The Impact of the U.S. Elections on Trade and International Supply Chains

October 28, 2024, Covington Alert

The upcoming U.S. presidential election on November 5 will have important implications for U.S. trade policy that are likely to affect companies reliant on international supply chains. There are important differences in how former President Donald Trump and Vice President Kamala Harris approach the use of trade tools to advance U.S. policies and priorities, including whether such tools should be deployed unilaterally, or as part of a collective action with U.S. allies.

For instance, a victory by Harris will likely signal continuity in the current approach of the Biden administration, in which trade has not been a central policy priority, but has instead taken a backseat to-and been used as a tool to support-other key policies on climate, technology, human rights, and industrial development. While a Harris administration is therefore unlikely to pursue new trade initiatives aimed at increased market access, a Harris administration may consider joint action with U.S. allies and likeminded trading partners, or at least be receptive to input from such partners in pursuing trade-related actions.

In contrast, trade is expected to take center stage under a second Trump administration, with unilateral action expected to be the preferred approach. Trump has repeatedly referred to tariffs as his policy tool of choice, and views tariffs as important in creating leverage for dealmaking with international partners on both economic and non-economic issues. Trump and his economic advisors also view the U.S. trade balance as an important measure of economic performance, and bilateral trade deficits are likely to face scrutiny and provoke potential action.

This alert explores certain key trade issues to be confronted by the next administration, assesses how each candidate may approach these issues differently, and considers how companies may prepare for and mitigate the risks associated with each candidate's approach.

Divergent Approaches to U.S. Tariffs

While Congress has primary constitutional authority over tariffs and other trade policy matters, the President has broad authority to adjust tariffs and impose other import restrictions under certain statutes, without approval from Congress. The outcome of the U.S. election will determine to a great extent the importance that tariffs will play as a U.S. policy tool over the next four years.

New Tariff Proposals

Trump, for his part, has made clear tariffs are his go-to tool, having imposed a litany of new tariffs during his first term. These included tariffs up to 25 percent on a range of Chinese imports imposed under Section 301 of the Trade Act of 1974, as well as tariffs on steel and aluminum imports of 25 percent and 10 percent, respectively, imposed under Section 232 of the Trade Expansion Act of 1962. More recently, Trump has proposed imposing a universal minimum tariff rate of 10 to 20 percent on all U.S. imports, as well as a separate tariff of 60 percent on all imports from China. Such tariffs would apply on top of existing tariffs, including those imposed under Section 232 and 301. Such across the board tariffs are likely to be challenged in both Congress and the courts, as it is questionable whether sufficient presidential authority exists to impose higher tariffs on all imports under existing trade statutes.

Trump has also suggested he would consider imposing even higher tariffs in specific situations, including tariffs of 200 percent against imports produced by companies that move manufacturing out of the United States. He has also suggested he could put in place even higher tariffs on Chinese automobiles made in Mexico.

The Trump campaign has emphasized that such tariffs would provide leverage for the United States in trade negotiations, while also incentivizing companies to move production to the United States. The campaign has also downplayed criticisms that such tariffs would raise costs for consumers and business, stating that tariff measures would be accompanied by other policies designed to offset increased costs, including deregulation and a decreased corporate tax rate for companies with manufacturing operations in the United States. Even if only partially implemented, however, Trump's proposed tariffs go well beyond the scope of tariffs implemented during his first term, and would drastically increase the tariff rates paid on most imports, as more than two-thirds of U.S. imports are estimated to currently enter the country duty-free. Accordingly, companies should be aware that, if implemented, Trump's tariff proposals have the potential to cause significant disruptions to international supply chains.

Harris, on the other hand, is expected to pursue trade policies of continuity, rather than drastic change. She is significantly less likely to seek significant increases in tariffs upon taking office, nor is she likely to rely on tariffs as negotiating leverage. In fact, Harris has condemned Trump's planned universal and China-specific tariffs as a "national sales tax," highlighting the negative impact such measures would have on U.S. consumers. That said, tariff increases under a Harris administration are not inconceivable. In May 2024, following a statutorily mandated four-year review of Section 301 tariffs imposed on Chinese goods by the Trump administration, the Biden administration opted to maintain those tariffs in place, and even to significantly increase tariffs in the case of electric vehicles ("EVs"), batteries, semiconductors, solar products, steel, and aluminum, among other products. It is possible that a Harris administration could similarly seek to pursue strategic tariff increases, though such actions would likely be much more targeted and pursued through a more deliberative process than the blanket tariffs proposed by the Trump campaign.

