Forget the executive, let's focus on Congress
In a remarkable year for the democratic world, the US elections have garnered special attention with two incumbent presidents and largely unpopular characters – Joe Biden and Donald Trump – battling for America’s favour.
Unfortunately, most of the election coverage has focused on the personality politics surrounding the two candidates, particularly Trump’s legal cases and Biden’s age and health, leaving little room to discuss the broader implications of their victory.
It is no secret a Trump victory will have significant implications for abortion rights, immigration policy, and the Ukraine conflict. Yet, the extent to which Biden or Trump’s campaign promises can be realized will not depend on the presidential win, but rather on whether we get a united or divided legislative and executive branches.
Senate flips to Republican, while the House remains a toss-up
Alongside the Presidential elections, the House of Representatives and one-third of the Senate will be up for elections in November. The House and the Senate make up the legislative branch of the US government, and depending on whether we get a united government (meaning one party wins majority in the House, Senate, and White House) or a divided government where the legislative and executive branches are split across party lines, will determine how aggressive either President can be with their campaign promises.
The polarization of US politics has made the prospect of a united government extremely unsettling for the global economy. The financial markets tend to favour a divided government as disagreement slows down the pace of legislation. While a united government tends to raise the risk of investment due to the increased likelihood of significant regulatory changes from fast-paced legislative action.
As it stands, we are likely to see a split Congress. A united Democratic Congress is extremely unlikely, while a Republican Congress is possible. Republicans are predicted to gain a majority of two to three seats in the Senate, while the Democratic party is currently predicted to flip the House. However, the majority margins are extremely small and are likely to change in the run-up to the elections.
Given the inevitability of change, businesses must understand the domestic and foreign implications of the November elections and start strategic planning now. Let’s look at a few result scenarios to understand the implications of a united versus divided government:
Scenario 1: Biden wins with a split Congress
In this scenario, a Republican-run Senate will likely roadblock most of Biden's plans for his second term. The Congress split will prohibit Biden and the Democrats from codifying Roe v Wade. However, the Biden administration can help protect certain abortion rights such as the right to travel across state lines to receive abortion medication.
China will remain a rare area of consensus in a divided Congress. Bipartisan collaboration can be expected to create a national defense strategy to counter China. A bipartisan border security bill is unlikely, although it may materialise if Trump decides to leave the Republican party after losing the elections. In other global affairs, financial and military support for foreign conflicts will likely be watered down by a split in Congress. But, there will be little to no attempts by Biden to improve US-Russia relations.
Scenario 2: Trump wins with a split Congress (Republican Senate/Democratic House)
Controlling the Senate is more important for Trump due to its role in approving agency, department, and judicial appointments. A Republican-majority Senate will facilitate Trump’s objective to reinstate Schedule F, giving the executive branch increased supervision over government agencies. Schedule F would also enable the removal of certain civil service protections and give the White House the ability to appoint or remove federal workers from their policy-related positions.
There will also be a reverse back to tougher protectionist policies. In an attempt to boost domestic manufacturing, Trump will push to impose a 10% global tariff on all imported goods and services. Some US-allied countries will be able to circumvent the tariffs through new free trade agreements. While there will be bipartisan support for a continued trade war with China, any further tariff increases including Trump’s threat to increase tariffs on Chinese goods to 60%, will likely be blocked by Congress. Trump’s protectionist policies will also prioritize reshoring over nearshoring. This will likely increase the cost of de-risking from China and weaken the US’ position in the great-power competition.
Turning to the climate, Trump has not committed to leaving the Paris Agreement but has promised to increase investment into the oil & gas industry and recall Biden’s green initiatives. It is unlikely that Trump will try to roll back Biden’s investment initiatives (e.g., Inflation Reduction Act (IRA), CHIPS and Science Act) as studies have shown that Republican states have benefited the most from the IRA. According to Fidelity, Republican states and swing states account for 58% and 10% of the projects announced under IRA. However, the Trump administration will likely delay the implementation of many IRA incentives.
Scenario 3: Trump wins with a united Republican Congress
We can expect a strong fiscal stimulus and aggressive fiscal policy with a united Congress. This will include higher tax cuts for individuals and a dilution in fiscal regulation. The tougher fiscal requirements introduced by Biden in the aftermath of the Silicon Valley Bank collapse will be dropped. A drastic change in fiscal policy will result in drops in investor confidence in US assets.
A Republican-majority Congress will support Trump’s more extreme protectionist policies. Domestically, there will be an expansion of the immigrant ban, followed by increased funding to build the border wall between the US and Mexico. On the foreign front, there will be a slowdown in financial and military support for Ukraine and Israel. Trump will push hard toward a resolution to the Ukraine conflict, likely favouring Russian territorial objectives, and will threaten to leave NATO. It is unclear whether he intends to leave NATO, but the threat will push European countries to increase defense spending.
Authors
Carolina Pinto
Carolina is an analyst in GlobalData's Thematic Intelligence team. She looks into macro threats to the technology sector.