Voters have long used elections as a referendum on the incumbent’s performance, but perhaps never so clearly as in the US in 2020.
Joe Biden’s chief asset among Democratic primary voters was his perceived ability to beat Donald Trump, and his low-key, low-risk election campaign allowed him to unite an ideologically diverse anti-Trump coalition and scrape a narrow victory in key states.
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This low-risk approach extended to trade and investment policy, where Biden steered clear of concrete commitments that put him at odds with the broad thrust of Trump’s economic nationalism.
With regard to outward investment, Biden has pledged not to include investor-state dispute settlements (ISDS) in any future treaties, although the reform of existing treaties is unlikely to receive the same attention it got under Trump.
“Obviously, with Covid – and just generally with [Joe Biden’s] politics – this kind of thing is just not on his radar,” says Todd Weiler, an independent Canadian ISDS practitioner. “He is supposed to be rural, manufacturing Joe, so I think the best thing he could do from his political standpoint is just say absolutely nothing about it and do absolutely nothing about it. Obviously, given Covid he has got more than enough to focus on.”
Biden isn’t likely to go soft on China
On trade, Biden has hinted that a traditional Democratic concern for free trade will be combined with an effort to boost the US’s export competitiveness and a coherent geopolitical strategy to contain China.
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By GlobalData“The wrong thing to do is to put our heads in the sand and say no more trade deals,” he wrote in March 2020. “Countries will trade with or without the US. The question is, who writes the rules that govern trade? […] The US, not China, should be leading that effort.”
It remains unclear whether Biden will attempt to revive the Trans-Pacific Partnership (TPP). The largest free-trade agreement ever negotiated, the TPP was part of the Obama administration’s overall strategy to reassert US dominance in East Asia. However, the deal failed to win Congressional support, and Trump swiftly withdrew US participation upon taking office.
Biden’s suggestion that the US, not China, should be writing the rules that govern trade is a more nakedly nationalistic vision of US trade policy than would have been seen under Barack Obama. Although Biden himself was initially a strong advocate of China’s integration into the world economy, he has more recently begun echoing Trump’s much more hawkish approach.
How will Biden differ from Trump on FDI?
Trump and his wing of the Republican party have long been concerned about the yawning US-China bilateral trade deficit, which they attribute in part to currency manipulation.
Restrictions on inward foreign direct investment (FDI) have also been a point of contention, with the US concerned that Chinese policies to encourage technological spillover are building the country up as a competitor in high-tech, high-value-added industries.
In response, Trump has placed tariffs on $360bn of Chinese imports, sanctioned Chinese companies and restricted Chinese investment into the US.
The Biden transition team has very clearly stated that it is not going to change the main facets of Trump’s trade policy. Simeon Djankov, Peterson Institute of International Economics
Where Biden is likely to differ from Trump, however, is his treatment of the US’s alliances. Trump has been willing to impose tariffs on allies – whether in response to a successful World Trade Organisation (WTO) dispute, as in the case of the EU, to protect domestic industry, as in the case of Canada, or to extract unrelated policy concessions, as in the case of Mexico.
Biden has criticised this proliferation of trade disputes as counterproductive to the grander strategic goal of preserving US hegemony against China.
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“When we join together with fellow democracies, our strength more than doubles,” Biden wrote during the election campaign. “That gives us substantial leverage to shape the rules of the road on everything from the environment to labour, trade, technology and transparency, so they continue to reflect democratic interests and values.”
Trump’s erratic trade policy may also be responsible for the disappointing increase in inward FDI that followed Trump’s reduction of corporate income tax from 35% to 21% in 2017.
“The Trump administration reduced corporate income taxes but at the same time started a trade war with Canada, with China, and for a period of time with Mexico and the EU,” says Simeon Djankov, a researcher at the Peterson Institute of International Economics. “So, who else would invest? Basically, Japan – but it is in a permanent recession.”
Biden’s slow road to investment stability
While Biden is likely to provide a more stable climate for investors, Djankov doesn’t expect any sudden resumption of investor confidence.
“I don’t think that we are going to suddenly see a reversal in the next two years – both because it takes a bit of time to turn the ship around, but also because the Biden transition team has very clearly stated that it is not going to change the main facets of Trump’s trade policy.
