How the US presidential election could affect Asian bonds

With the entry of Kamala Harris as a US presidential candidate, we look at the potential impact on trade policies and, in turn, Asian bond markets.

The US presidential election is proving eventful. In July 2024, the incumbent, President Joe Biden, declined to seek a second term and endorsed Vice-President Kamala Harris as the Democratic Party’s candidate. Until then, most polls pointed towards Republican rival Donald Trump as the likely winner. However, momentum began to change, especially in the swing states, and the possibility of America electing its first female president became more of a reality.¹

With around two months until polling day, we explore how the policies and objectives of the two presidential contenders could impact the US and Asian bond markets.

The differing trade policies of Trump and Harris

When President Trump is campaigning, he is keen to promote his track record of using trade tariffs to protect US industries and jobs. However, he is not alone in harnessing sanctions. President Joe Biden has also introduced higher levies for certain Chinese-manufactured goods, including electric vehicles and semiconductors, to resist ‘unfair trade practices and to counteract the resulting harms.²

Given Harris’ recent entrance to the presidential race, less is known about her stance on tax and trade issues.³ Both Trump and Harris understand the political benefit of promoting tariffs to protect US jobs. Trump has said he will impose higher levies on Chinese goods if elected.⁴ While Harris is generally viewed as less protectionist than Trump, this does not mean she will abandon tariffs.

Impediments to trade can be economically sub-optimal but politically advantageous

Trade sanctions on goods can negatively affect consumers more than businesses, with the latter often passing on the tariff as a cost increase.⁵ However, there are beneficiaries. A US company producing goods in a sector subject to an import tariff is, to a degree, protected from foreign competitors and can potentially charge more for their output. This is perhaps most obvious in the US auto industry. Recently announced tariffs of 100% on imported Chinese electric vehicles do protect US car manufacturers.⁶ The benefit should not be overstated, as the US does not import many Chinese electric vehicles.

The employment cost of sanctions

According to a paper published by the US-based National Bureau of Economic Research (NBER), tariffs introduced by Trump during the 2019-20 trade tensions between the US and China appeared to show that there was a benefit to the Republican party in those areas with industries and employment that were protected by tariffs, despite the fact there were no employment impacts.⁷ The research also found that retaliatory tariffs, mainly on agricultural products, did result in higher unemployment across the affected areas. Yet, this only led to a modest weakening of support for Trump and the Republicans. These findings support the view that sanctions can be politically advantageous, even if they are not economically beneficial.

Indeed, a victory for Trump followed by a subsequent rise in tariffs may trigger a response from affected territories. The US energy sector could be particularly vulnerable in this scenario as it exports crude oil, liquid natural gas and coal to Asian markets.⁸

Uncertainty could support defensive assets

With an attempted assassination and a late switch of Democratic candidate, the ambivalence surrounding this election is higher than in recent cycles. This could cause riskier assets like equities to become more volatile. Almost daily election polls may add to the sense of uncertainty. More risk-averse investors may seek the perceived safety of fixed income rather than riskier assets until after polling day.

When the election outcome is known and uncertainty abates, there may be a relief rally in riskier assets like equities. After this honeymoon period, investors may turn their attention to the US federal government’s large budget deficit – revenue is lower than the amount it commits to spend.⁹ This shortfall means the total amount of debt the US carries is growing, and in early August, it reached US$35 trillion.¹⁰

This growing debt burden could trigger anxiety in bond investors, and they could demand higher yields for longer-term government bonds to compensate them for the perceived increased risk of default.¹¹ While a growing and large amount of debt generates headlines in the media, it is more of a political issue than an economic one and unlikely to be a significant concern for US bond investors.¹²

The likely impact on Asian bond markets

While there is little direct impact, most Asian fixed income assets are incidentally affected events in the US bond segment. For instance, the region’s markets, except for China, are unable to decouple their monetary policy from that of the US painlessly. The US Federal Reserve has signalled that it expects to begin cutting interest rates in September.¹³ If this were to occur, then it would provide more latitude for Asian central banks to look at trimming their borrowing costs. Lower interest rates could be expected to increase demand for bonds, while cheaper debt should also help businesses moderate their costs and potentially boost profitability. This falling interest rate environment, a lack of global trade shocks and steady economic growth would generally support Asian bonds.¹⁴