- With the elections approaching, Trump and Biden are outbidding each other to show who is the toughest on trade. Trump has proposed a universal tariff and even higher tariffs on China, while Biden has kept the Trump tariffs of 2018 and added specific tariffs on “strategic” imports from China.
- Since Trump is ahead in the polls and we expect the economic data to deteriorate, we made a Trump victory our baseline in February. A universal tariff would lead to a rebound of inflation in 2025. Recent simulations, which include retaliation by the EU and China, suggest a more prolonged inflationary effect extending into 2026 and an adverse effect on US GDP growth in 2026.
- If the Republicans also get control of the Senate and the House of Representatives, reduced immigration and tax cuts could reinforce the inflationary impact from the universal tariff.
- Meanwhile, it remains to be seen whether the Trump legal cases will lead to a sustained rebound for Biden in the polls. However, they are highlighting that “lawfare” has become a feature of the US elections, which are likely to be contested again. This leads to a further erosion of US institutions and undermines the long-run strength of the economy.
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