Will Trump’s trade stance now be tempered?

The midterm elections in the United States are a significant barometer of the voters’ perception on the President’s performance. They occur exactly at the mid-point of the four-year term and hence are a useful input to predict the outcome of the presidential election coming up in the next two years. The last three U.S. Presidents had two full terms each, i.e. a tenure of eight years, the maximum allowed by the U.S. constitution. After each of Presidents Clinton, Bush, Jr and Obama’s two terms, their party lost control of the White House, a development that was anticipated by respective midterm elections, during their second term. This see-saw of party swings every eight years is perhaps the way of America’s democracy to rotate power. But even during the first term, the incumbent president’s party does tend to lose seats, not gain.

This year’s November midterm election too was seen as a critical test of President Donald Trump’s popularity. After two years, he is faced with an unprecedented and strange combination. His approval rating is low, at 42 percent as compared to previous Presidents. For instance, Obama’s rating was at 45 percent in 2010. Yet, the economy is doing exceptionally well presently. Unemployment at 3.7 percent is the lowest in several decades and quarterly GDP growth at 4 per cent is at historic highs. The stock market has created record wealth and the US dollar is gaining strength against all major currencies of the world. Corporate profitability is handsome. By comparison, the economy was much bleaker during the 2010 midterm election of Obama’s first term.

Most importantly, President Trump’s party was in a majority, and hence controlled both the upper and lower houses since 2014, i.e. the Senate and House of Representatives (collectively called the Congress). This majority control of both houses allowed the President to pass a sweeping tax reform law, which lowered the corporate income tax rate substantially, and is what is largely contributing to growth. The fiscal hawks are worried that this tax giveaway will make the deficit and national debt unsustainable, causing inflation and possibly recession in the medium term. Since there are a lot of unfinished items on President Trump’s agenda, it was important for his party to retain majority control of both houses.

This midterm election also had great importance to the world community at large. The trade war with China is hotting up, and is quite contrary to the free market principles that the U.S. normally espouses. Many analysts felt that the President had a hard and inflexible posture on trade, since it appealed to his core constituencies, i.e. the rust belt with blue collar workers, who have faced competitive pressures and job losses due to the China factor. Since the President is otherwise seen as pro-business and pro-market, his rhetoric about raising trade barriers was somewhat out of character. But he has followed up on his words, and imposed higher import tariffs even on allies like Canada and the European Union. For India, Trump’s trade policies meant that Chinese goods (especially steel and aluminium) denied entry to the U.S. would now possibly flood the Indian market. As such India has a mounting bilateral trade deficit with China (currently more than 52 billion dollars), and a further import surge caused by a U.S. trade war will only make it worse. 

Another important reason the world watched the U.S. midterm elections was because of the Iran issue. In May, President Trump had pulled out of the historic nuclear deal with Iran, and threatened to impose sanctions, including punitive action against countries that import oil from Iran. Large consumers like India were naturally concerned, due to their significant dependence on Iranian oil. Further, the negative supply shock on the oil market can make prices spike, which is a negative for the world economy. Was the sabre-rattling with Iran merely pre-election posturing or was the President determined to go ahead, no matter what the outcome.

The results are out, and it looks like a major setback for the Republican Party. The Democratic party took majority control of the lower House, and the Republicans retained their majority in the Senate. The swing was 49 seats in favour of the Democrats, the largest ever for the Democrats since 1974 and the year of Watergate. Of course, in 2010, the Republicans had swung 63 seats in their favour during Obama’s first midterm. The Democrats also gained Governors in seven States (the midterm also had State elections). Unlike in 2014, when only 39 per cent voted, this time the voter turnout was 48 percent. In specific voter demographics like the youth (below 29 years), the Democrats secured two-thirds of the vote. The share among Latino or Asian voters was much higher.

However, it can’t be denied that the voters remain polarised, as much if not more than 2016. On issues like immigration and gun control, there is still a great divide and consensus is elusive. It is true that women have made major gains in the midterm elections. The Congress now has more than 22 per cent women lawmakers. Across the country, more than 4,000 women had contested (including Congress and State level elections). Nine States have women as governors. All this might portend better political compromise and less partisanship.

So, does the world take a breather? Thankfully, oil prices dipped below USD 72/barrel (Brent). Presidents Trump and Xi of China will meet in the coming weeks, possibly diffusing trade tensions. Trump has already given leeway to five major consumers to import Iranian oil, since he doesn’t want the world to suffer an oil price spike. The stock market in the U.S. is giving a thumbs up. The bigger worry is now around the deficit and debt. President Trump has asked for expenditure cuts in the proposed budget, which implies prudence. It is possible that since election fever is behind us, cooler heads will prevail and will hopefully focus on mundane matters like economy and trade. So, the signal to India and the rest of the world is “relax”, the trade war is unlikely to hot up. As for India’s own policy makers? They have their own set of elections to contend with (in five States). So, in India, election fever is just picking up!

(The author is an economist and Senior Fellow, Takshashila Institution)