Deutsche Bank-US Economic Perspectives Trade war II Supply-side risks ve...-108446682.pdf

29May2024DeutscheBankResearchNorthAmericaUnitedStatesEconomicsUSEconomicPerspectivesDateTradewarII:Supply-siderisksversusrevenuerewards2WiththeUSelectionlessthansixmonthsaway,wearetakingdeepdivesintotheeconomicpolicyissuesthatwillhavethegreatestimpactontheoutlook.Recently,weassessedthebudgetdeficitoverthecomingyearsandthepotentialeffectsofachangeinimmigrationpolicies,especiallyforinflation(see"Fiscaloutlook:Achickenineverypotiscostly"and"Howlargewasinflationmitigationfromimmigration?").Inthisreport,weconsidertheimpactoftheelectiononUStradepolicy.2OurfocusisonchangesthatcouldcomeunderasecondTrumpadministration,theelectionoutcomewiththeclearestdifferencesfromthestatusquo.Weprovideaninitialassessmentofthepotentialimpactofanotherroundoftraderestrictions,withparticularfocusongrowth,thelabormarket,inflation,andtheFed.2Theexperienceof2018-2019servesasauseful,althoughpossiblywatereddown,templateforhowthesepolicychangescouldproceedandhowtheymightimpacttheeconomy.Ouranalysissuggeststhattheconsiderabletariffs–e.g.,a10%universalbaselinetariff,tariffsof50-60%onimportsfromChina,andothers–couldraisesubstantialrevenues,thoughattheexpenseofweakergrowthandhigherinflation.Weprovideaninitialquantificationoftheseeffects.2Ultimately,tradeprotectionismwouldactasanegativesupplyshock.Suchashiftcouldcounteractatleastsomeofthepositivesupplydynamicsthatarecurrentlyallowingstronggrowthtocoincidewithdisinflation.WithinflationalreadywellabovetheFed"starget,andupsideinflationrisksstilltopofmindformonetarypolicymakers,weseetradepoliciesaspossiblyaddinganotherreasontokeeptheFedonholdinto2025.ThisisahawkishrisktotheFedoutlookwedetailedinourlastupdatereport(see"(Pushed)BacktoDecember").MatthewLuzzetti,Ph.D.ChiefUSEconomist+1-212-250-6161BrettRyanSeniorUSEconomist+1-212-250-6294JustinWeidnerEconomist+1-212-469-1679AmyYangEconomist+1-212-454-9893DeutscheBankSecuritiesInc.IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.MCI(P)041/10/2023.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS.Distributedon:29/05/202413:53:08GMT7T2se3r0Ot6kwoPa29May2024USEconomicPerspectivesPage2DeutscheBankSecuritiesInc.IntroductionWiththeUSelectionlessthansixmonthsaway,weareconductingdeepdivesintotheeconomicpolicyissuesthatwillbemostimpactfultotheUSeconomicoutlook.Recently,weassessedthebudgetdeficitoverthecomingyearsandthepotentialeffectsofachangeinimmigrationpolicies,especiallyforinflation(see"Fiscaloutlook:Achickenineverypotiscostly"and"Howlargewasinflationmitigationfromimmigration?").Inthisreport,weconsiderthepotentialimpactoftheelectiononUStradepolicy.WefocusonpotentialchangesthatcouldcomeunderasecondTrumpadministration,asthatistheoutcomewiththeclearestdifferencesfromthestatusquo.Webeginbyrecappingthetradewarof2018/19anddetailtheeconomiceffectsofthosepolicies.Wethendocumentsomeofthepolicychangesthatareunderconsideration.Finally,weprovideaninitialassessmentofthepotentialimpactofanotherroundoftraderestrictionsin2025,withparticu