What a Biden presidency would mean for the economy – and the world
As the battle for the U.S. presidency heads into its final days, Canadians have to brace for two radically different outcomes. A second term for President Donald Trump would overturn pollsters’ expectations – again – and likely mean more of the high-drama, high-testosterone confrontations the world has come to know so well over the past four years. In Canada’s case, that would nearly certainly involve continuing trade battles in areas such as aluminum and softwood lumber, as well as frequent late-night Twitter harangues by Mr. Trump.
A victory by Joe Biden, the runaway favourite in most recent polling, would turn down the volume. The Democratic candidate’s low-key personality and long history of genteel consensus building suggest he would remove much of the heat from relations between the United States and Canada.
But does that mean Canadians should cheer for a Biden presidency? Not so fast.
“It’s not the least bit clear to me that Biden – albeit more polished – would be a better friend to Canada” than Mr. Trump has been, writes Derek Holt, head of capital markets economics at Bank of Nova Scotia, in a recent report.
Among other issues, a Biden administration might rattle Alberta oil markets and create new friction on issues such as how to deal with China.
That, of course, is just the start of the differences between the two candidates. Mr. Trump is a big fan of tax cuts, fossil fuels and rapid reopening of the economy even in the face of rising COVID-19 infections. In contrast, Mr. Biden urges modest tax increases to help fund a massive infrastructure program as well as new emphasis on so-called green initiatives to help reduce carbon emissions.
Right now, the biggest single issue before the two candidates is how to deal with a weakening U.S. recovery. Proposals for a new round of stimulus have stalled in Congress, caught between a Democratcontrolled House of Representatives and a Republican-dominated Senate.
The danger is that continued clashes between the winner of the presidential election on Nov. 3 and a divided Congress will stymie efforts to boost the U.S. recovery. “The most important thing for Canada is how fast the U.S. economy grows,” says Avery Shenfeld, chief economist at CIBC Capital Markets. And that will hinge in large part on whether either party can forge a dominant position in the coming election.
Whoever wins the presidency will face a sobering economic reality. In the early months of the pandemic, a massive surge of government support coupled with extraordinary measures from the Federal Reserve helped the economy bounce off its lows with surprising speed. However, the recovery is losing velocity as the initial stimulus wanes.
Unemployment is far down from the 14.7 per cent it hit in April, but still nudges a painful 7.9 per cent. New filings for unemployment insurance continue to exceed 800,000 a week. Meanwhile, a wave of big companies – including Walt Disney, Goldman Sachs, Allstate, Raytheon Technologies and a host of airlines – have announced plans to chop even more jobs.
“Things are starting to slow,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “What kept things going over the past few months was the U.S. becoming essentially a social welfare economy, with government supporting both companies and households through income transfers.”
Without a big additional jolt of fiscal support, growth will slip back, he says. “The U.S. economy is not yet capable of standing on its own without significant federal assistance.”
The question du jour is how much assistance will be delivered and in what form. Proposals for additional fiscal stimulus have been bogged down in Congress for weeks, with Democrats demanding a US$2.2-trillion package while Republicans are willing to support only about US$1.8trillion in new spending.
If fresh stimulus isn’t delivered before the November election, Mr. Naroff worries that “we wake up in January and February looking at flat to negative growth” and an economy on the verge of sinking back into recession.
In a worst case, whoever is in the president’s chair in January will face a divided Congress that remains split along partisan lines and unwilling to move on stimulus.
A “blue wave” of Democratic votes in November might sweep this problem away if it allowed Democrats to seize control of the presidency and the Senate as well as the House. Polls have signalled rising chances of such a Democratic clean sweep in recent weeks. Stock prices and Treasury bond yields have jumped in response.
The theory is that a complete Democratic victory would unclog the machinery of government and unleash a torrent of fiscal stimulus. “All else equal, a blue wave would likely prompt us to upgrade our [U.S. economic growth] forecasts,” Jan Hatzius, chief economist at investment bank Goldman Sachs, wrote earlier this month.
The problem is that a blue wave is still far from a sure thing. “There is still a substantial chance of more gridlock ahead,” Mr. Naroff says. “If Trump were to surprise everyone and win the presidency again, but Democrats keep control of the House, nothing gets done. If Biden wins, but the Republicans hold onto the Senate with a diminished majority, he might get a couple of things through, but not much.”
Even if the Democrats manage a clean sweep, it may not guarantee clear sailing for the recovery. The single biggest unknown for the next few months is as much about science as politics: Can the pandemic be brought under control over that time without shutting down the economy again?