Potential International Responses to Increased Tariffs

In addition to the direct impact Trump's proposed tariffs may have on companies and their supply chains, increased tariffs are also expected to provoke opposition and potential retaliation from U.S. trading partners. This includes not only China, but also U.S. allies such as the European Union ("EU"). In recent days, the European Commission made public its work to develop a contingency plan for increased tariffs under a second Trump administration. EU countries have reportedly developed a list of U.S. exports to target for potential retaliation, noting the objective of such retaliatory tariffs would be to impose sufficient economic pain to force a second Trump administration to negotiate immediately, rather than engage in a prolonged escalation of trade actions. To this end, the EU has also approached other U.S. and EU trade partners, such as Australia, Japan, and the Republic of Korea, to seek a coordinated response to any tariff hike implemented by a second Trump administration.

U.S. companies exporting to China, the EU, and other countries likely to pursue retaliatory responses to increased U.S. tariffs should keep in mind not only the direct impact increased U.S. tariffs may have on their operations, but also the potential implications of such retaliatory responses.

China

Under either a Trump or Harris presidency, the U.S.-China bilateral relationship will continue to be defined by intense strategic competition. Nevertheless, the differing approaches taken by a second Trump administration or a Harris administration with respect to China are likely to impact the bilateral relationship in important ways.

A second Trump administration is likely to pursue a more aggressive approach to China immediately upon taking office, which could include the imposition of-or at least the threat to impose-the blanket 60 percent tariff Trump has repeatedly proposed in his campaign. Trump has also suggested imposing increased tariffs on U.S. imports of products produced by Chinese companies, even where such products do not originate from China. For instance, expressing concern that increased Chinese investment in the Mexican automotive sector could inundate the U.S. market with Chinese brand cars, Trump has also proposed preventing China from accessing the U.S. market via Mexico by imposing tariffs of "100, 200, 2,000 percent" on U.S. imports of Chinese automobiles made in Mexico. Trump's repeated statements endorsing imposition of tariffs on products based on the fact such goods are produced by Chinese-owned companies, rather than on traditional country-of-origin rules, would reflect a major change in U.S. customs law.

If implemented, this more aggressive stance is expected to immediately inject into the U.S.-China relationship increased volatility, which is likely to be magnified by the transactional approach to China that Trump embraced during his first term. Trade is also likely to be a key metric through which a second Trump administration views the U.S. relationship with China, and a particular focus will be establishing a more balanced trade relationship, defined by Trump and his advisors in large part as reducing the U.S. bilateral trade deficit with China. Highlighting the likelihood of increased tariffs against China under a second Trump administration, Trump has also indicated he would consider trade actions against China to address broader foreign policy issues. Trump has suggested that this could include imposing tariffs of 150 to 200 percent as a means to deter a Chinese military action against Taiwan. Actions taken directly against China and its companies, including the imposition of a blanket tariff against imports from China, are likely to trigger retaliatory Chinese tariffs and actions in response.

In comparison, it is anticipated that a Harris administration will pursue more continuity in the U.S.-China relationship by following policies consistent with the "managed competition" approach employed by the Biden administration. While this approach has, at times, resulted in increased trade tensions, overall, it has offered far more predictability and consistency in the bilateral relationship than existed under the first Trump administration. Harris is also more likely to demonstrate a willingness to engage and align with allies in order to shape the international economic environment as a means to constrain China. It is also possible, however, that Harris could pursue unilateral actions designed to check China's growing dominance in key strategic sectors. Such actions could be similar to those enacted by the Biden administration, which included the quadrupling of Trump-era Section 301 tariffs on Chinese cars and the issuance of proposed measures to impose new restrictions on the importation of "connected vehicles" and related components from China (and Russia). Harris has also pledged to "level the playing field" and combat unfair Chinese trade practices, indicating that U.S.-China trade tensions are unlikely to abate in the near term.

Any U.S. action against China is likely also to lead to parallel measures in Europe, similar to actions the EU has taken in response to prior U.S. measures. For instance, the EU adopted retaliatory tariffs and safeguard measures following the first Trump administration's imposition of Section 232 tariffs on steel and aluminum products in 2018; and also responded to the Biden administration's increased tariffs on Chinese-made EVs with anti-subsidy investigations of the Chinese manufacturers most directly affected, which resulted in the EU also imposing significant duties on those imports.

