US Politics and Policies Politics beyond borders

ElectionWatch 2024

19 Mar 2024

State of the race

The general election campaign is starting early this year. The two presumptive presidential candidates, Joe Biden and Donald Trump, have already garnered enough delegates to secure their nominations this summer at the Democratic and Republican conventions, respectively. Primary ballots will be cast for another two months, but a replay of the last election is now all but certain. We anticipate a highly contentious campaign with the two candidates espousing competing world views on issues ranging from taxation to industry regulation to foreign policy.

Geopolitics will cast a shadow over this year’s presidential election. With war raging in Ukraine and Gaza, the US has been unable to reach a consensus on whether to respond with additional financial and material assistance. America’s enduring commitment to its transatlantic alliances has come under scrutiny, and tensions in the US-China bilateral relationship remain elevated. The porous southern border with Mexico has become a major campaign issue. Voters are exhibiting fatigue over the lengthy list of US commitments around the world. Resistance to foreign entanglements is growing, with profound implications for world order in the 21st century.

Introduction

History and experience prove that foreign influence is one of the most baneful foes of republican government.
George Washington, Farewell Address, 1796

At the conclusion of his second term as president of the United States, George Washington penned a farewell address to citizens of the nascent nation. Most of his message focused on the rise of political parties and the importance of maintaining a viable union among the states despite sectarian differences. Over time, however, the Farewell Address became better known for its promotion of American neutrality and freedom from foreign entanglements. While Washington did not favor isolationism per se, he discouraged forging new military alliances and encouraged a degree of detachment from European affairs. The Farewell Address had a profound impact on the American psyche and contributed to recurring bouts of US ambivalence to engage in affairs outside the Western Hemisphere until the middle of the 20th century.

In that context, the growing skepticism today among some segments of the American public over the provision of financial assistance and materiel support to other nations is not all that surprising. Over the past two decades, the US and its allies have expended a significant amount of blood and treasure in foreign entanglements, with disappointing results. Now that the US election season is underway, the execution of foreign policy in all its forms—from military support for allied powers to immigration to trade—has become a topic of national debate.

The incumbent president is a vocal proponent of multilateral organizations, circumspect diplomacy, and historical alliances. The challenger, himself a former president, is highly skeptical of their utility value and prefers a more transactional approach to bilateral relations. This type of policy debate is not new; we simply have not seen it played out in public for quite some time.

Geopolitics

The North Atlantic Treaty Organization (NATO) was created in 1949 by the US, Canada, and several Western European nations to provide collective security against the Soviet Union. Its founding was a watershed event in American history because it represented a definitive break from the isolationist sentiment that had prevailed in the US before the Second World War. For the next 75 years, bipartisan support for the alliance became a touchstone for American foreign policy. And while popular opinion about NATO has shifted over time, the alliance retains support from a broad base of the US population, as seen from a recent poll by the Gallup organization.

Donald Trump’s declaration at a recent campaign event that he would encourage Russia to “do whatever the hell they want” to NATO members who were delinquent in their financial obligations appears to be at odds with public sentiment. His inflammatory comment understandably triggered widespread anxiety among US allies, but it is important remember that he made the impromptu statement to his most stalwart supporters in the heat of an election rally.1 Trump has been remarkably consistent in his assertion that the US has borne a disproportionate share of the costs of sustaining the alliance, and this is the lens through which his statement should be viewed. His reluctance to offer unwavering support for NATO may stem from a belief that the US is no longer capable of bearing that level of financial responsibility when America’s domestic infrastructure is often in disrepair and its accumulated deficit is growing at an unsustainable rate.

If the former president is returned to office in January 2025, he might well pursue a policy of transactional isolationism, where US participation in multilateral forums is dependent on the receipt of concessions from other nations. Much will depend on the composition of Congress. The bipartisan amendment to the 2024 National Defense Authorization Act permits US withdrawal from NATO only with prior approval of the Senate. If Trump were to unilaterally withdraw from the alliance over the Senate’s objections, the act would limit funding for the withdrawal until two-thirds of both chambers of Congress agreed to make the necessary appropriation.2

Although NATO defense ministers agreed in 2006 to commit at least 2% of their gross domestic product to defense spending to ensure military readiness, the target was often ignored.3 Today, 11 members of the 32-nation alliance, including many on the eastern flank, have achieved that level of funding. According to Secretary General Jens Stoltenberg, 18 members are expected to reach the 2% threshold this year, a significant improvement from a decade ago when only three met the target.4 The renewed commitments are a rational reaction to Russia’s invasion of Ukraine but also may represent a tacit acknowledgment that the unipolar world dominated by the US has begun to give way. Over the longer term, the net result will be greater competition from Europe in the production of military armaments and munitions.

