Finally the dust settles: US Elections

This morning I picked my newspaper and it seemed strangely light. Absent minded (and groggy) I picked it up and headed home. Once back home, I started getting ready for office (i.e. in the WFH era moving from my bedroom to my study desk!). I glimpsed through the front pages and Voila! Indeed my newspaper had cut some fat. I felt short changed and angry.

Then it dawned on me that the most anticipated gala event of this year has come to an end. The front, back and every other page hogging news has started to taper down. Yes, the US elections has ended.

Once I made peace with this fact I started to wonder what changed? (Except my newspaper’s weight :-) )

The global factors that could possibly be impacted by this change are Foreign and Economic policy. However, these will be dependent on the internal challenges that may arise.

A key aspect to bear in mind is that Mr. Trump will be President till Jan 20th allowing him the freedom to handle personnel changes and pass execute orders.

Now let’s fast forward to the world post Jan 20th…….

Internal challenges

The control of the senate is not yet clear. The runoffs on January 5 for Georgia will determine which side the future leadership leans on. If the Senate retains a Republican majority, that will make Mitch McConnell an influential political leader, who was instrumental in pushing a lot of Trump policies, including the most recent Supreme Court appointment. Mr. Biden will have to draw on all his statesmanship experience to navigate this tide.

Future policies on Trade, Immigration, Economic stimulus etc which require Senate approval hangs on this thin thread.

Foreign Policy

Mr Biden promised to rejoin the Paris climate change agreement. Also he will halt the US withdrawal from WHO and engage more with US allies in Asia and EU.

These could augur well for India, Canada, EU and other allies as it finds support for common agenda in World forums.

Uncertainty in the past led its allies (France, Australia, Germany and Japan) deepening their relationship with India. I see a fractured mandate in the Senate further deepening these ties. We could see more geo-political decisions being taken without a full blown agreement by US.

Another issue which might need attention is overseas deployment of troops. Mr. Biden may not be too inclined to decry the Abraham Accord signed by Mr. Trump. In all probability he might be happy to inherit a less involved America. What could be challenging is to build an America which is less involved but more impactful. The terms of this engagement could be significantly different.

Economic Policy

An issue to the fore is the divide on tax ideology between Mr. Biden and Mr. Trump. This ideology was prominent with the passage of The Tax Cuts and Jobs Act (TCJA) by Mr. Trump.

The plinth of this change was reduction in federal corporate tax from 35% to 21%. Also TCJA limited the interest deductions available and in certain cases allowed corporates to deduct 100% costs of depreciable assets in Yr 1. These changes made the US tax structure beneficial to large multinationals and nudged companies to onshore operations.

As per the Economist, these measures could have sailed Mr. Trump through the elections had COVID not taken place. Before the pandemic, wages among the poorest quarter of workers were growing by 4.7% a year. Small-business confidence was near a 30-year peak. Abroad, his disruptive approach brought some welcome change. Some allies in NATO were contributing more on defence. China’s government knows that the White House now recognises it as a formidable adversary.

Mr. Biden proposed during his campaign an increase in the corporate tax rate to 28%. While this may benefit the US exchequer’s coffer (largely depleted due to COVID measures), corporations might not be too keen to onshore activities or change their global supply chain. What needs to be seen is, if the democrats can follow through on their promise of implementing a “Make in America tax”. This might meet stiff resistance in WTO but can help counter the effects of higher corporate tax.

Another key change promised by Mr. Biden is to raise the Capital gains tax from 20% to appx. 40%. While this may help tide over the current shortfall in taxes, in time to come we might see HNI’s and corporations moving to more opaque overseas structures or investing in low tax jurisdictions.

I expect the US move on Huawei, Tik Tok and others to continue. This may antagonise the Silicon Valley and Big Tech, who count Harris as one of theirs.

Another theme is the impact of these economic policies on the allies of US far & wide. The EU union already announced plans to impose $4 billion in tariffs on U.S. goods. This includes a 15 percent tariff on Boeing airplanes and a 25 percent tariff on products such as tractors, frozen shellfish, gin, salmon etc.

I feel these sanctions are retaliatory to the tariffs imposed on steel and aluminium imports by Mr. Trump citing national security as a reason. EU being a long time US ally didn’t take this too well.

On the US front, one of the effects of the sanction is that the US spirts industry could get sluggish. The US spirits business had already fallen by 41% as per the president of the Distilled Spirits Council of the United States. Additional tariffs now imposed will further deal a blow to the U.S. spirits industry. This along with the COVID impact on restaurants can leave a long lasting dent in the American spirits business.

What can I say, dry days to come :-P

In terms of countries, Canada being an all-weather ally of the US closely watched this election. Mr. Biden's first wife came from Canada. Sen. Kamala Harris too spent her high school years in Montreal, where her mother was a professor at McGill University.

Canada will be hoping that these ties materialise on the economic front. Under the Trump regime, tariffs were slapped on Canadian metals exports and there was a threat to scrap NAFTA that underpins Canada’s economic prosperity. Even now, this might not change much given the US has lately become an inward looking and a protectionist economy.

Biden promises a “Buy America” push to spend $400 billion on U.S.-made goods. As per News 18, this could harm Canada since its economy is highly integrated with that of the United States, which takes 75% of all Canadian goods exported. Mr. Biden was the vice-president when the protectionist measures introduced in 2008 financial crisis continued. Canada had to go through a lengthy process to secure waivers which allowed its companies to take part in the federal procurement contracts.

A significant proportion of Canada’s economy is driven by the energy sector. Mr. Biden has not only vowed to join the Paris agreement but also outlined a $2 trillion plan of environmental investments. These could be detrimental as Canada might need to move to clean energy, electric vehicles and less reliance on the oil sector. The price of such a transition in the post pandemic economy may be severe.

Mr. Biden has vowed to make policy changes that would be a setback for the oil and gas sector, such as preventing new drilling on federal land in the U.S. and cancelling the presidential permit for the Keystone XL pipeline, a project that would help deliver Alberta crude to the U.S.'s Gulf Coast refineries.

The stoppage of Keystone project might not come easy. A key factor being Keystone XL would create huge number of jobs in the U.S. This might be critical to the post pandemic employment stats that Mr. Biden is targeting.

On the flip side though, Canada will be impacted if there is any change to the Keystone project. However this can be offset through the other pipeline projects such as Enbridge's Line 3 and the Trans mountain expansion. It will be interesting to see how Canadian companies such as Citadel Drilling, CES Energy solutions which operate in US shape their strategy in the coming months.

Another industry in Canada which could be impacted is Lumbering. The US lumbering industry feeds on Canada’s softwood lumber industry. Ottawa would do well to iron out a deal on forest products as this will help save jobs in Canada and stabilise the economy in the post pandemic world

By now as expected it seems that Mr Biden’s policy will differ much from Mr. Trump’s policies. But the real question is how much will Mr Biden’s policy differ from Mr. Obama’s. The coming days, months and years will answer this.

Till then I will happily carry a lighter newspaper home!