Leibowitz: 'Elections Always Matter, But This One Perhaps More Than Most'

Today, it’s time for an assessment of the midterm elections and how they may affect trade policy and tariffs for the next two years. 

The House

It is clear that the Democrats took control of the House of Representatives for the 116th Congress, which convenes in January. The latest tally is 227 Democrats, 198 Republicans and 10 races that are, in the famous media phrase, still “too close to call.” The new House could have more than 60 freshman Democrats and about 35 or so Republicans. More than half the new Democrats are women. 

The House leadership will, of course, be in Democratic hands. Current Minority Leader Nancy Pelosi will run for Speaker and most forecasts are that she will be elected. The new Majority Leader (second in command) is an open race. Rep. Steny Hoyer, who was Majority Leader the last time Nancy Pelosi was Speaker, is in the running, as is Jim Clyburn of South Carolina. There will be a number of new faces in the mix.

Committee chairmen and ranking members will be chosen in December. The new Chairman of Ways and Means will probably be Richard Neal of Massachusetts. The ranking Republican will be Kevin Brady of Texas, the outgoing Chairman. The Trade Subcommittee Chairman may be Bill Pascrell of New Jersey, who is openly angling for it, but has competition. The ranking Republican may well be Devin Nunez of California, who was the Chairman of the Subcommittee during the 115th Congress.

The Senate

It is also clear that the Republicans will retain control of the Senate. They now have 51 confirmed Senate seats for the 116th Congress, while Democrats have 46. There are three races (in Arizona, Florida and Mississippi) that are still “too close to call.”  By next weekend we should have a better idea of the outcome of two of those races (Arizona and Florida). The third will be determined in a runoff election on Dec. 4 in Mississippi. The Republican incumbent, Cindy Hyde-Smith, is widely expected to prevail on Dec. 4 over Mike Espy, the Democrat who finished second in the balloting. Republicans unseated three Democratic incumbents on Nov. 6 (in Indiana, Missouri and North Dakota), and could do so in Florida. Democrats unseated one Republican incumbent (Nevada). In Arizona, the tabulation is surprisingly slow. As of Saturday, the Democrat had a small lead (28,000 votes) over the Republican.

The Majority Leader will remain Mitch McConnell and the Minority Leader Chuck Schumer.

The Chairman of the Senate Finance Committee will likely remain Chuck Grassley of Iowa and the ranking Democrat Ron Wyden of Oregon. Their positions on trade issues of the day are well-known.

What does all this mean for trade? I think the split has implications on several current issues:

1. The United States-Mexico-Canada Agreement (“NAFTA 2.0”)

We still do not know for sure if the final USMCA will be signed at the end of November. Most signs point to a signature of the agreement on the last day of the presidency of Enrique Pena Nieto (Nov. 30). Assuming the agreement is signed, Congress must approve the deal before it goes into effect. 

The prospects for passage dimmed a bit as a result of the Democrats capturing control of the House of Representatives. The new Chairman of the House Ways and Means Committee, which will play a critical role in congressional consideration, is likely to be Richard Neal of Massachusetts. He is promising to study closely the revamped NAFTA deal. Like most Democrats, he wants stronger labor and environmental protections. Nancy Pelosi, who may well become Speaker, is in the same camp.

The key to approval of the deal may well be the “no deal alternative.”  If NAFTA 2.0 cannot get through Congress, President Trump has threatened to terminate NAFTA 1.0. That will cause a constitutional dust-up. There is considerable doubt, about which I have written before, whether the president has the authority to terminate NAFTA without congressional approval. The current hostility between President Trump and congressional Democrats makes congressional passage doubtful of the new NAFTA, but a fight about termination of the old NAFTA will be strongly contested. If Congress cannot pass legislation, either approving NAFTA 2.0 or continuing NAFTA 1.0, then the courts will likely have to decide what happens. It could be a very contentious 2019.

2. U.S.-China Trade War

Half of U.S. imports from China are subject to the “section 301” tariffs. The other half could be subject to tariffs by the spring of next year. Companies that are dependent on China are scrambling to change their trade supply chains. Many are finding it difficult to do so. 

Democrats are generally supportive of the Trump trade actions against China, saying that Chinese actions infringing on intellectual property rights, trade secrets and forced technology transfer need to be addressed. There is controversy caused by the economic hardship suffered by importers dealing with vastly increased costs and exporters (especially agriculture) hurting from retaliatory tariffs imposed by China. Those who are hurting want the tariffs removed; but for the most part the complaints of the suffering did not have a major effect on the elections last week. For example, two of the three Senate elections that unseated Democrats were won by Republicans that broadly agreed with the president. The Democratic losers were critics of the president’s China policies. 

There is no sign that China will become more conciliatory any time soon. There are economic hardships suffered by China as a result of this trade war, but China shows no signs of backing down. 

In Congress, we should expect more hearings, especially in the House, calling into question the tactics of the trade war. However, so far there have been few calls to abandon the tariffs to rein in perceived trade abuses by China. Perhaps Congress will make suggestions on potential further actions against China, but so far this is not clear. The many new members of Congress may develop new ideas. If so, we will hear them in 2019.

3. Steel and Aluminum Tariffs

These tariffs, based on “national security,” are controversial because the nexus between the steel and aluminum industries and national security is debatable; and because the tariffs and quotas imposed in 2018 are questionable as a cure for whatever national security problems may exist. 

The Democratic support for the section 232 tariffs is much more mixed than is the case with China tariffs as a result. There were bills introduced in the 115th Congress to rein in the president’s authority to impose national security-related tariffs. Democratic control of the House could add substantially to these efforts. There will likely be hearings about the national security tariffs and their effects on downstream industries, as well as foreign policy hearings on the tariffs and relations with U.S. allies. Support for the tariffs in their current form is not likely to increase and may decline.

In addition, the USMCA may result in a relaxation of the tariffs for Canada and Mexico, which would complicate the tariffs and quotas for other U.S. allies. Add to that the prospect of U.S. litigation over the tariffs, and increased activity at the World Trade Organization as disputes continue, and 2019 will provide many opportunities for change in steel and aluminum policy. Secretary of Commerce Wilbur Ross is also the object of speculation in Washington trade publications. He may leave his post and could be replaced by someone that is less committed to tariffs and quotas as an instrument of policy. All this, of course, is speculation at present.

In conclusion, elections always matter, but this one perhaps more than most. The House Democrats, who have been unable to get anything going on Capitol Hill for two years, will be eager to challenge the administration on issues as diverse as Russia, infrastructure, health care, immigration and trade. The opportunities to shape policy through Capitol Hill will increase. 

It will be interesting.

Lewis Leibowitz

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