There is often a disconnect between how voters view a presidential candidate’s foreign policy platform and how they judge the individual’s leadership capabilities to occupy the Oval Office. It is not unusual for a candidate to exaggerate geopolitical threats during a presidential campaign as a way to undermine voter confidence in a competitor. Look no further than John F. Kennedy’s criticism of the Eisenhower administration over a perceived gap in the country’s ballistic missile technology (i.e., the “missile gap”), or Jimmy Carter’s criticism of the Ford administration over perceived mismanagement of Washington’s bilateral relationship with Moscow.

American voters traditionally have placed a higher value on a presidential candidate’s leadership qualities than on whether they agree with a specific foreign policy platform.5 To the extent they believe that a candidate will vigorously defend American interests abroad, they will overlook many of the details that make a specific policy potentially untenable or counterproductive. Trump intuitively understands this, and he is willing to make what some observers consider to be outrageous remarks to draw a sharper distinction between himself and Joe Biden.

Immigration

By and large, US presidential contests are won and lost based upon the state of the domestic economy. A Pew Research survey conducted on 16–21 January shows this historical pattern is playing out again this year. Nearly three-quarters of the respondents agreed that strengthening the US economy should be the top priority for the president and Congress.6 

However, in a break with the past, immigration has risen sharply in importance. The porous southern border has begun to displace consumer prices as a principal focus for the voting public. And for good reason. According to US Customs and Border Protection, the number of encounters with individuals crossing into the US along the southwestern border rose from 1.7 million in fiscal year 2021 to almost 2.5 million in fiscal year 2023.7 The Congressional Budget Office now estimates that net immigration, which includes lawful permanent residents and temporary workers, reached 3.3 million in 2023. 

The surge in illegal immigration poses serious challenges for state and local governments, who bear the burden of higher spending for social services and public safety. However, the resulting population growth also leads to increases in aggregate consumer spending and labor force participation, which might dampen inflationary pressure.8 Regardless of the macroeconomic consequences, nearly 60% of those surveyed by Pew now believe immigration should be treated as a major policy priority. The more interesting aspect of the survey was the partisan divergence. More than three-quarters of registered Republicans, and those who lean toward the GOP, believe immigration is a top priority. Democrats, meanwhile, have exhibited more ambivalence over the issue.9 

The shadow being cast by immigration and border control over the presidential election was illustrated by competing visits to the southern border by both Biden and Trump on 29 February. The dueling appearances reflected the approach each candidate aims to pursue. Biden prefers the legislative route, which thus far has been blocked by his opponents. Trump prefers the construction of physical barriers and prompt repatriation for those apprehended. The debate will persist through the election and will be a motivating factor for Republican voters. 

Trade and tariffs

The US Constitution grants authority to Congress to “collect taxes, duties, imposts and excises...and to regulate commerce with foreign nations.”10 For more than a century, Congress exercised exclusive authority in this realm, often levying tariffs on imported goods. Over time, however, it delegated greater authority to the president to negotiate tariffs with other nations. The Trade Expansion Act of 1962, which permitted the president to adjust tariffs based on threats to national security, proved to be pivotal in the transfer of authority over international commerce from Capitol Hill to the White House.11 Other delegations of authority followed, ultimately entrenching the management of commercial relations with other nations within the sphere of the president’s authority over foreign policy (see below “Representative list of statutes delegating trade authority to the president”).

