CGS International analyst Edith Qian has taken a closer look at the US presidential election and posits three potential scenarios.
Qian’s scenarios are based on both candidates’ stances on key economic issues.
So far, former President Donald Trump has proposed a mix of tax cuts, import tax increases and tariffs on goods from other countries. These moves would result in a net increase in debt by US$7.75 trillion ($10.21 trillion) through 2035, according to the Committee for a Responsible Federal Budget (CRFB). Trump has suggested extending his tax cuts in 2017 under the Tax Cuts and Jobs Act (TCJA), which will mostly expire at the end of 2025 and exempt various types of income from the income tax.
Meanwhile, Vice President Kamala Harris has proposed a combination of tax increases, cuts and expanded tax credits, including increasing the corporate tax rate from 21% to 28%, which will see the US’s debt level increase to US$3.95 trillion through 2035, according to the CRFB. Harris has also suggested increasing taxes on capital income and expanding the child tax credit as well as other tax credits.
Both candidates have also spoken about energy, trade and immigration.
According to Qian, Trump is likely to be “net positive” for traditional energy sources such as oil and gas. “His emphasis on energy independence implies [a] preference for fossil fuels and potential deregulation in the oil, gas and coal industries.” Trump has said before that he plans to repeal the subsidies for green technologies that were introduced under the Inflation Reduction Act, which was signed into law by President Joe Biden in August 2022.
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Meanwhile, Harris cast the tiebreaking vote on the Inflation Reduction Act as vice president, although she dropped her opposition to fracking while campaigning for the role of president.
On trade, Trump has said that he intends to increase tariffs by another 10% to 20% on most foreign products and increase tariffs to as high as 60% for Chinese goods. At the same time, Harris believes that additional tariffs across the board would mean an effective tax on American households due to the higher price of goods.
However, she has supported targeted tariffs such as those on Chinese electric vehicles (EVs), advanced batteries, solar cells, steel and aluminium imposed by the Biden administration. Harris also supported the Biden administration’s efforts to “severely restrict the export to China of advanced semiconductors and the equipment used to make them”.
Both candidates also covered immigration policies, with Trump promising to carry out mass deportations of unauthorised immigrants in the US. Harris has also toughened her stance on immigration, as she outlines plans to crack down further on asylum claims and extend restrictions in place by the Biden administration on asylum access. She emphasised on her experience as California attorney general taking on human traffickers.
Implications on US inflation, treasury yields and the DXY
The way Qian sees it, Trump’s proposed policies, which include raising tariffs on imported goods and deporting millions of unauthorised immigrants, will have an inflationary effect. His tax plan, which includes an extension of the tax cuts in 2017 under the Tax Cuts and Jobs Act, will also result in a higher budget deficit should the plan be approved by the US Congress.
As a result, Trump’s policies will lead to higher US Treasury yields and a stronger US dollar index or DXY. DXY refers to the US dollar index, which is used to measure the US dollar against a basket of six foreign currencies, the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona.
“The [US] dollar will also likely see higher demand for haven assets amid uncertainties introduced by the trade war, and may gain against major trading partners, whose exports will be hit by tariffs,” she writes in her Oct 31 report. “Higher treasury yields and a stronger DXY could create headwinds for emerging markets.”
However, in the medium-to-longer term, the impact to these three factors will depend on how well the US economy can withstand higher inflation, yields and potential retaliation from other countries.
“The subsequent risk of recession and potentially lower yields will have a more mixed impact on emerging markets,” says Qian.
Under Harris, the outlook for inflation is likely to be more stable thanks to her more targeted approach for tariffs. However, her tax plan will also result in a higher federal debt burden, although to a lesser extent compared to Trump’s plans.
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Implications on China’s economy and policies
The Chinese government may conduct more “significant and decisive” policy efforts to counter the impact of the tariffs proposed by Trump.
Qian notes that China’s trade surplus continued to rise and remained elevated in 2023 to 2024 since the first Trump administration between 2017 to 2021, which “reflects the competitiveness” of China’s manufacturing supply chain.
“However, it also underscores China’s longstanding structural issue: a heavy reliance on investment coupled with insufficient domestic demand,” she adds, with exports to the US accounting for 15% of China’s total goods exports, down from 19.3% in 2018.
Among major destinations, China is exporting more to developing countries, including those in Asean, Latin America and Africa. Trump’s tariff plan will be a significant drag on China’s growth due to its direct impact on exports, and secondary effect on the labour market and investments,” the analyst notes. “Net exports have been a key economic growth driver this year, contributing 23.8% to China’s GDP growth in the first three quarters.”
Compared to 2018, China’s economy is now more vulnerable to a major external shock due to the downturn in the country’s property market, fiscal stress faced by local governments, and deflationary pressure.
In addition to the Chinese government’s policy efforts, Qian believes that the renminbi (RMB) is likely to weaken significantly to mitigate the impact of a tariff hike partially.
A Harris win will likely see “less significant outright shocks” and a “more benign reaction” from policymakers instead.
Implications on the Chinese stock market and sectors
The potential reaction from the Chinese government to counter the impact of the hike in tariffs will be a “key variable” in the performance of Chinese stocks, says Qian. This is in addition to the impact on emerging markets (EMs) due to the initial increase in treasury yields and DXY and downward pressure on corporate profits from the implementation on tariffs.
In her view, rate-sensitive sectors such as Hong Kong properties and biotech firms may see a stronger initial impact from higher yields, while export-oriented sectors will bear the brunt. This applies to companies with the highest proportion of their onshore production exposed to the US, especially organisations within China’s consumer electronics sector.
“Any further tightening in the current de minimis exemption will have implications for cross-border e-commerce firms including PDD’s Temu,” Qian writes.
Should Harris win, there may be tailwinds for EMs with the initial unwinding in “Trump trade” possibly leading to a decline in treasury yields and DXY.
“Harris has laid out a detailed roadmap aimed at expanding access to affordable housing for homebuyers which includes offering first-time US homebuyers up to US$25,000 in downpayment assistance,” says Qian.
“Her overall policy package will introduce smaller upward pressure on interest rates, which also benefits the US housing sector,” she adds. “We believe China's home appliances sector (Haier, Midea) will benefit from potential new home-related demand from the US.”
The elections are scheduled to be held on Nov 5.