Because competition with China in strategic sectors will remain a key issue under either a Trump or Harris administration, and may at times prompt intensification of trade tensions, companies should continue to consider diversification of supply chains, as well as scenario planning to assess China-related risks and vulnerabilities in their operations.

North American Trade and the 2026 USMCA Review

The U.S.-Mexico-Canda Agreements ("USMCA") entered into force in July 2020, replacing the North American Free Trade Agreement ("NAFTA") as the treaty governing North American trade. Under USMCA Article 34.7, known as the "sunset" clause, the Agreement will automatically terminate 16 years after entry into force (in July 2036), unless the United States, Mexico, and Canada confirm in writing during a periodic review process that they wish to extend the Agreement for a further 16-year term. The first such review will occur in July 2026. If no agreement to extend the USMCA is reached during this first review, the three USMCA parties will continue to conduct subsequent joint reviews on an annual basis until 2036. During any of these subsequent reviews, the three countries may confirm in writing their agreement to extend the USMCA for a 16-year term. If no such agreement is reached by 2036, the USMCA will terminate.

While the first USMCA joint review will not formally occur until July 2026, much of the work relating to this review will begin in 2025. In the United States, for instance, the President is required to hold congressional and stakeholder consultations prior to each review, and to carry out various public notice and comment procedures at least 270 days before the joint review (i.e., by October 2025). Accordingly, the USMCA review is expected to be among the pressing trade issues confronting the next administration, and will play a significant role in determining the future of North American trade.

Several issues are likely to be front and center in the USMCA review, regardless of whether a Trump or Harris administration is in power. For instance, trade in automobiles is expected to be a key focus. The United States has taken a stricter view than Canada or Mexico on how North American content is calculated for purposes of determining country of origin for autos under the USMCA, and it has also identified Chinese investment in the Mexican auto sector as a major issue of concern. Other priorities for the review may include addressing various agricultural disputes (dairy, corn, lumber), Mexico's energy policies, and Canada's digital service tax measures, as well as possible reforms to the Rapid Response Labor Mechanism ("RRM"). Canada has also expressed interest in using the review to discuss trade measures to address emissions-intensive imports. Independent of the above-mentioned issues, the review process could be further complicated by other non-trade issues currently front and center in the U.S.-Mexico bilateral agenda, such as immigration and security. Given Trump's emphatic focus on such issues during his campaign, these issues are likely to be especially elevated should he take office in January.

While the above issues are likely to be discussed regardless, there are important differences in how a Trump or Harris administration may approach and shape the review and its outcome. Both candidates have called the review a "renegotiation," but a Trump administration may seek to more broadly renegotiate the Agreement and implement significant modifications across a range of areas. Trump is also likely to focus on the increase in the U.S. deficit for trade in goods that has occurred with both USMCA partners since the Agreement entered into force in 2020 (and which has in fact more than doubled since the beginning of Trump's first term in 2017). In the case of Mexico, the U.S. goods trade deficit (which increased by roughly 37 percent since 2020) has largely been driven by increased Mexican exports of autos, while the increase in the goods trade deficit with Canada (up 385 percent since 2020, though much lower in absolute value) stems in part from an increase in Canadian energy exports to the United States. Even though absolute values of U.S. exports to Canada and Mexico have also increased dramatically during this period, the U.S. trade deficit with USMCA partners could be a major focus of a second Trump administration as part of a USMCA review.

In contrast, a Harris administration may use the USMCA review to focus more strategically on discrete issues of concern, though that is not to say that review will be uncontroversial. As a senator, Harris was one of only ten senators (eight of which were Democrats) to vote against passage of the USMCA in 2020. At the time, Harris cited lack of sufficient environmental provisions and attention to climate change for her opposition, which suggests that she could press for insertion into the Agreement of additional binding environmental provisions and enforcement mechanisms. More recently as a candidate, Harris also criticized the Trump administration's negotiation of the USMCA as having made it far too easy for companies to outsource U.S. jobs, particularly in the auto sector, and has vowed to use the review process to address this issue.