By imposing tariffs on thousands of products valued at USD 380 billion in 2018 and 2019, the Trump administration transformed the narrow and exceptional provisions found in federal statutes into a broader foreign policy tool. The tariffs constituted a tax on consumers to the tune of roughly USD 80 billion and reduced the rate of economic growth (by 0.21% by one estimate), but it is worth noting that Biden retained most of those levies upon assuming office.12 As we said in a prior ElectionWatch report in 2019: “Both parties are now more skeptical of treaties that might jeopardize American jobs. The dynamic is relatively new, which suggests that our trading partners may not find themselves in a better position even if there were a change in control of the White House in 2020.”13

Biden’s decision to retain most of Trump’s tariffs is a tacit acknowledgment that the American public retains a high degree of skepticism regarding the benefits of free trade. Simply put, too many manufacturing jobs were moved offshore. This trend now appears to have slowed. Recent legislation promoting incentives for domestic manufacturing has already created tension with US trading partners, but the US domestic political environment makes it more difficult for any president to make many trade concessions.

Trump has publicly floated the idea of a universal 10% tariff on all imported goods and a targeted tariff in excess of 60% on shipments from China. In 2022, the aggregate value of US imports from abroad was USD 3.27 trillion, of which more than USD 500 billion originated in China. Based on those figures alone, the tariffs would constitute an extraordinary tax hike of roughly USD 300 billion in each instance.14 Supply chains would be disrupted, and retaliatory actions by other countries could be expected to follow. The US automobile industry might benefit from new obstacles to the importation of less expensive vehicles, but it is important to remember that other imports from China are vital components in US industrial production.

Tariffs are inherently inflationary and would undermine the Federal Reserve’s efforts to reduce inflation through a restrictive monetary policy, but practical politics could trounce economics if Trump assumes office and decides to create more obstacles to global trade. If Biden were reelected, he would be more likely to refrain from imposing such tariffs, instead favoring incentives for domestic manufacturing and encouraging reshoring of production capacity (which also constitutes a cost to the federal treasury). In either instance, the era of free trade is now behind us.

Representative list of statutes delegating trade authority to the president

  • Tariff Act of 1930 (Section 338)
  • Trade Expansion Act of 1962 (Section 232)
  • Trade Act of 1974 (Sections 122, 123, and 301)
  • International Emergency Economic Power Act of 1977 (Section 203)
  • Congressional Trade Priorities and Accountability Act of 2015 (Section 103)

Source: Congressional Research Service, 9 December 2016

Investment implications

There are significant market implications arising from the stark contrast in the policies promulgated by the two candidates for president. While we are obliged to remind investors that portfolio construction is best treated as an apolitical exercise, the next eight months are likely to be exceptionally distracting. Incessant media coverage will be the order of the day, particularly in the seven states that are likely to decide the outcome. Investors generally don’t like uncertainty, so we wouldn’t be surprised to see some pickup in equity market volatility as the election nears. But bear in mind that government policy is just one of the many factors—among them Fed actions, inflation, and corporate profit growth, just to name a few—that can have an influence on markets. 

The ability of either presidential candidate to pursue a robust legislative agenda in 2025 will depend upon the outcome of congressional races. Republicans have the edge in the race to control the Senate as they are obliged in this cycle to defend fewer seats and are well positioned in the states that are holding elections for the upper chamber. The House of Representatives is more difficult to predict, but regardless of who ends up with the gavel, the margin of control is expected to remain narrow.

Given the high degree of partisanship and the expectation that majority control in both chambers will be slim, it will be difficult for either party to pass groundbreaking legislation in the absence of a unified government. Neither party has exhibited much appetite for tackling entitlement reform, and concerns over the size of federal deficit have increased in the past two years, which will complicate efforts to pass the obligatory tax bill. The personal tax provisions embodied in the Tax Cuts and Jobs Act are scheduled to expire at the end of 2025, so both parties will be anxious to leverage the necessity to pass a tax bill to advance their own policy agenda.

Below, we outline our policy, economic, and market expectations for the most likely election scenarios. Importantly, the increase in federal budget deficits and interest rates in recent years leaves much less “fiscal space” for Congress to embark on significant fiscal expansion through tax cuts or spending increases. So this will likely be a much greater constraint on lawmakers than it has been after the last two presidential elections.

 

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

A Democratic sweep would likely be the most negative outcome for equity markets primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.

If Biden wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Biden administration would be obliged to rely on executive action and regulatory oversight to a great degree.

