Expert Column Preview of The 2024 U.S. Presidential Election for Trade Companies

After Trump's surprise victory in 2016, high tariffs were imposed on China, leading to a restructuring of the supply chain. When Biden took office, he brought additional changes to the global supply chain through the Inflation Reduction Act and CHIPS Act. As U.S. politics has recently brought about major changes in the global supply chain, importers and exporters need to pay attention to the U.S. presidential election in November. Neck and neck race between Donald Trump and Kamala Harris The U.S. presidential election is becoming fiercer than ever. Initially, the prevailing assessment was that candidate Trump won an overwhelming victory over President Biden in the first presidential debate on June 27, and the pendulum was tilted. In addition, the attack on Trump on July 13th followed and victory seemed to be solidified. However, on July 21st, the Democratic Party raised stakes by making the decision to give up the reelection of the incumbent president, turning the competition into a close game again.

Uncertainty of Donald Trump
Trump enjoys using aggressive policies as we already experienced in his last term. Additionally, since he uses negotiation tactics to push others to the limit, much noise occurs during negotiations. Therefore, the market is most concerned about Trump’s uncertainties.

He plays the same game this time as well. First is keeping China in check. Trump declared that he would impose tariffs of a whopping 60%, in addition to the current tariff of 25%. The Bank of Korea analyzed that if the U.S. tariff of 60% on China were realized, Korea's exports to China would decrease by 6% and GDP would also decrease by 1%.

There is also pressure on allies' defense costs, mainly targeting NATO. He ordered NATO member countries to increase their defense spending by 50%. It is expected that the same burden will be exerted on the Republic of Korea.

Trump's uncertainties could also be found when he interfered with Jerome Powell, Chair of the Federal Reserve by telling him not to decrease interest rates and when he stated he would consider eliminating subsidies for electric vehicles if he is reelected.

Uncertainty of Kamala Harris
Uncertainty is also laid on Kamala Harris. What the market is doubtful about is tax increases. She announced that she would increase both corporate tax and income tax. Some Republicans go extreme that her overall pledges appear to be ones of communists. Uncertainty Factors of Trump Increasing Tariff on China
The first uncertainty is an increase of tariffs on China. But this might be unlikely to materialize as there still is fear of inflation in the U.S. market as higher tariffs could cause upward pressure on inflation.
There were many studies on who bore the burden of Trump’s tariff on China. These studies proposed several possibilities - tariffs were burdened by U.S. companies and households or Chinese companies or weakened Chinese currency. To find this out more clearly, the U.S. Congress stepped in and the Democratic and Republican parties came up with a bipartisan agreement in 2022 to pass a bill to conduct relevant studies and let the United States International Trade Commission (USITC), the bipartisan organization analyzing trade issues, to take responsibility for it. The result of the study came out in 2023, demonstrating that the tariffs were solely levied on the U.S. It estimated that whenever the tariff went up by 1%, the price of the targeted product increased by 1%. In other words, almost every tariff was shouldered on U.S. importers. The higher cost for U.S. companies triggered higher prices of products for consumers, putting a burden on citizens. As such, an increase in tariffs could lead to inflation, which could meet an objection from the Republican party even though Trump pushes ahead.

Foreign Policies and Exchange Rates
If Trump is elected as the next president, many analyze that pressure on foreign policies will be higher, reinforcing the dollar to be stronger. However, this would not be true when looking at the dollar trend during Trump’s presidency.

During the early days of Trump’s administration, steep tax cuts and pressure on allies were one of the factors weakening the dollar in the market about by 7%, which was not a big decline. But in the later days of his tenure, he focused on countering China, encouraging American exceptionalism, which led to a strong dollar. But it was not much increase as well. The increase stopped at 10% even though there was a strong preference for a safe haven currency, the dollar, when uncertainties caused by COVID-19 peaked.

The unexpectedly stable dollar seemed to be attributed to Trump’s unique strategies. His every policy goes to the extreme. What if one of those incurs a weak dollar and the other causes a strong dollar, how will the dollar change? It would show a weird balance where a weak dollar appears when the U.S. criticizes China for manipulating currency and the dollar is strengthened when the U.S. levies high tariffs on China. Trump utilizes both at the same time.

And it is the same for now. For example, Trump publicly said he would ramp up the oil production in the U.S., which would make oil prices go down. But simultaneously, he said he would fill the Strategic Petroleum Reserve which was lessened during the Biden administration, which would put upward pressure on oil prices. Each statement seems dramatic and as Trump wants to take advantage of each policy, when every policy is combined, it strikes a strange balance.

As such, general perception regarding Trump often shows a gap between real data. It appears that the U.S. kept China in check strongly but in fact, Chinese stocks earned good returns and countries that are highly affected by China, such as Taiwan and the Republic of Korea were ranked high on the stock market list. And the exchange rate was stable. In addition, although Trump sometimes commented negatively on platform and ICT companies, the ICT industries recorded the highest sales. Uncertainty Factors of Harris Tax Increase Plan
The tax increase plan is Harris’s uncertainty factor in the market. If taxes go up, corporations in the U.S. would decline their investments, which in turn let U.S. consumers decrease their consumption.
However, her plan faces challenges to be realized because to change tax rates, it has to pass Congress. But in this election, the Democratic Party is hard to win in the Senate race as elections will be held in states where the incumbent Democrat Senators need to be reelected.

