Tight US election race could reshape trade, energy, and monetary policy

The US election could mark a pivot point in US domestic and global policy, with far-reaching consequences in multiple markets.

The race to November is shaping up to be a tight one and analysts have little visibility on whether a Democratic or Republican win is more likely. In either case, there are likely to be policy shifts as even if the incumbent party wins, the incoming candidate is the current vice-president rather than President Joe Biden. That means that whichever party wins, the new president will be looking to make their mark.

There are several key areas of contrast between the likely Democratic and Republican policy stances that are particularly relevant economically, including trade, energy, monetary policy and regulation.

Trade

US-China relations are likely to continue to be fraught regardless of the new ruling party, but Republicans and Democrats have proposed different tactics.

Under President Biden, the policy was “tough on China” and this stance would probably continue if Vice-President Kamala Harris wins the election. Biden introduced a 100% tariff on Chinese-made electric vehicles during his term, as well as upping the tariffs on steel and aluminium from China to 25%.^[1] He also maintained tariffs on more than $300 billion worth of Chinese goods that were put in place during the presidency of Donald Trump.^[2] In an effort to kickstart America’s green industries, he also imposed tariffs on Chinese imports of greentech, including doubling the rate on solar cells to 50%, putting a 25% rate on advanced batteries and some critical minerals, and raising semiconductor tariffs to 50%.^[3]

Both Democrats and Republicans have signalled they intend to keep up the pressure, but the extent and scope of the industrial policy is different. While Democrats have talked about keeping existing tariffs in place and considering higher rates on steel and aluminium, Republican candidate Donald Trump has proposed a universal baseline tariff of 10% on all US imports, along with a 60% tariff on imports from China specifically.^[4]

The impacts of continuing trade protectionism in the US and a potentially escalating trade war with China would be mixed. Tariffs tend to raise domestic prices and some critics have suggested that a 10% baseline tariff would be so damaging to prices that it could lead to recession.^[5] However, trade tariffs at some level have garnered bipartisan support for a number of reasons, including bolstering the US manufacturing industry, improving supply chain security and market competition for much-needed components and boosting a domestic green industry. Energy

While tariffs may seek to grow the green economy in the US, the candidates have very different stances on climate crisis initiatives and investment in the energy transition. Although Kamala Harris has not yet laid out specific policy on climate crisis mitigation, it was her key vote that passed Biden’s landmark climate law, the Inflation Reduction Act and she was an early supporter of the Green New Deal, a series of proposals championed by the progressive wing of the Democratic party.^[6] However, since gaining the nomination, she has reversed her position on fracking and the Green New Deal, although she insists that her “values haven’t changed”.^[7]

The Republicans have also been clear that they view many of the current administration’s moves as “punishing regulations” on the US energy industry. They have vowed to roll back key elements of the Inflation Reduction Act and increase fossil fuel production.^[8] Number one on the list is to reverse the temporary halt on new LNG export permits. Democrats paused new licences earlier this year to take a “hard look” at how LNG exports fit into the US’ long-term energy plans, including economic, environmental and national security issues.^[9] Monetary policy

Inflation and the cost of living in the US are key voter interests in the upcoming election and for the candidates, so too is the independence of the Federal Reserve. Trump advisors and allies were reported to be drawing up proposals to limit the independence and authority of the central bank back in April.^[10] Although the campaign didn’t associate itself with the report, this month, Trump said on the campaign trail that he thought the president should have a say in interest rate decisions.

"I feel the president should have at least (a) say in there," he said. "I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman."^[11]

The Fed chair and its board of governors are already nominated by the president, subject to confirmation by the Senate. Current chair Jerome Powell’s term is up in 2026, so it may be that Republicans will focus their political power on their candidate for the role. But Trump’s latest comments indicate at least some support for reducing how the central bank can independently set monetary policy.

Market impacts

The likely outcome for both monetary policy and regulatory environment under the Democrats is more of the same, with a neutral impact on markets. But the Republican strategy is very different. Trump has promised to cut both corporate taxes and regulations,^[12] moves that alongside his tariffs and investment in fossil fuels are likely to help deflate the US economy in the short term. That would also probably support US equities, although US treasuries could be adversely impacted in the short-term.

It’s also worth bearing in mind that while politics often affect markets, it’s not the only game in town. JP Morgan pointed out that markets often move in mysterious ways:

“In the 2020 race, Biden campaigned on scaling back fossil fuels and galvanizing renewables and once in office, he passed the largest ever fiscal commitment to climate of $369 billion through the Inflation Reduction Act. On the other hand, President Trump campaigned vigorously to support the traditional energy industry during his presidency. Sector performance was the opposite of what one might expect. Under Trump, the S&P 500 Energy index was down -40%, while the S&P 500 Global Clean Energy index was up 275%. Under Biden, the S&P 500 Energy index nearly doubled, while the S&P 500 Global Clean Energy index was down -50%. Ultimately, macro forces drove markets: varying supply/demand and interest rate environments drove performance more than any policies or intentions by the White House.”^[13]

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