An extension of the 2017 tax cuts would be likely with a possible further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

How US investors can prepare for potential tax changes

Presidential budgets often encounter resistance from members of Congress and typically do not become law. However, they are a useful guide in ascertaining the incumbent president’s policy priorities in an election year. President Biden released his proposed budget for fiscal year 2025 last week. In doing so, he sketched out a fiscal policy that raises taxes on wealthier Americans and corporations. Former President Trump is likely to advocate a contrary set of fiscal policies, including the preservation of tax cuts enacted in 2017. 

Regardless of whom voters decide to return to office, the accumulated federal deficit is likely to serve as an ever larger constraint on future fiscal policy. As interest rates have risen, it has become progressively more expensive to finance the federal deficit. According to fiscal data provided by the US Treasury, 16% of total federal spending in the month of February was dedicated to interest payments, thereby crowding out other expenditures.15 While it’s too early to know when taxes will rise, we suggest four strategies to help manage future tax liabilities, regardless of the outcome of this year’s election.

  1. Enhance flexibility by diversifying tax treatments. Spreading your wealth across multiple tax treatments (taxable, tax-deferred, or tax-exempt) will give you the option to withdraw from your retirement funds in whichever sequence is more tax-efficient year to year.
  2. Continue deferring capital gains (when it makes sense). Investors with longer time horizons will often be better off deferring capital gains rather than attempting to lock in a potentially lower tax rate today—especially for investments with higher expected return or smaller increases in the capital gains tax rate. 
  3. Accelerate lifetime gifting. Looming reductions to the lifetime gift and estate tax exemption create a “use-it-or-lose-it” opportunity to potentially save millions in estate taxes. Strategic lifetime gifting is imperative if you want to protect those assets—and their appreciation—from being included in your taxable estate. Completing gifts today will help you utilize the historically high exemption before it’s too late.
  4. Don’t wait to review your estate plan. Waiting to take action until the election results are clear can prolong the estate planning process, as trust and estate lawyers will likely be overwhelmed with other families seeking similar planning advice. Proactively engaging with your estate attorney, financial advisor, and accountant will make sure that you have access to these key resources. 

Endnotes

1Edward Hellmore, “Trump says he would encourage Russia to attack NATO allies who pay too little,” The Guardian, 11 February 2024

2Bryant Harris, “With eyes on Trump, Senate votes to make NATO withdrawal harder,” Defense News, 19 July 2023

3North Atlantic Treaty Organization, “Funding NATO,”  7 March 2024 

4North Atlantic Treaty Organization, “Secretary General welcomes unprecedented rise in NATO defence spending,”14 February 2024

5For an excellent summation of the distinctions drawn by American voters regarding foreign policy, see Jeffrey A. Friedman, “Foreign Policy and Presidential Elections: Why Voters Don’t Just Care About ‘The Economy, Stupid!’” Cornell University Press, 6 December 2023

6Anna Jackson, “State of the Union 2024: Where Americans stand on the economy, immigration and other key issues,” Pew Research Center, 7 March 2024

7US Customs and Border Protection estimates 2.5 million encounters on the Southwest Land border in 2023. See US Customs and Border Protection, “Southwest Land Border Encounters,” March 2024. CBP data methodology was changed in March 2020 so prior data on southwest border encounters may not be directly comparable. However, CBP reports 400,651 apprehensions in fiscal year 2020. 

8Wendy Edelberg, and Tara Watson, “New Immigration estimates help make sense of the pace of employment,” Brookings, March 2024.

9Anna Jackson, “State of the Union”

10United Sates Constitution, Article 1, Section 8

11Emily Loftis, “Who has authority to impose tariffs and how does this affect international trade,” University of Nebraska, 2019

12Erica York, “Tracking the economic impact of US tariffs and retaliatory actions,” Tax Foundation, 7 July 2023. The Biden administration did suspend some tariffs related to aircraft manufacturing, replaced some steel and aluminum tariffs, and terminated the tariff on Washington machines.

13ElectionWatch, “Trade off,” 2 August 2019

14Bureau of Economic Analysis, February 2024; see also Erica York, “Tariff of Abominations Redux,” Tax Foundation, 29 January 2024

15United States treasury, Fiscal Data, 12 March 2024. See www.fiscaldata.treasury.gov.

CIO research disclaimer