US mid-term elections and the global economy

The world had a keen interest in this year’s mid-term elections. John Kotch argued that, except in times of war, American elections are typically decided on domestic issues, but the long-run impact is felt internationally. The ‘America first’ attitude demonstrated by President Trump ideates an international atmosphere in which competition comes before cooperation and where America pursues its interests unilaterally. The mid-term elections would be indicative as to whether or not our world is shifting towards nationalist attitudes and would clarify America’s position in the global arena.

We have yet to see the how the Democratic victory in the House will affect the president’s attitude. His potential upcoming meeting with President Xi of China may give us our first taste, where a frustrated, rather than emboldened, Trump will confront his Chinese counterpart on trade policy and tariffs. Trump furthermore plans to meet in another summit meeting with North Korean leader Kim Jong-un, to discuss denuclearisation. Kotch emphasised that momentum in both events is key, momentum ultimately decided by the elections.

Before the votes were cast, Jeremy Shapiro wrote that a Democratic win in the elections would shift the US domestic political trajectory for at least a few years. History suggests that US presidents generally turn to foreign policy when their domestic power is limited by Congress. To be specific, when the House (but not the Senate) is in opposition hands, the likelihood increases that the president will use force abroad. They have greater influence in this domain and can hope to achieve more clear-cut victories, mainly through small interventions rather than major wars.

Frank Langfitt wrote that most western Europeans would be particularly interested in a Democratic victory in the House, in order to put President Trump’s power into check. The interest comes from a concern that Trump seems to be turning his back on the transatlantic alliance, a group of Western democracies and traditional American allies. Although a large portion of Europe’s official circles don’t like Trump’s ‘America First’ approach to foreign policy, Trump does have supporters – particularly among Brexiters such as the UK’s former foreign secretary Boris Johnson. Trump gets along well with Brexit proponents over a shared disapproval of the European Union, and Trump has spoken more warmly about a free-trade deal with the UK than did his predecessor, President Barack Obama. Many such Brexiters felt that a strong Trump administration would be in their favour at present.

It’s a different story for China. Earlier this year, President Trump initiated a massive trade war against China, slapping tariffs on around $250 billion-worth of Chinese goods. China retaliated, aiming tariffs at products from predominantly Republican states. Chinese scholar Anson Au  from the South China Morning Post said that a Democratic success in the mid-terms would mean that Trump would have to adopt a more moderate tone. Where before he could command, he would now have to negotiate – both with other countries and within his own.

Others, like Nyshka Chandran, argue that the mid-term elections are unlikely to have an impact on Washington’s trade war with Beijing. The shift in power is likely to challenge President Trump in passing major legislation on many fronts, including military spending and his foreign business dealings. However, the president enjoys executive power on trade policy and can set the terms regardless of whether or not Congress is divided. Furthermore, both Democrats and Republicans are typically believed to support a tough stance on Chinese trade and intellectual property practices. Nonetheless, if Trump were to withdraw the US from the World Trade Organization or re-introduce tariffs on the EU, Democrats could intervene.

Frederick Kempe from the Atlantic Council writes that American allies are worried that US democracy is losing credibility and that the American model is becoming less attractive. This, combined with the rise of China, is a perfect environment in which Chinese leaders can promote their state capitalist model as a valid substitute for both developing and developed countries alike. The less effective the polarised US political framework appears in addressing core problems, the more attractive authoritarian models will appear, and the mid-term elections will no doubt have an effect on America’s competitiveness in the global contest of political models.

In an analysis of the post-election market performance, Fred Imbert and Michael Sheetznoted that Wednesday saw the biggest post-mid-terms gain for both the Dow and the S&P 500 since the day after the 1982 contests. The major averages peaked after President Trump suggested that he would be willing to work with Democrats on policy initiatives that would help the economy grow.

Daniel Shane and Mark Thompson said that European stock markets “cheered” the election outcomes. Asian markets fluctuated between small gains and losses while investors assimilated the results and then ended the day mixed. By the time European trading began, the prospect of government inactivity through a divided US Congress had positively affected the market. The election outcome proved benign for investors; historically, legislative gridlock has been modestly positive for US equity markets, as changes in regulation are generally disruptive.

America’s fiscal, regulatory and monetary policies will likely remain the same with a divided Congress. According to Randall Jensen and Vildana Hajric, Republicans will have difficulty further cutting taxes, and current tax cuts won’t be easily rolled back. Major fiscal initiatives that might have pushed interest rates higher look less likely. Too much gridlock, however, can be a bad thing – as was the case in the debt-ceiling stalemate of 2011, which triggered an unprecedented credit-rating downgrade. Investors made it through the mid-term elections without the shocks that accompanied the US presidential election and Brexit referendum in 2016, both of which were surprise events that catalysed dramatic reactions in the market.