Midterms may cool trade war
Trump created the China trade crisis; U.S. elections may have given him reason to end it
Talking heads are still debating who won and who lost the U.S. midterm elections — or at least they were, before Donald Trump fired his attorney general and successfully changed the media topic-du-jour once again. But the fact is, the overall result was a yawn. The elections went pretty much as expected. The House of Representatives went to the Democrats; Republicans consolidated control of the Senate. President Trump still proclaimed victory (including over those Republicans who dared not enlist his support during the campaign and lost). So what else is new?
If you’re looking for real winners, you might point to investors in U.S. stocks, which enjoyed their biggest post-midterm lift since 1982 on Wednesday. Historically, stocks tend to enjoy nice runs after midterm elections, in part because they eliminate uncertainty. This one might prove especially welcome for investors, and it just might last a while. The reasons: gridlock, infrastructure and — hold on — China.
As much as the citizenry gets frustrated with political gridlock, it’s rarely a bad thing for businesses or investors. Gridlock means stability. This time around, it ensures the Trump corporate tax cuts are safe. It also means a nice balance of enmity between the House of Representatives and the presidency. (I’ll leave the Senate out of the equation, because it has now lost any incentive to differ with Trump on anything.) Given the polarization of Democrats and Trumpublicans, they will produce many bitter words, but not much legislation. In short, the U.S. political system, insofar as it will not accomplish anything in any reasonable length of time, will function as designed. Good news for investors!
Some, however, see a ray of hope for agreement on infrastructure. Trump has said he can work with Dems on a big, beautiful stuffbuilding program, and that has helped lift infrastructure and construction-related stock prices. But we have been down this pothole-y road before. The President promised a trillion-dollar building program back in the 2016 campaign, remember? Also, the deficit is already soaring under Trump (it hit US$780 billion in fiscal 2017-2018, an increase of 17 per cent in fiscal 2017-2018). The Republicans have been talking spending cuts to address the soaring debt, but you can forget about those with a Democratic House. Assuming some level of sanity when it comes to tapping debt markets even more, the President’s infrastructure program, if it materializes, could end up being not that big or that beautiful.
A brighter ray of hope for investors might actually lie in the prospect for some kind of resolution in the U.S.-China trade war, which is already biting into the outlook for China’s economy, U.S. corporate earnings and global growth. If it’s going to happen before the pain gets worse, it will have to be soon: the tariff level on about US$200 billion worth of Chinese imports to the States is scheduled to rise from 10 per cent to 25 per cent in January. So the meeting between Trump and Chinese President Xi Jinping at the G20 summit at the end of November will be one to watch for investors.
At first glance, it might look like the midterm results will lower the odds of a resolution, given that Democrats also favour a hard line on trade with China; if anything, doubters say, the new House will support Trump’s antagonistic path. Yet, on trade, the House is basically irrelevant; it’s one of the few arenas where the President has wide discretion. And Trump will go his own way on it, no matter what the House thinks.
But what is he thinking? Pre-election, he was talking up how well discussions with the Chinese president have been coming along. Some dismissed that as a midterm ploy, but even now he’s been tweeting about big “Trade Deals” to come. Of course, you don’t want to put too much faith in Twitter Trump, but there might be sound political reasons for him to make peace with Xi. And the biggest could be this: with Democrats in the House, he’s run out of other options to juice the economy.
For a president who likes to brag he’s done more for the U.S. economy than any other in history, that’s a problem. His signature achievement — those corporate tax cuts that are helping to run up the deficit — was a one-time adrenalin shot. What’s he got left? Before the midterms, Trump trial-ballooned the notion of tax cuts for the middle class — an undeliverable promise that would have no chance at all in the new congressional configuration.
But a deal with China? That’s within his purview. Any improvements to the relationship will probably be modest — perhaps some concessions from China on lowering the nonproblem trade deficit, and undertakings to lower barriers to investment and protect intellectual property.
China will likely give back nothing it hasn’t promised to give before. But for Trump’s political fortunes, the details of the agreement will be irrelevant. First and foremost, it will be his deal. And it will allow him to claim victory, no matter how weak it is or how much the crisis was of his own making.
It would also be good policy. And for investors, it would provide a breather from worrying about the world — at least, that is, until Trump manufactures another crisis, probably when the next election cycle comes around.
A guard gestures at an entrance to the first China International Import Expo (CIIE) in Shanghai last week. There was a notable absentee among the dozens of national pavilions at a massive Chinese import fair — the United States — a no-show that underlines how Trump economic policies are causing trading partners to turn more toward China.