Meet the New Trade Policy, Same as the Old Trade Policy

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The Office of the US Trade Representative (USTR) announced retaliatory tariffs against six nations’ digital taxes yesterday, concluding a process begun last summer. But it then immediately suspended these levies—against Austria, India, Italy, Spain, Turkey and the UK—for six months, during which the Biden administration hopes to finally hash out a global digital taxation regime. Now, the announcement of small, delayed tariffs that are ostensibly a negotiating tool generally isn’t a huge deal for stocks, and we don’t see anything here to make us say this time is different. But it does help flesh out President Joe Biden’s general trade policy, which looks a lot like his predecessor’s. To us, this illustrates a timeless investing lesson: Always watch what politicians do, not what they say—or what pundits say they will do.

Trade policy didn’t loom large in Biden’s campaign platform, but that didn’t stop many from presuming his trade doctrine would be a 180-degree turn from former President Donald Trump’s tariffs and tough talk. Pundits seemingly salivated at the possibility for Trump’s tariffs on China and others to go away, followed by a US return to the artist formerly known as the Trans-Pacific Partnership (TPP). But four-plus months in, what little action Biden and US Trade Rep Katherine Tai have taken largely extends the status quo. In a March interview, Tai logically pointed out that it would be an own goal to surrender a negotiating tool when the relevant negotiations aren’t over yet. Sky-high resources prices haven’t yet inspired Biden to lift Trump’s steel and aluminum tariffs. Ditto the tariffs on Canadian lumber, which Biden’s Commerce Department recommended doubling last week. He did suspend tariffs on UK goods tied to the ongoing dispute with the EU over Boeing and Airbus subsidies. But only because the UK isn’t in the EU anymore—the broader EU tariffs remain.

In our view, this shouldn’t be a huge surprise. Most new presidents in recent decades have largely continued their predecessors’ trade policies, with Trump being the notable exception. Bill Clinton campaigned against the North American Free Trade Agreement (NAFTA), which George H.W. Bush negotiated, then took it the rest of the way once in office. A free-trade deal with Jordan followed later in the Clinton presidency, and George W. Bush followed up with deals with Australia, Singapore and several others. When he left office, his administration was rounding third on deals with South Korea, Colombia and Panama. Barack Obama jawboned against all three, then completed negotiations, signed and implemented the free trade agreements once in office. It wasn’t until Trump abandoned TPP talks, which started under Obama, that there was a notable break from one administration to the next. Obama did slap tariffs on China while in office, but Trump went a lot further.

But even then, acting on Trump’s trade-related campaign rhetoric would have been an error, because his tariffs weren’t anywhere near large or sweeping enough to derail global commerce and cause a bear market. They were—and remain—easily avoided by clever businesses that route goods through nearby third countries like Vietnam and Taiwan. Accordingly, while we see many reasons to be bullish right now, the prospect of these tariffs lifting was never one of them. To us, that people broadly seem to view continued and new tariffs as negatives largely lowers expectations and extends this bull market’s wall of worry.

As for what happens with digital taxes specifically, we suggest the old wait-and-see approach. Yes, the Biden administration wants a global digital services tax to accompany a global minimum tax. Yes, OECD nations are largely sympathetic to that general viewpoint. But as of now, there is little to no consensus on the finer points, including the tax rates and how to define where a transaction takes place. The latter is no small matter, considering every country has a vested interest in maximizing its own take from a global tax, and the UK has already unveiled some of its red lines. Other nations will no doubt follow. The meandering talks might stoke uncertainty, but for now, the likelihood of sweeping new taxes or tariffs creating stiff barriers to entry for newer, smaller Tech firms, seems low.