Trump, Biden Largely Agree on China. One Candidate’s Plans Could Rattle Markets More.

President Joe Biden and his challenger, former President Donald Trump, have similar goals when it comes to China policy.But their approaches differ widely—and that is why investors may want to pay attention to the November election of the next president.

Both Biden and Trump have flexed their muscles by restricting Chinese trade and access to U.S. technology. Tensions between the U.S. and China are likely to intensify regardless of who wins the White House—and increased trade and investment restrictions are ahead. But the fallout—including the market’s reaction—may differ based on who wins.

The Biden administration is likely to continue its current course, relying on a toolbox of targeted tariffs, export controls and other restrictions to limit China’s access to advanced technology, biotech and other goods critical for national security. While targeted, the list keeps growing.

At the same time, the administration is increasing investment at home to make the U.S. less reliant on China for critical goods. It’s also encouraging allies to join its efforts, which it describes as a targeted way to protect national security, rather than a move toward a complete breakup with the world’s second largest economy.

Another Trump administration is expected to rely on largely the same toolbox but it may use the tools differently. Whereas Biden’s approach is “de-risking with a scalpel,” Trump is seeking “to decouple with a hammer,” write analysts at Beacon Policy Advisors in a client note.

That could rattle markets, at least initially. Volatility is likely to ensue as analysts see Trump taking a more transactional approach, open to dealmaking, which can be hard to game for investors.

Tariffs will continue under either candidate. The Biden administration recently announced tariff increases on a small list of goods, including electric vehicles. But Trump has floated the prospect of raising tariffs on all Chinese exports to 60% and is expected to use trade restrictions as a decoupling tool.

“The former president is less likely to attempt to minimize industry disruptions than Biden’s efforts. This difference is due to a shift in Trump and other Republicans’ thinking that companies should not invest in China or do business there,” Beacon analysts write.

The two presidential candidates differ also around the scope of proposed restrictions on where and how U.S. investors invest in China. The Biden administration is expected to announce its long-awaited final rules on this front by year-end, with restrictions likely targeting the areas hit by export controls such as advanced semiconductors but also biotechs and drones. Analysts expect the administration to start by requiring U.S. investors to notify the government of investments in targeted areas rather than banning them outright, with private equity and venture capital likely the focus for now.

A Trump White House may cast a wider net, possibly starting with a ban and targeting a wider range of sectors—and possibly even covering publicly traded stocks, according to Beacon analysts.

And that could create market ripples and put companies like MSCI and BlackRock, which were named in a report from the House Select Committee on the Chinese Communist Party as facilitators of these investments, in the administration’s crosshairs. In total, the report estimated $6.5 billion is invested in Chinese companies that were flagged or blacklisted by the U.S. last year—some of these investments show up in index funds.

One of the starker differences between the candidates is their engagement with allies. The Biden administration is expected to continue nudging its friends to follow it in its China-oriented restrictions to make it harder for China to get around them.

But building a united front with allies may be a harder task for Trump given his skepticism about funding for NATO, talk of tariffs against European allies and focus on bilateralism. And that in the end could make life easier for China and some global companies caught in the middle.

What’s clear is that neither candidate looks likely to go back to the old days of a friendlier relationship. The path ahead for both candidates is likely about navigating an increasingly tense rivalry without creating collateral damage.

Write to Reshma Kapadia at [email protected]