In the US mid-term elections yesterday Republicans strengthened their position in the Senate but Democrats won control of the House of Representatives for the first time in 10 years.
The change in the House means the Trump’s party no longer controls both congressional bodies and will have a more difficult time pushing through legislation. This could slow his political agenda and stop some plans in their tracks. It may also restrict the government’s ability to cushion the economy in case of a downturn.
As we enter 2019 and moreso in 2020, the positive effects of the fiscal stimulus of late 2017 will fade out at the same time as monetary policy tightens, which may bring on a slowdown – one that the divided government may not be able to effectively address. Moreover, budget-setting and debt ceiling discussions will likely prove even more volatile. However, the increase in Senate could enable him to push through more conservative candidates to the judiciary and executive branches.
We do not expect this to have a significant impact on trade policy uncertainty or the US-China trade war. First and foremost, the president has significant power in trade policy and in many instances does not need congressional support to take action. Furthermore, there is a general consensus in Washington for a tougher stance on China concerning unfair trade and intellectual property practices.
There is, however, a downside risk that this could spell an escalation of the trade war with China. With the loss of the majority in the House, the administration may double down on its trade agenda where it has the power in order to please its voter base ahead of the next presidential elections in 2020.