticky role in global production networks suggests that, in the longer term, US trade measures under either president will simply accelerate the ongoing elongation of international supply chains. China’s competitive advantages in production and sourcing—reflecting its sophisticated industrial parks, advanced logistics networks and low utility and labour costs, all of which express decades of Chinese government support for its export-oriented manufacturing industries—ensure that the country will continue to play a dominant role in global supply chains.

Companies interested in the US market would probably respond to US tariffs by expanding their operational presence in third markets across Latin America and South-east Asia, even as they remain reliant on certain critical inputs sourced from China, ranging from raw materials to intermediate goods. These supply-chain dynamics would be reflected by the trade data of many of these third markets. Some countries, like Thailand, already have a bilateral goods trade deficit with China that mirrors their bilateral goods trade surplus with the US. These developments will sit awkwardly with trade officials under either administration.

Consequently, our global and regional trade forecasts—regardless of the outcome of the November 2024 elections—already assume an escalation in US trade hostilities against third regions. The Biden administration is already examining trade links between China and Mexico in the automotive sector, while US solar panel manufacturers are petitioning US trade officials to impose tariffs on China-linked solar panels from South-east Asia. Under a second Biden term, we would nevertheless expect the US to proceed carefully with these moves; trade and diplomatic policy would remain guided by the aim of preserving “guardrails” for US relations not only with China, but also with these third nations. Under a second Trump term, concerns over US policy goals, as well as “free-riding” by other nations, would override this caution. This would elevate the risk of US trade actions spilling into other markets with much more rapidity and higher intensity under Mr Trump than we would expect under Mr Biden.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.