“In the minds of many Democrat leaders, a significant reason for the gains in some of the states such as Michigan, Wisconsin, Georgia and Arizona is the appeal of Trump’s trade policies for the average US worker. Because it is the case that in some particular regions, particularly the US Midwest but also the south-west, certain manufacturing jobs were lost.”
US imports from China have soared since the country joined the World Trade Organisation in 2001, but this has not been matched by a commensurate boost to exports. The increased competition forced many US businesses, particularly in manufacturing, to either shut down or relocate abroad.
This cost the US 3.7 million jobs between 2001 and 2018, according to estimates by the Economic Policy Institute. Three-quarters of these were in manufacturing, and many of them in electorally vital rust belt swing states such as Michigan and Wisconsin.
These electoral incentives are likely to be further strengthened by Biden’s weakness in Congress. With only the slimmest of majorities in the House of Representatives and the Senate, Biden will have little room for manoeuvre.
The 2022 midterms are likely to be in the Biden administration’s view from day one, with the loss of even one Senate seat risking its ability to pass key legislation. Many of the closest races are likely to be in districts where jobs have been hit particularly hard by Chinese imports.
Until then, Biden’s policy agenda will depend on a careful handling of Congressional alliances, including with moderate Republicans and his own party’s increasingly empowered progressive wing.
“The incompetence will go away, as will the attitude to the WTO and so on,” says Djankov. “But the direction of trade policy, certainly vis-à-vis China but also others, will remain for some time. At least, those are the signals of the incoming administration.”
Friendly relations and FDI
Even if Biden does little to change the broad impetus of US trade and investment policy, Djankov thinks that the change in tenor will significantly boost investor confidence.
“At some level, this ‘America First’ approach is not going to change significantly, or at least not quickly – not in the first year or two of the incoming administration,” he says. “But the tenor of negotiation, the friendliness, the attitude towards the WTO – I think that is going to change almost overnight, and that itself is going to have a beneficial effect.”
Researcher Marina Azzimonti found that when there were more news reports of political disagreement between US politicians, growth of US inward FDI stock was smaller.
Political conflict is thought to deter FDI because it creates policy uncertainty, and long-term investments are highly vulnerable to changing conditions. If an administration suddenly introduces a swathe of taxes or regulations, foreign investors that are already established are unlikely to be able to simply pack up and leave.
This is especially true for sectors where investment projects include large-scale, fixed-capital expenditure, such as utilities, mining and gas extraction.
The US’s political turmoil preceded Trump
While Biden himself may be a more stable hand, the Covid-19 pandemic makes the situation anything but predictable for investors. Global FDI flows are expected to have fallen by 40% in 2020, according to the UN Conference on Trade and Development.
Even if a successful vaccine roll-out puts economic recovery on the cards in 2021, there is little reason to expect a return to political stability.
The US public is severely divided. Democrats are nearly twice as likely as Republicans to consider Covid-19 a major threat to public health. Before the November election, 90% of Trump supporters said that they feared Biden would do lasting harm and damage to the country if he won, while 89% of Biden supporters said the same of Trump.
This is not a trend that originated with coronavirus, or even with Trump. In 2004, 28% of Democrats were more conservative than the average Republican – slightly lower than that recorded a decade earlier. By 2014, however, this figure had plummeted to just 6%.
Azzimonti found that political conflict rose sharply to its current levels in the years immediately following the financial crisis, having previously been remarkably stable.
Investors can expect more continuity than change under the Biden administration. Although Biden is likely to seek consensus rather than fanning division, the US’s domestic political turmoil preceded Trump and is likely to outlast him. Similarly, the country’s anti-China turn is bigger than Trump and likely to be professionalised, rather than ameliorated, under Biden.
This article is one of a series covering the inauguration of Joe Biden across the Monitor network, including City Monitor, Energy Monitor and Tech Monitor. For further coverage from the Investment Monitor writers on the challenges Biden faces in office, see also:
• Joe Biden and the future of US manufacturing
• Will Biden punish Britain for Brexit?
• Can Biden’s infrastructure plan meet high expectations?
• Joe Biden’s Made in America rhetoric is about to meet the ongoing reality of globalisation (New Statesman)
