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The Midterms: Action on Trade Possible, But So is Gridlock

Trade policy hangs in the balance depending on the outcome of the U.S. midterm elections on Tuesday, from China tariffs to passage of the U.S.-Mexico-Canada Agreement (USMCA), along with the potential for political paralysis on topics of interest to the apparel, textile and footwear supply chains.

John Raines, head of political risk at IHS Markit, along with Lindsay Newman, principal analyst at the business data analysis firm, said in a new report that regardless of the outcome of Tuesday’s elections, “executive actions are likely to continue to be used to pursue renegotiations of additional trade agreements under a fast-track Trade Promotion Authority.” There’s also the likelihood of further tariff increases and deregulation efforts, as well as sanctions on individuals, firms and countries.

Given current polling, presidential approval ratings and Democratic performance in recent special elections, IHS Markit predicts Democrats will most likely retake the House, while Republicans will retain their majority in the Senate.

“Under the scenarios of either a split chamber or Democratic majority in both chambers, the likelihood of policy gridlock would increase, although opportunities for bipartisanship include infrastructure and immigration reform,” Raines and Newman said.

Meanwhile, if Republicans retain control of both houses, Nicole Bivens Collinson, president of international trade and government relations at Sandler, Travis & Rosenberg, said, “Then we’re going to see a doubling down and more of the same, which makes me feel that we may see the remaining imports from China subject to additional tariffs. And a lot of that is in footwear and apparel.”

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Should Democrats take the House and Republicans maintain a majority in the Senate, GOP efforts to make the 2017 individual tax cuts permanent, eliminate the Affordable Care Act or undertake substantial changes to social entitlements will probably be off the table until the next federal elections in 2020, the IHS report said.

In this scenario, although a House Democratic majority is seen resisting efforts to deprioritize environmental protections, bipartisan legislative compromise could include investment in public transportation, ports and water systems, IHS contended.

Collinson said she believes even if Democrats take the House, the pending USMCA will pass. She said if the Democrats try to amend the trade policy in any way, President Trump will just say he’ll withdraw it, because under Trade Promotion Authority it is supposed to go to an up or down vote.

“Trump might still double down on the [tariffs] to China because he’s going to be mad if the Republicans lose the House,” Collinson said. “I feel there will be additional tariffs on China because I don’t see Trump backing off of his threats and I don’t see Chinese President Xi Jinping moving at all because we all know how important the Chinese face is. I see this as a long-term, multiyear trend of these tariffs. I think we’re looking at a new reality and folks just have to face it.”

Paul Rosenthal, a partner at Kelley Drye & Warren, said, “Assuming the House does go Democratic and the Senate stays Republican, I don’t think you’re going to see much change in trade policy, at least not dramatic change. The reason is that the consensus is that, while the Trump administration may have not been tactically sound, its general assessment of the problem for a lot of industries and the economy is the Chinese failure to abide by its international trade obligations. So, most Democrats will agree with the Trump administration that being tough on China is a good policy.”

Rosenthal said there is a lot of concern, however, over the tactics that have been employed, and going after other U.S. trading partners such as Canada, Europe and Mexico has not enjoyed as much support among Democrats or Republicans. Rather, a unified effort with U.S. allies against China’s trade policies would be more effective.

If Republicans keep their majority in both chambers, the Trump administration would most likely pursue additional trade tactics, including reconsidering auto tariffs and expanding the current tariff regime against China, the IHS report predicts. In this case, the administration could pursue some of the more aggressive trade strategies on its policy wish list, including the crafting of the reinitiated U.S.-European Union Trade negotiations and calls for re-evaluating the U.S. participation in the World Trade Organization.

If a blue wave materializes and Democrats win a majority in the House and Senate, Raines and Newman said, “prospects for passage of the current administration’s legislative goals would essentially cease.” The potential for government shutdowns around budgetary matters would also increase since Democrats would have a unified front.

Under a Democratic House or overall Congress, for that matter, Rosenthal sees more scrutiny of how tariffs are imposed and the process for seeking exemptions. There will also likely be hearings on whether the trade policies are being carried out effectively and fairly.

“I don’t think you’ll get disagreement about being tough on China, but you’ll get a disagreement on whether all these tariffs are getting us the objectives that we want, whether the retaliation has been worth it—you’ll get discussions on those types of issues,” he said.

Rosenthal said the vote on USMCA is “going to be a close one,” which “depends on what the final language looks like and what gets put into the final bill to satisfy certain constituencies.” He also felt that the proposed free trade agreements with the European Union and Japan have a chance of moving forward. “I liken it to Nixon going to China,” he said, referring to President Richard Nixon, a staunch anti-Communist, having détente with China in the middle of the Cold War and comparing it to Trump, an ardent anti-free trader striking these deals.

Rosenthal also noted there’s a chance of bipartisanship on an infrastructure package, although the question of where the money is going to come from after the deficit-raising tax bill still needs to be addressed. In the end, he added, a lot will also depend on whether there is any spirit of compromise or simply continued political polarization and animosity.