With the mid-term Congressional elections in the US done and dusted, we examine how its consequences could affect Asia. We observe three sets of implications that are of note:
- First, geopolitical rivalries in East Asia and other hotspots could be inflamed;
- Second, downside risks to economic growth loom large; and
- Third, a higher probability of greater turmoil in emerging Asian economies.
In short, the world could become a more dangerous place for Asia.
Important changes are afoot
The mid-term elections which saw the Democrats take back the House of Representatives after eight years while the Republicans held on to control of the Senate means that US President Donald Trump’s political bedrock has been eroded. Trump will find his legislative agenda stymied by the Democrat-held House unless it involves policies which both sides are amenable to including infrastructure spending, capping drug prices and regulating tech giants particularly in the area of data privacy. The Democrats look likely to ramp up oversight of the Trump Administration and to investigate Trump’s personal matters, with potential legal consequences. Trump looks set to impede the investigation of Special Counsel Robert Mueller which would bring him into direct confrontation with the Democrats.
More politicking is set to come as the campaign for the 2020 presidential and congressional elections kick off. In an early start, we should see aspiring presidential candidates and incumbent congressmen setting themselves up for the next campaign. Unfortunately, this political posturing will come at the expense of strategic policy issues.
Appeals based on race still hold water, as exemplified by some results of the mid-terms. Trump’s rallies in support of Republican candidates in the late stages of the campaign probably helped swing the vote in their favour: Trump will feel that his pitch to voters, which smacked of nativism and racial appeals, had been vindicated. Politics could well turn a lot nastier.
The US economy is set for below-trend growth without further stimulus
The US economy has been flying high due to fiscal stimulus. This jolt should begin to fizzle out by 2H19 and growth in the US could slow sharply sharply to below its 2% trend rate, to perhaps as low as 1%.
Given that the US Federal Reserve will continue to tighten monetary policy, this means that fiscal policy is the only answer to the inevitable deceleration. Yet, with the reins of the House in Democrat hands, tax cuts are unlikely to be forthcoming. There could be a concerted push on the infrastructure front but such a consensus could take some time to materialise in light of growing disquiet over budgetary shortfalls. The eventual programme for infrastructure development could come too late to avoid the cliff in economic growth.
Geopolitics set to heat up in the face of a weakened American presidency
The first threat to Asia is that the US political leadership will have its energies occupied by domestic infighting in the next two years. Much more than in the first half of his term, Trump’s bandwidth will be taken up by efforts to fend off legal and other challenges that the Democrats in the House could unleash against him. This will embolden America’s rivals to exploit the geopolitical vacuum to advance their own objectives. This could entail greater Russian pressure on the Baltic states, a more assertive and hegemonic China in maritime disputes, a recalcitrant North Korea backing out of nuclear disarmament, Middle Eastern strife stoked by Iran and galvanised radical groups in Afghanistan should Trump opt to withdraw American troops. This could eventually pose a security threat should Afghanistan under the sway of the Taliban become a base for radical groups to be trained and armed, including those which target countries such as India, Indonesia and Malaysia.
The second threat concerns the US-China relationship and its trajectory. It appears that after tit-for-tat measures, both sides are stepping back from the brink and even ready to do some sort of a deal. However, the strategic dialogue held in Washington, D.C. on 9 November which yielded not much more than a reiteration of their respective stances should be a reminder that while it is a positive that the two hegemons are communicating, their positions remain too far apart for any quick détente to occur. US Vice-President Pence’s harsh comments on China at the APEC Summit in late November also support this view.
Thus, any improvement in bilateral ties as a result of a good meeting between Xi and Trump will probably be limited and short-lived. With Trump’s domestic agenda likely to be stymied by the Democrats, the temptation might be for him to focus on the areas where the American constitution gives him more leeway such as trade and foreign policies. Picking a fight with China could help distract attention from his likely legal and related challenges whereas a statesmanlike accommodation with China may expose him to attack from his domestic rivals.
Since the midterm election did not deal a body blow to Trump’s domestic political authority, China will conclude that it may have to handle Trump for the foreseeable future and thus be willing to concede some ground in exchange for a cessation of trade belligerence. But China is unlikely to make concessions on its industrial policy or its strategy of controlling the South China Sea. The more fundamental elements of the growing US-China strategic rivalry will therefore remain in place.
Assessment: Threats to Asia loom large
In addition to geopolitical uncertainties mentioned above, a deceleration in US growth will crimp the growth prospects of export-oriented Asian economies. For Asian exporters of manufactured goods, the key is the composition of US growth. Hence, capital spending is a key driver of demand for Asia’s electronics components and related products rather than infrastructure spending. It is not clear that the policy tools that are politically viable in the US post-midterm elections can help boost private sector capital spending.
Moreover, the latest Federal Reserve meeting shows that the gradual but sustained rise in interest rates in the US will persist with a possible deceleration in late 2019 not material to the Fed’s current decision-making process. The trajectory of increasing rates in the US will constrain the policy space of central banks, especially those in emerging economies, and cause more ructions for the weaker EM economies such as Argentina and Turkey, with spillovers into Asia.
The dearth of political middle ground in the US means that the US budget deficit could grow ever wider as higher spending is not counteracted by higher taxes. A larger deficit means massive growth in US government debt issuance and a corresponding upward pressure on US bond yields. Higher long-term rates will add further pressure to emerging markets through asset markets and currencies.