In particular, some Democrats with neutral status won in red states in the last election. Those states were included in this election and according to surveys released so far, Republicans are expected to win seats in those states. If Republicans take those seats, it would be almost impossible to enforce the tax plan.

It is the same for Trump. On the contrary, Trump proceeds with tax cuts but a survey of the House of Representatives presents that the Democratic Party would prevail. If the Democrats win votes, it would be unfeasible for Trump to implement the tax cuts.

What would happen if Harris pushes tax increases? Then it would take at least one year. When Trump lowered the corporate tax rate in the past, the Republican party had the upper hand in both the Senate and the House. Even though the tax cut was the first action Trump took, it took one year to go into effect. And the effect of the tax increase might not be as big as a technical calculation. Let’s say the corporate tax is raised from the current 21% to 28%, in the calculation, the net profit of corporations after taxes will go down by 9%.

But the figure is a nominal tax rate. The effective rate could see a lower increase when some tax deductions and tax credits are applied. And even if she keeps trying to increase taxes, she should meet with strong opposition from the Republican party so that they might reach a compromise of 24 to 25%, between the current 21% and 28% claimed by the Democratic Party.

In addition, even though the tax increase is her pledge, it might not be enforced if it is regarded to hurt the economy. This pledge is on the same page as the one made by President Biden four years ago. And the reasons for objection listed above appeared at that time as well. After four years, the Biden administration could not impose higher tax rates due to realistic reasons even though it could have been passed during the first two years when the Democratic Party dominated both the Senate and the House. Congressional Election Could Matter More Than the Presidential Election Decentralized Power
As we understand from the content above, even the president has to go through many steps in Congress. Therefore, which party takes more seats in the Senate and the House is as important as who will be the president. And from an economic perspective, it would be better to decentralize the power to prevent extreme policies from passage. The economy could be damaged by extreme policies and uncertainties but if the power is decentralized, risks will be far less.

The stock market proves it. Let’s take a look at changes after elections in the stock market since 1949. The first case is when the Democrats took all the power. In this case, the profit of the stock market was at 12.6% one year after the election but the profit went down to -1.5% two years after the election. In the second case where the Republicans won, the profit was at a mere 0.7% and it rebounded to 7.3% next year. But in the case of sharing power, it saw 7.7% next year and 8.3% two years later. When the power was focused on one party, profits became volatile and as a result, the accumulated return rates were poor. On the other hand, when the power was not on one side, profits were less volatile and the cumulative return rates improved.

That’s why decentralizing power is key in this election. The presidential election showcases neck and neck race but it is estimated that the Republicans would gain the advantage in the Senate and the Democrats would win in the House. So it displays a high chance of dispersing power in an economic sense. Increased investments to pay attention to after the election Fierce competition in the presidential election and high uncertainties for the candidates are negatively impacting the economy in part, which is Private Investment in Fixed Assets. Unless it is essential, people delay their investment for a few months until the president is appointed.
Of the Private Investment in Fixed Assets, Nonresidential Structure and Equipment Investment other than Intellectual Property showed lower expectations for their contribution to the U.S. GDP growth. For example, since 2021 it has contributed an average of 0.36%p in growth per quarter but in the 3Q, the figure is forecasted to be at only 0.03%p.

This was found right before the last Mid-term Election. What the “Mid-term Election” means is that it is an election held in the second year of the four-year presidency to elect Senators, Representatives, governors, Prosecutor General, State Senators and State Representatives, etc. And in the 4Q 2022, the contribution rate recorded 0.08%p.
But the pending investment would be restored after the election as there will be a policy direction. For reference, the CHIPS Act and Inflation Reduction Act were enacted after the last Mid-term Election, which heightened the contribution rate of investment to 0.55%p in 1Q and 0.84%p in 2Q 2023.

Long-term investment in particular, the overall investment was down due to high uncertainty after COVID-19 and high interest rates. Since the investment amount went below the 2010-2019 long-term trend line during the COVID era, still it is positioned below the previous trend line. It is the outcome indicating a lack of aggressive investment due to heightened uncertainties after COVID-19. However, as interest rate cuts are around the corner and the election result will come out soon, we could positively expect a restoration up to the previous trend line.

The other pillar of investment, the residential investment, is estimated to contribute more afterward. This is not directly connected to the election but to interest rates. Due to the expectation for a cut in interest rates, mortgage rates are also decreasing. And the mortgage rates are closely linked with the real estate market. In the 2Q last year, the contribution rate of the residential investment was at -0.05%p and is likely to be at 0.50%p in the 3Q. The sluggish real estate market is blamed for high interest rates but it could be addressed when the interest rates are down.

Economic entities are anxious ahead of the election this year due to the previous supply chain shock during the Trump administration. And a feeling of uneasiness can be found clearly in the investment field. It seems that investors put investment in the non-urgent areas on hold to set strategies according to the election outcome. Whoever wins the election, once the result is announced, the direction will be proposed, leading to ease of uncertainties. Also, as the data shows, not only the presidential election but also the Senate and House election matters. The best way to reduce uncertainties is to share power, which will be the important point we need to pay keen attention to in this election. # Reference [1] Bank of Korea, https://www.bok.or.kr/portal/main/main.do
[2] USITC, https://www.usitc.gov/press_room/news_release/2023/er0315_63679.htm
[3] FRED, https://fred.stlouisfed.org/
[4] Yahoo finance, https://finance.yahoo.com/
[5] U.S. Bureau of Economic Analysis, www.usa.gov/election-results

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