Reading the Tea leaves on Harris Trade policy: Targeted Tariffs and Sectoral Agreements?

This post was slightly updated after posting to include a little more of a bottom line on the trade/fiscal/monetary policy mix between the likely Harris and Trump policy.

The Harris campaign and surrogates have been, rightly in my view, very critical of proposed broad-based tariffs floated by former President Donald Trump. Armed with good analysis from Kimberly Clausing and Mary Lovely of the Peterson Institute, they point to the inflationary impact of these policies. After all, 60% tariffs on all Chinese goods, presumably on top of prior tariffs, and 10-20% on other nations would be inflationary and distortionary both in the US and globally. Not only that, but tariffs and other consumer taxes are regressive, hitting lower income households harder given a higher propensity to consume. Harris’ acceptance speech at the DNC critiqued these policies, leading  some commentators like Jennifer Rubin to wonder about whether there is a new moment for free-trade emerging. Free trade is likely overstating it. Harris has long been skeptical of free trade, but nonetheless her comments of late raises questions about where she stands on these issues and whether trade and investment policy abroad will take on a greater role in meeting US economic and national security objectives.

Looking ahead voters, businesses and investors will need to not just hear critiques of Trump trade policies but will seek clues about where Harris lands on trade policy. Will Harris strike a new approach with trade or continue the approach of targeted tariffs and sectoral agreements used by the Biden Harris administration as part of their industrial policy? Can such policies still be considered targeted? . Will tariffs remain a key tool of industrial policy and rejuvenation? Will she continue to use trade as a wedge for labor and environmental goals (probably)? My assumption has been yes, but I will be watching closely in coming weeks and months including perhaps in some of the interviews that she will undoubtedly do.

So far the Harris campaign has been pretty quiet on their trade policy goals . Fair enough – the ticket change came only a few weeks ago and the Biden Harris admin doesn’t have a lot to show on the trade side which has arguably been one of the weaker links of the economic policy platform. The focus on supporting the American middle class, especially workers, suggests a continuity of policies aiming to use trade and investment to boost labor and environmental rights globally, reducing the reliance on China and catalyzing investment in the US and where necessary in partner nations. Tariffs have become a bipartisan tool in the United States – and increasingly their allies, but the two political parties have somewhat different goals in mind and the Democrats seem more likely to use trade measures to help support the areas where they have deployed national balance sheets. At present that seems likely to continue. 

The Biden Harris administration maintained many of most of the Trump tariffs on China and has in a somewhat targeted way added to them. The new tariffs announced this year, are in sectors linked to areas of where the US has invested public capital (sectors supported during the pandemic, Chips, and clean tech supported by the Inflation Reduction Act). In a sense they are should be seen as part of that exercise of industrial policy. Their argument is that these sectors need not just capital and purchase commitment but also protection as they make that transition, especially as China has reoriented towards export-led growth and is adding capacity in many of these sectors. Such willingness may continue.  Other tools including market shaping mechanisms to help companies hedge their resource costs (say in critical minerals) may result. Think of new strategic metal reserves and other investments.

The Biden Harris administration has also encouraged a wide range of allies to their own policies that protect their economies from China’s over capacity, we saw that most recently with Canada‘s tariffs on EVs and other likely ones on other parts of the supply chain (batteries, critical minerals, chips and semi-conductors, perhaps unsurprisingly those protected by US tariffs earlier this year). The European union measures on EV‘s and clean energy technology well somewhat domestically driven, but also reflect this shared concern and worry. The goal is not necessarily fully identical policies which are unrealistic, but sort of coordinated somewhat parallel, processes to reduce the risks of diversion of goods that are no longer going to the United States suddenly being dumped in another economy that they might harm that economy, but also might then trigger indirect trade.  

The Trump era tariffs on China, many held over by the Biden Harris administration, plus forced labor restrictions on solar panels, textiles and other goods, have partly succeeded in reducing the direct trade between the US and China and some of the US reliance on one supplier. The question remains though about how the US will grapple with the impacts of trade redirection at a time when China’s own capacity has been increasing. Moreover, how will the US take steps to address China’s retaliation.

Overall, the era of 1980s/90s broad-based free trade deals is behind us, given extensive use of non-tariff barriers, the advent of industrial policy and the challenge of dealing with China’s significant and growing excess capacity. Instead, Harris may opt for sectoral measures, perhaps with both G10 allies and with some emerging markets. It remains to be seen if a Harris admin will be more ambitious on trade than the Biden administration has been.  One key place to watch will be whether new chapters are added to regional economic agreements and whether the recent round of MOUs on critical minerals will create the infrastructure needed for more extensive joint technology development.  Following agreements with G10 allies, the US has recently struck less extensive ones with Argentina and Brazil. Brian Deese, now an econ advisor to the Harris campaign and key architect of Biden-era industrial policy, has called for a Marshall Plan for Green energy, which would seek to develop and export new infrastructure. The challenge is that some of the countries the US seeks to partner with or sell to in the Emerging and frontier world want to move up the value chain in these sectors as much as the US does and would like to jointly develop technology. 

Thus where Harris and Trump may diverge the most is in the interaction of their trade policy with fiscal policy. Where Trump is testing out the idea of broad-based tariffs, in part to boost revenue to cut other taxes, Harris would likely try to align tariffs with the sectors prioritized for national support and those where regulation are also supporting. Moreover, Trump monetary policy signals including attempts to weaken the dollar might be more inflationary since they would try to counteract the dollar strengthening that typically comes with higher tariffs as markets adjust. Moreover, there would likely be some trial and error and tariffs threatened as a negotiating approach in a Trump administration which might make it harder for business to adjust and predict. Overall, there is broad bipartisan support for tariffs, either for protecting the sectors in which taxpayer money is being invested, or for a combination of trying to cut imports and boost revenues (an optimistic goal IMO). The issue is what sectors are prioritized, and how trade interacts with investment and development policy as well as fiscal and monetary. More to come on this.

Will the divergent goals and tradeoffs be balanced? Will the goal of restoring conflict with other economic goals and are common extenrnal tariffs a measure of the future? All of these are questions we should be asking as they will drive the opportunity set. But of all the scenarios out there, I doubt we are going back to broad market access trade free trade agreements.