Under the Trump administration, the U.S. response to the virus has been unusually inept. The country has suffered more than twice as many virus-related deaths per capita as Canada, Germany or Switzerland, according to the Coronavirus Research Center at Johns Hopkins University. Meanwhile, new cases are once again on the upswing in the U.S., as they are in many other countries.
Mr. Biden’s appeal to voters rests in large part on the belief he can do better than Mr. Trump in taming the pandemic.
A Pew Research Center poll in early October found that voters still give Mr. Trump a narrow edge when it comes to choosing which candidate is best equipped to make good decisions about economic policy. However, by an overwhelming margin (57 per cent to 40 per cent), those same voters said Mr. Biden is better equipped to handle the publichealth impact of the coronavirus outbreak.
That seems reasonable. “My hypothesis would be that the Democrats might do a better job of listening to the scientists and therefore containing the virus,” CIBC’s Mr. Shenfeld says. However, much depends on things outside any president’s control, such as how quickly an effective vaccine can be delivered.
In comparison to the economy and the pandemic, Canada barely registers as an issue in the U.S. election.
For Mr. Trump, Canada appears to function mainly as a convenient whipping boy. He periodically blasts Canada for its trade behaviour as he did in August, when he imposed tariffs on Canadian aluminum. “Canada was taking advantage of us,” he complained at the time. But the U.S. quickly hit the pause button on those penalties in September, continuing a pattern of on-again, off-again trade tension.
Mr. Biden also trumpets his support for Buy America policies and other measures that would advance U.S. trade interests. However, he isn’t one to take swipes at allies. In the Democratic Party platform, Canada garners just two mentions in a 91page document – once in regard to its strong record on upward income mobility, then in a passing reference to the new North American trade deal.
Still, the outcome of next month’s election could reverberate in Canada on several fronts, especially if Mr. Biden wins.
For one, Mr. Biden has outlined a hefty plan on climate change. He has not only pledged to rejoin the Paris Agreement, but has also vowed to get tough on other countries.
The Biden platform says his administration would levy taxes or quotas on carbon-intensive goods imported from countries that are failing to meet their climate objectives. Based on the latest projections, Canada will fall well short of its 2030 emissions targets and might be vulnerable to such U.S. sanctions.
“The direct effects on Canada – if directly targeted – and the indirect effects on world trade, growth and commodity prices could be damaging,” said Mr. Holt of Scotiabank.
Another Canadian concern is the fate of Keystone XL, the cross-border pipeline between Alberta and Nebraska. Mr. Biden is stridently opposed to the project, telling CNBC in May he’s “been against Keystone from the beginning.” Former U.S. president Barack Obama rejected the pipeline in 2015, only for Mr. Trump to greenlight it later.
A second rejection would sting in Alberta. The province is investing $1.5-billion in the project, which would ease bottlenecks that have suppressed Alberta crude prices in recent years.
Mr. Biden’s position “may just be election hype that could change, given that the horse has already left the barn with parts of the [Keystone system] already operational,” Mr. Holt said. “Thwart its progress and more trains and trucks may be rumbling through Canada’s and America’s backyards.”
A Biden presidency would almost certainly bring a U-turn in immigration policy. Under the current administration, the U.S. has separated migrant families at the southern border, enacted a “travel ban” on largely Muslim-majority countries and tightened access to the H-1B visa program for skilled foreign workers.
Mr. Biden would rescind the travel ban, substantially increase the U.S.’s intake of refugees and remove the annual cap of 140,000 employment-based visas, among a litany of other proposals.
“A theme you can really draw out from Biden’s promises is a plan to revert to the pre-Trump, more Obama-like immigration system, which is signalling they want talented workers from around the world,” said Robert Falconer, a research associate at the University of Calgary.
That would have an impact on Canada. As immigration to the U.S. was tumbling to multidecade lows, Canada’s intake was on the upswing, a key part of the federal Liberals’ economic strategy. International enrolment at Canadian colleges and universities has surged over the past four years, while Ottawa unveiled a fast-track system for high-skilled immigration.
Under a Biden presidency, “Canada will have to compete a little bit more with the U.S. in terms of attracting immigrants,” Mr. Falconer said. However, Canada should still be able to hit its targets, he added.
A more complex issue is the Democrats’ promise to raise taxes on corporations and high-income earners. Canada saw its corporate-tax advantage wiped out in 2017, when Mr. Trump slashed the U.S. rate to 21 per cent from 35 per cent. Now Mr. Biden proposes boosting the statutory tax rate for businesses back to 28 per cent.
