The rhetoric around the US elections is heating up, and tariffs
have become a central theme – to rally for or against. In Part II
of our roundtable discussion, our chief economists break down
national and global implications of this policy lever.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist.
On this special episode of the podcast, we're going to continue
our third roundtable discussion with Morgan Stanley's economists
from around the world as we enter the fourth quarter of 2024.
It's Tuesday, October 8th at 10am in New York.
Jens Eisenschmidt: And 3pm in London.
Seth Carpenter: All right, so yesterday we
covered topics about central banks, inflation, reflation,
deflation, China's stimulus policies – a whole set of things. But
today I really want to focus on the upcoming US elections and
some of the possible implications around the world.
As of this recording, the race between Vice President Harris and
former President Trump is essentially in a dead heat and it has
left policymakers and market participants with few clear signals
about what policy is going to be going forward.
One key policy lever is tariffs; and so Diego, I’m going to come
to you. What has the US team said about tariffs and what it might
mean for the economy?
Diego Anzoategui: Yes, I think the three
key policy levers to consider are tariffs, as you mentioned Seth,
immigration policy, and fiscal policy. Tariffs, in particular,
are basically a presidential authority, so the outcome of the
election is going to be very important there.
Fiscal policy will depend not only on the White House, but also
on the Congress, which most polls suggest that it will be split
between the two parties. So, we don't expect much there. And
immigration policy is tricky because if you take a look at the
data, immigration flows have been decreasing. And the key
question here is whether the new policy is going to affect that
already decreasing path
Seth Carpenter: For tariffs, I know that
we've published -- that there's both a boost to inflation that
can come, but also a hit to economic growth. And that boost to
inflation likely comes first.
The logic is tariffs are taxes, and so they should be seen as a
tax on consumption spending -- but also, on domestic CapEx
spending and domestic manufacturing because a lot of the imports
that are under tariff are either capital goods or intermediate
goods that go into manufacturing here in the US.
Diego Anzoategui: Yeah, that's right. Of
course, the details will matter a lot. So, suffice it to say,
there's a lot of uncertainty.
Seth Carpenter: Okay, that's fair. Chetan,
let me come back to you on this. This topic is particularly
important for China's economy since the Trump campaign has
pledged tariffs of up to 60 per cent on China, and then 10 per
cent globally -- something that our public policy team believes
could be a driver of a broader decoupling.
You've written a lot about tariffs, tariff structure, what it
means for China, the deflationary path. Could you just elaborate
a little bit for us?
Chetan Ahya: Yeah, absolutely. I think the
timing of this tariff, if they do come up in November or sometime
in 2025, couldn't have been coming at a worse time for China. As
we've been discussing, China has already been going through this
challenge of deflation, and tariffs essentially will mean
additional deflationary pressures on China.
So that is one source of impact that we would be watching. The
other would be what is the impact on global corporate confidence
and China's corporate confidence. That can have additional
negative impact in form of slowdown in investment. And one other
thing to keep in mind is that in 2018-2019, China could respond,
in terms of fiscal and monetary easing and offset some of the
downside that came from tariffs. But in this cycle, considering
the state of the property market, it would be very difficult for
China to reflate that property market demand and offset the
downside from tariff.
So essentially, we think the tariffs, if they come in this time,
could be far more challenging for China, particularly for
deflation management.
Seth Carpenter: Of course, tariffs are
global and the Trump campaign has talked about not just tariffs
on China. So, Jens, let me come to you. Maybe there are some
implications here for Europe as well.
During former President Trump's administration, there were
targeted tariffs that, met challenges of the WTO and retaliatory
tariffs on American exports to Europe. Looking back on what
happened in 2018 and 2019, what do you think could be ahead in
the event that former President Trump wins the election again?
Jens Eisenschmidt: So, the episode in 2018
could be actually a template, even though it's probably limited
in scopes because tariffs were much more limited that were
applied back then. We've talked about around 1 per cent of total
American-EU imports that back then were targeted; while now we
are really talking about, at least in terms of proposals,
everything.
So first to notice that when back then the impact was limited, it
will be a little bit bigger now simply because more is targeted.
And we think it could be around 30 basis points, shaping around
30 basis points, of European GDP.
Again, that's a very crude measure that depends on many things in
particular on also the retaliation. And here for instance, we
think EU would, of course, like last time, file a complaint with
the World Trade Organization, you know, as a basis for then
following negotiations around these tariffs.
Then, the EU would, of course, be looking into what type of
tariffs it could put in terms of retaliation on US products
entering the EU. And here we would observe first that a lot of
that is actually oil, and it's unlikely that you would want to
put tariffs on oil -- or more broadly energy goods. So also,
natural gas.
Then that means we would look for the next product categories.
But here, I think it's not so clear; no single product category
stands out. But what stands out is that the US has a surplus in
services exports to the EU. And here the EU could, in theory at
least, come up with a strategy to retaliate through services
regulation. Again, that would need to be seen, once we see these
tariffs being implemented. But that certainly would be a road for
the EU to take.
Seth Carpenter: Thanks Jens. It makes a lot
of sense. And gentlemen, I want to thank you all for a terrific
discussion today.
And thanks to our listeners. If you like Thoughts on the Market,
please leave us a review wherever you listen to podcasts and
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