US elections in the spotlight

Trade and tariffs are high on the agenda for the US elections, according to scenarios modelled by BNP Paribas’ market research platform, Markets 360.


All eyes are on this event as it has significant potential to move global markets, notes the latest Markets 360 US Election Tracker. Both major US parties see tariffs as a lever with candidates using it as part of their playbook ahead of the 2024 election.

The analysis takes a deep dive into the implications of tariffs and models the economic and market impacts of the various tariff scenarios that have been announced to date. This includes a potential 10% across the board tariff and a 60% tariff on China proposed by presumptive Republican presidential nominee Donald Trump.

“Regardless of who wins the US presidential election, the government is likely to continue adopting a more protectionist stance on trade policy. A second term for Trump may bring an escalation in trade tensions that would likely deliver another stagflationary shock to major world economies. BNP Paribas’ Markets 360 modeling suggests higher inflation, tighter monetary policy, and lower growth across major economies, all else equal,” says Calvin Tse, Head of Americas Macro Strategy, BNP Paribas.

A second term for Trump may bring an escalation in trade tensions that would likely deliver another stagflationary shock to major world economies.

Calvin Tse, Head of Americas Macro Strategy, BNP Paribas
Key scenarios

The more consequential changes relative to the status quo would likely occur under a Republican presidency, based on announcements made to date, according to BNP Paribas’ Markets 360.

To gauge the potential impact of these changes, the Markets 360 analysis also models four scenarios using the tariff version of the National Institute Global Econometric Model (NiGEM), a policy model designed to study the dynamic effects of shocks.

“The output of our modeling exercise shows changes to fair value across asset classes in different extreme tariff scenarios. Modelling these outcomes provides ranges on how large of an impact that tariffs can have on the global and US economy and markets,” explains Tse.

Likely impact of tariffs

Tariffs tend to generate a disproportionately larger and more persistent impact on inflation than on growth. However, this may push central banks back toward rate hikes, with the monetary policy tightening required to counteract such inflation pressures amplifying the drag on growth and in most cases exceeding the direct GDP impact from tariffs, notes the analysis. 

“It’s a difficult situation for central banks still fighting inflation. For the Fed, our modeling suggests broad-based tariffs could push US price inflation over four percentage points higher in the year after the shock. That would delay rate cuts, all else equal, and may jump-start arguments for further tightening. Tighter-than-expected policy from the Fed could complicate the task for foreign central banks,” adds Tse.

Mixed implications for Asia

Considering direct and indirect impact of tariff hikes from the trade war during Trump’s first term, China’s market share of US imports may continue to decline under a variety of higher tariff scenarios.

A 10% US import tariff, if implemented, would have also a negative impact on Japan’s export sector. But given the JPY weakness vs. USD over the past few years, many Japanese exporters may choose to absorb the cost of tariffs for the time being.

The lasting repercussions of the US-China trade conflict extend beyond the two countries, affecting their trading partners as well. Markets 360 thinks export-oriented ASEAN countries may indirectly benefit from this as a re-export region.

What lies in store for Europe

The US election could meanwhile have meaningful political and economic implications for the EU, the Markets 360 analysis finds. Looking ahead it suggests that the most likely impact of a renewed increase in US tariffs would be stagflationary for Europe.

The short-term impact on inflation would be mitigated if monetary policy were to tighten in response, the modelling suggests, but this would result in an even larger hit to the European economy. Beyond tariffs, other political and economic factors could also weigh on European sentiment.

Market impact

BNP Paribas’ Markets 360 analysts expect FX will be the asset class most immediately impacted by increased trade restrictions. FX serves as the intermediary between countries in international trade; in a world of largely free-floating exchange rates, any actual material government-imposed restrictions may result in immediate reassessments of current exchange rate levels.

A large positive shock to ‘terms of trade’ should increase the fair value of the USD. However, there are also other exogenous factors not incorporated into the Markets 360 scenario analysis that could materially change the results, including the potential impact of fiscal policy following the election.

BNP Paribas does not consider this content to be “Research” as defined under the MiFID II unbundling rules. If you are subject to inducement and unbundling rules, you should consider making your own assessment as to the characterisation of this content. Legal notice for marketing documents, referencing to whom this communication is directed.

Read the full report