Other International Trade Initiatives and Agreements

While a Trump administration is more likely to pursue unilateral action and be less responsive to opposition from allies, Trump-as a self-proclaimed dealmaker-is also more likely to pursue negotiation of trade deals, using tariffs as leverage. The first Trump administration was very active in this respect, concluding not only USMCA negotiations, but also renegotiating aspects of the U.S.-Korea free trade agreement, concluding the Phase I Agreement with China, and launching trade negotiations with the United Kingdom and Kenya, among others. At the same time, a Trump administration may limit or abandon ongoing economic initiatives launched under the Biden administration, including the Indo-Pacific Economic Framework ("IPEF"), which Trump has dubbed "TPP Two" in reference to his decision to terminate U.S. involvement in the Trans-Pacific Partnership ("TPP") on his first day in office in 2017. His intent to abandon other Biden administration trade initiatives-such as the bilateral Trade and Technology Council ("TTC") established with the EU-is less clear, though the TTC's survival is far from assured.

Trump may also repeat threats leveled during his first term to withdraw from multilateral institutions such as the World Trade Organization ("WTO"), though this would require congressional action. Trump is also expected to resist strongly other governments' efforts to assess climate and social impacts in supply chains, including through efforts such as the EU's Corporate Sustainability Reporting Directive ("CSRD") and Corporate Sustainability Due Diligence Directive ("CSDDD"). Trump may also react more aggressively to such actions where they are viewed as disadvantageous to U.S. companies, which could include the EU Carbon Border Adjustment Mechanism ("CBAM"), implementation of which is currently expected in 2026.

In contrast, a Harris administration is expected to more closely follow the approach taken by the Biden administration. Harris is therefore not likely to pursue new trade agreement deals containing market access commitments, as divisions among Democrats have undermined Democratic Party support for such deals. As an example, the Biden administration significantly pared back the Kenya trade negotiations started under the first Trump administration, transforming those talks into a process more closely resembling a cooperative economic dialogue. Nevertheless, Harris may seek to push forward other initiatives launched under the Biden administration, including the IPEF and the TTC. She may also seek to elevate the importance of environmental issues in trade discussions having cited lack of attention to such matters as a reason for opposing the Trump administration's trade discussions with Brazil, as well as passage of the USMCA. She is also expected to place a greater emphasis on maintaining cooperative relationships with allies like the EU and pursuing collective efforts to addressing trade challenges, including China's non-market policies. Despite this greater emphasis on multilateralism and collective action, however, Harris is not expected to drastically alter the current U.S. engagement strategy regarding the WTO, or U.S. criticisms regarding the functioning of the body's dispute settlement mechanism.

Continued Focus on Supply Chain Tracing Expected

Of note, under either a Trump or Harris administration, companies will continue to face demands to carry out supply chain tracing as part of their international operations. Compliance with U.S. trade laws, including the Uyghur Forced Labor Prevention Act ("UFLPA"), will remain a priority for either administration, as will increased enforcement of such laws. Relatedly, the importance of supply chain tracing will be reinforced in other ways and in specific sectors, including to ensure compliance with critical minerals and battery sourcing requirements under the Inflation Reduction Act EV tax credit provisions. Similarly, the Biden administration's proposed rule to prohibit the importation of "connected vehicles" and related components from China and Russia would also impose significant new compliance requirements on manufacturers and importers in automotive supply chains. Government initiatives to require companies to map and know their supply chains are not expected to subside, regardless of the election outcome in November.

Conclusion

In summary, former President Trump and Vice President Harris present markedly different approaches to tariffs, trade deals, and strategies for economic engagement. In assessing the possible impact of the upcoming election, companies should conduct scenario planning to assess how both their upstream and downstream value chains may be affected by possible changes to U.S. tariffs or trade policies. This is particularly important where companies are reliant on imports from countries like China, which face a greater risk of trade action by a future administration. Companies should also be aware of whether a bilateral U.S. trade deficit exists with countries from which they import, as such countries may also face greater tariff risks under a second Trump administration. Finally, companies should be mindful of potential risks for trade retaliation that exist, which may also impact their ability to export their products from the United States. After identifying such risks, businesses should look at options for mitigating those impacts.

Our team at Covington can assist in this process, assessing key vulnerabilities, ensuring compliance with new measures, and identifying opportunities for tariff relief and supply chain diversification moving forward.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade practice.

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