In the fourth installment of our US elections series, we consider the consequences of changes in policy on economies and markets outside the United States. Given that a victory for any Democratic presidential candidate would typically mean a status quo in terms of policy settings, our analysis focuses largely on the implications of a second Trump presidency. Some countries will fare better than others in the latter scenario, and we tease out where the effects are most likely to be felt with a Trump White House.
How US Policy Changes Transmit Abroad
We have identified four main policy transmissions that we consider most relevant. First, and foremost, the US shapes global financial markets via the dominance of its reserve currency status as well as being home to the world’s largest and deepest capital markets. In particular, US influence transmits rapidly via changes in financial conditions expressed in the relative value of the US dollar as well as US interest rates. These conditions are heavily subject to the overall macro policy mix, with fiscal and monetary policy each playing central roles in shaping the outcome.
President Biden’s decision to exit the US Presidential race means the 2024 elections are less likely to result in a Republican sweep (2024 US Election – Big or Small Macro Policy Shift Coming?) and sizable fiscal expansion. Rather, Democrats could control the House, resulting in a more modest fiscal impulse. Markets’ perception of US monetary policy under a Trump administration would also be a key factor. We believe that Trump would attempt to influence monetary policy, even without a congressional mandate, and force markets to contemplate more inflation uncertainty in the long term. These potential scenarios have already been enough to move markets, with longer-term yields rising alongside Trump’s improved polling numbers.
In addition, the US president has executive discretion over policy areas independent of Congress. Three areas are likely to be most in focus: energy, trade and security. With regard to energy, Trump would undoubtedly amplify US efforts to grow US energy exports. Improved relations with major energy producers should also help ensure global energy supply remains abundant and prices contained. Energy supply and prices are part of a global market and thus the benefits/costs of US action directly affect the world’s economy.
On trade, there would almost certainly be tariff increases, with a disproportionate share being levied on Chinese imports. However, selective tariffs can also be expected on a range of imports from Europe and certain emerging market countries. We would not expect Mexico to face any meaningful trade disruption, with the Trump-authored USMCA only up for renewal in 2026 and likely to be extended under similar conditions. Given its discriminatory application by design, trade policy is the lever most likely to drive divergence between foreign economies and markets.
Finally, foreign and security policy are the exclusive domain of the president. Trump is likely to continue to extract higher security commitments from US allies, notably in Europe. The explicit pivot of US military attention to Asia would also impose a higher premium on China via geopolitical risk perceptions and the stifling of domestic reforms.
So Who Wins, Who Loses?
Figure 1 summarizes our overall views, with China and many emerging markets being most exposed due to their negative correlation with a stronger US dollar and higher US long-term rates. China would inevitably be the central target of US trade sanctions, but the impact on China would be partially mitigated by its ability to devalue the renminbi. The capacity of China’s corporate sectors to diversify production in third-party countries provides an additional offset. Moreover, as a large energy importer, China would be an indirect beneficiary of cheaper energy. Other large EM energy importers such as India would also benefit, although the emerging markets (EM) complex contains many energy producers for whom softer energy prices would pose a constraint on their own economic prospects.
In contrast to China, Europe cannot offset trade tensions via its exchange rate and thus would also suffer from RMB depreciation and loss of competitiveness vis-à-vis China. Trade disputes in large European capital goods also prevent any re-importation via third parties, thus leaving important industries in Europe heavily exposed. A larger trade war may well be prevented, but the price of that for the European Union may be concessions that weaken its export sectors. Another concession would be even higher security expenditures in exchange for US security commitments. This fiscal burden would also exacerbate long-term worries over European security and push structural risk premia higher on European assets.
Net winners from a new Trump regime are likely to be the same ones as during Trump 1.0. The Mexican peso was the best performing currency from 2017-2020 as anti-Mexican policies failed to materialize – we would expect the same in the domain of economics and markets for 2025-2028. Similarly, Japan is much less exposed to trade ruptures and could even displace some Chinese market share in the coming years; Japan would also benefit from cheaper energy costs.
More to Watch For
For investors, US elections are classically played via US equity sectors due to each party’s regulatory stance, as we outlined in a previous article. In conjunction with the rejection of the legality of the Chevron deference by the US Supreme Court, the US is about to enter an era where regulation is likely to be distinctly more ‘light touch’. Could this trigger similar moves towards deregulation beyond the borders of the US?
There is also a strong likelihood that a Trump administration would parallel this domestic deregulatory development by withdrawing the US from several global policy organizations and agreements across areas such as climate, finance, technology, and digital regulation. For Europe, this represents another structural challenge as the gap grows in favor of US outperformance in innovation and business environment. This is hard to specify but is a non-negligible tailwind to US exceptionalism more broadly. However, at the same time, domestic political cohesion may pose a threat to US leadership, something we will examine in our final article in the autumn.
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Originally Posted July 22, 2024 – US Elections: Global Spillover Effects
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