“For Canada, it’s a double-edged sword: Raising U.S. corporate taxes would initially make capital spending in Canada more attractive on a relative basis,” said Mr. Shenfeld of CIBC. “But it raises the risk … that a Canadian government might choose to [also raise taxes] down the road.”
The biggest immediate impact of a Biden victory might be to remove some of the tensions from U.S.-Canada trade issues. Under the Trump administration, tariffs on Canadian aluminum, steel and other goods became a cudgel Washington picked up whenever it wanted to make a point.
“Obviously, President Trump has levied tariffs at various times against Canada, often quite unpredictably,” said Leslie Preston, senior economist at Toronto-Dominion Bank. “I think you would see less of that under a Biden presidency.”
Chad Bown, a trade expert and senior fellow at the Peterson Institute for International Economics in Washington, also expects the tone of the Canada-U.S. relationship would improve under a Biden presidency.
“Mr. Trump is unique in that he likes to be combative and he has found trade to be a useful communications device with his political base,” he says. “But that is rare for U.S. political leaders once they’re in office. Trade is an incredibly unpopular political topic.”
Bottom line: Mr. Bown expects trade issues to fade into the background if Mr. Biden wins. Tension over issues such as softwood lumber or the World Trade Organization won’t disappear, he says, but Mr. Biden won’t be looking to pick unnecessary fights or renegotiate trade deals while the recovery is stuttering and the pandemic still rages.
The knottiest trade issue in the early going may be how to deal with China. Mr. Biden is just as skeptical as Mr. Trump about Beijing’s trade practices, Mr. Bown points out. The difference is that Mr. Trump tried to confront China alone, while Mr. Biden is more eager to work with allies to present a united front.
A Biden administration may decide to join the successor to the Trans-Pacific Partnership Agreement – a proposed trade pact between Pacific Rim countries
other than China. Mr. Trump withdrew from the TPP in 2017. A President Biden might also attempt to negotiate broader agreements with European countries, as well as push individual allies to take a stronger stand.
“A legitimate question that is going to be asked is what are allies willing to do,” Mr. Bown says. “What is Ottawa willing to do on trade with China that it has not done in the past? That could be an interesting discussion.”
U.S. presidents don’t always follow the course that their personal history would suggest. Richard Nixon’s decision to go to China in 1972 is the classic example of how a career politician can surprise us all once in the Oval Office.
Few people expect Mr. Trump to change course if he wins re-election. “Most likely, we would just see a doubling down on the themes of his first term,” Mr. Naroff says.
Mr. Biden presents a more interesting case. If there is one big overarching question about a Biden presidency it is about whether he would be as middle-of-theroad as his record suggests or as radical as many in his party would like.
“Going on history alone, Biden is a very traditional centrist Democrat,” says Christopher Sands, head of the Canada Institute at Washington’s Wilson Center.
During his 36 years as a U.S. senator and eight years as Mr. Obama’s vice-president, Mr. Biden built a reputation as a backslapping advocate for bipartisan consensus and international co-operation. He hopscotched around the middle on contentious issues, joining conservatives in opposing mandatory school busing, while taking more liberal positions on topics such as banning assault weapons.
Many of his current proposals reflect his penchant for compromise. He advocates an increase on personal income taxes, for example, but only for the tiny fraction of the population earning more than US$400,000 a year. In a similar vein, his vow to raise corporate taxes amounts to reversing only half of the Trump administration’s big cuts in that area, meaning U.S. corporations would still pay a substantially lower rate than they did before 2017.
Such carefully calibrated moderation may continue to define Mr. Biden after the election. However, that is by no means a sure thing. The challenge for a lifelong centrist like him is that nobody is quite sure where the centre is located any more.
Policies that used to be considered snooze-worthy – a commitment to moreor-less balanced budgets, incremental progress on race relations and modest measures to halt global warming – have suddenly turned controversial. After a summer marked by economic implosion, Black Lives Matter protests and raging forest fires, many of those moderate positions now look hopelessly feeble.
If elected president, Mr. Biden would be leading a political party in which progressive firebrands such as Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez are pushing for radical change on everything from banning fracking to expanding health care to cracking down on the monopoly power of giant tech companies. The progressives blame Hillary Clinton’s defeat in 2016 on her overly timid approach. This time around, they want stronger action.
“If Joe wins as a moderate, will he govern as a moderate?” Mr. Sands of the Canada Institute asks. “Or will the expectations that have been building up over the past four years within the Democratic party push him further left than mainstream voters may be comfortable with?” Mr. Biden’s humdrum demeanour could hide some surprises ahead.