2024: Year Of Elections, Year Of Tariffs?

One of our less scintillating arguments is that 2024 will be a year of important elections in the democratic world. Despite the "duh" factor, we feel these contests are still weirdly underrated.

Our thinking is pretty simple: the policy consensus in the West is coalescing around a very new policy mix.

Now, it is still the case that many of these democratic contests will be high stakes, most of them will be hard fought and nearly all of them will be hugely important for the countries involved.

One of the reasons that elections are notable for investors - and citizens! - is that they provide the chance to meaningfully break with the policy mix in a given country.

Elections act as a referendum not just on politicians and parties but also on ideas.

This doesn't always happen. Sometimes either the incumbent wins or any proposed policy changes are only at the margin. Sometimes, however, you can get a sea change in the proverbial policy soup that determines a country's political economy.

This can happen at the level of policy detail. i.e.: what should the marginal tax rate be? But it can also happen at far higher, more strategic level. i.e.: should we tax investment at the same rate as income?

Lastly, if a country is large enough and powerful enough an election can have consequences internationally as well as domestically.

This doesn't happen every election but it can be very significant when it does.

The big change in the West is that we are rapidly moving to a zero sum understanding of economic growth:

Your gain is my loss and vice versa.

​You saw this most clearly after Donald Trump's victory in 2016 with the sudden about face on tariffs. His administration unilaterally imposed new duties on imported steel, washing machines and other, similar everyday goods.

Overnight this created a tit-for-tat response of other tariffs around the world. More significantly still, it presented a wider strategic attack on the international system of free trade we have laboriously built up over the last 75 years. It also launched sea-change in the policy consensus in the American political system.

From those small but symbolically important changes has come a raft of other, larger shifts in American policymaking - from both the left as well as the political right. We have alreday written about the return and, we believe, very negative turn towards industrial policy in the US and across the West.​

Suddenly, free trade was out, picking winners was in!

This wasn't just in the Republican party but across the political spectrum. The "Buy American" provisions in President Biden's Inflation Reduction Act are only the most significant example. They don't always get a ton of press but other, similar policies are being proposed all the time.

Tariffs and Buy American requirements have much the same animating force:

To protect favored domestic industries at the expense of less politically connected firms and and the consumer.

They almost universally don't work and the economic literature on this is not just extensive but absurdly definite. Here is a 2019 report from the US Federal Reserve on the Trump-era tariffs:​

“We find that U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs.”

For every precious middle class manufacturing job that these tariffs add to the US economy they are offset and then some by higher costs for businesses and consumers. They also, of course, encourage retaliatory tariffs that often cost the US in the industries we are actually competitive in.

We ding Chinese washing machines, they ding Californian wine or Iowa soy beans or John Deere tractors etc and so it goes.

We are slowly getting very precise estimates of how much these misguided policies are costing us. One of the most clicked links ever in the history of this newsletter is the Peterson Institute's finding that every saved steel job in the US costs $900,000 per year.

This is why our policy consensus had slowly but surely decided that tariffs in general were a very bad idea. The evidence was simply overwhelming: they didn't work.

They might work to save a particular factory or help a particular company but in aggregate, Americans and America will be worse off.

Here is the conclusion of a New York Federal Reserve and Princeton study in 2021:​

“U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers."

Not awesome, as the kids say.

Our prediction, however, is that you won't hear much about that truth during the election though. To the contrary, all the emphasis will be on how these policy measures are reinvigorating our country's manufacturing sector once more.

Build back better etc.

Further, what is perhaps less appreciated today is that this focus on protectionism is unlikely to change, no matter who wins.

How bad could it be?

Pretty bad! Donald Trump, the front runner right now, has suggested a flat 10% tariff on all imported manufactured goods. Such a blanket measure would likely kill the free trade system off for good and also bring a huge amount of inflation and disruption to the US economy overnight.

But he isn't alone.

For instance, the Wall Street Journal has recently reported that the Biden administration is considering increasing the import tariffs on Chinese electric vehicles even though the tariff is already at 27.5%. It is revealing that such a move would be entirely preemptive: The number of Chinese EVs currently imported are minuscule.

The new and fascinating reality is that all the arguments around "national security" and "Chinese dumping" are winning out on both sides of the political spectrum.

The right is abandoning its commitment to free trade and competition. The left is deprioritizing its emphasis on combating climate change and protecting the standard of living for the average working American.

Everyone is singing the same tune, just doing so in a different key.

On the last point, look no further latest rules from the US Treasury Department that have, overnight, made many US manufactured EVs ineligible for the largest tax credit from the US government. Since either the batteries or a large percentage of the battery components are manufactured in China these cars no longer qualify for the credit. Chinese companies have to own less than 25% of a battery-parts producer to avoid disqualifying a vehicle......

This makes those vehicles suddenly less competitive against other models which leaves consumers and especially car companies suddenly scrambling. You might have an entire line of cars that are suddenly uncompetitive by thousands of dollars compared to their peers.

The point isn't just that this is "bad" however. It likely is but the most important takeaway might be just that both political parties in the US have totally changed their priorities and also what is optimal, for the economy and for average American.

These measures might (?!) be worth it to make sure that China doesn't dominate electric vehicle batteries in the same way that they dominate rare earth minerals or buttons or penicillin.

But that is sort of beside the point, in a way. Regardless of their ultimate positive or negative this has huge consequences for investors and consumers and voters.

Higher costs and more disruption to global trade would be inflationary for one. It will also change the incentives for companies as well. For instance, while we try and build up our supply chains will China be selling cheap EVs around the world and re-investing in better batteries and better technology? Will they leave us behind as the new champions of (subsidized) free trade as we throw up walls and try and protect our domestic market?

Big questions to consider. Perhaps even election worthy questions? We w on't hold our breathe.

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