Protectionist Symbolism Is Fully Bipartisan

Editors’ Note: This article touches on politics, so please note that MarketMinder is nonpartisan, favoring no politician nor any party. We comment on political matters solely for their potential economic or market impact.

What do you call a broad tariff hike in an election year that applies to things America doesn’t much buy? Symbolism!

That is the word we think best describes the Biden administration’s latest tariffs on China, announced Tuesday. Like the Trump campaign’s tariff proposals, they generate many headlines and warnings about their alleged economic (higher inflation) and sociological (slower “green” transition) implications. We suggest tuning it down and focusing on the simple fact that the tariffs—should they stick around—don’t hit anywhere near enough of America’s imports to move the needle. For stocks, they are background noise, not a market driver.

In principle, we don’t think tariffs are positive. No matter which party levies them, they add costs for American consumers and businesses and interfere with commerce. Not just costs of imported goods. But the lack of price competition for domestic goods keeps them more elevated than they would likely be otherwise.

But for them to sway markets, they have to be broad enough to both affect a huge swath of US trade and invite global blowback on the same scale. We haven’t really had that since the Smoot-Hawley tariff, which (along with global retaliation) contributed to the Great Depression. Biden’s tariffs, which hit the following products, are nowhere near that. Here is a bullet-pointed list of them:

Tariffs will rise on:

• Steel and aluminum products from 7.5% to 25% in 2024
• Solar panels from 25% to 50% in 2024
• Electric vehicles (EVs) from 27.5% to 102.5% in 2024
• Lithium-ion batteries used for EVs and battery parts from 7.5% to 25% in 2024
• All other lithium-ion batteries from 7.5% to 25% in 2026
• Larger-storage batteries from 25% to 75% in 2026
• Select medical products from 0% - 7.5% to 25% in 2024 and 2026
• Semiconductors from 25% to 50% in 2025

New tariffs will be imposed on:

• Several “critical minerals” in 2024 (25%)
• Shipping cranes in 2024 (25%)
• Graphite in 2026 (25%)

Long list! But it adds up to only about $18 billion worth of imports annually for a simple reason: The tariffs getting most headlines apply to things America doesn’t really buy from China.

We discussed this last month, when Biden previewed the steel and aluminum tariffs in a speech to some steelworkers in Pittsburgh. The US weaned off Chinese steel and aluminum after former President Trump adopted new tariffs in 2018, rendering the increase an empty gesture. With EVs, America has barely even started buying from China. There is only one Chinese-owned brand on the market here. The administration calls the tariffs preemptive and preventative, to fend off the potential for cheap Chinese imports to displace more expensive American-made EVs, but that is a speculative move aimed at a lot of ifs and ands, not actual commerce taking place.

Note, too, that none of this is sneaking up on Chinese manufacturers. The tariffs follow a multiyear review and a lot of public jawboning, giving Chinese businesses time to prepare. Accordingly, they have been busy expanding their production footprint in Mexico, which will fold them into the trade terms set by the US-Mexico-Canada Trade Agreement (aka the artist formerly known as NAFTA) as long as they comply with rules-of-origin requirements. Businesses aren’t dumb, and when they see a big market for their product, they will adjust as needed to tap it.

At any rate, to see how feckless these tariffs are, we can do some simple math. The US imported $427.2 billion worth of Chinese goods last year.^[i] The new tariffs hit 4.2% of that and 0.6% of our $3.08 trillion in total imports—or will hit, if whoever occupies the White House from next January onward proceeds with them in 2024, 2025 and 2026.^[ii] The long phase-in process leaves a lot of wiggle room, not to mention even more time for businesses to prepare and adapt.

In our view, this is a political story, not an economic one. US politicians have talked tough on Chinese trade and touted tariffs in election years since well before MarketMinder existed. When Trump amped up rhetoric in 2016, pundits clutched their pearls as if it were new. But when his harsh talk proved popular with voters, other politicians in both parties took note. Now we have two presidential candidates vying for the title of Toughest on China in order to win over Rust Belt voters.

Much as markets might prefer it if they were instead making the case for freer trade, none of this creeping protectionism is new. Stocks got over 2018’s tariffs quickly, and they have taken the latest proposals in stride. When (and if) they take effect, their surprise power will be gone. Markets move most on surprises—big surprises. Slow-moving, tiny tariffs don’t qualify.