November 08, 2018

What Impact Might the U.S. Midterm Elections Have on Trade Negotiations?

With the U.S. midterm elections in the rearview mirror, we now know that the Democrats have retaken the House and the Republicans were able to hold onto their majority in the Senate — a result that was widely expected.

As the election results rolled in, the dollar sold off in reaction to a divided Congress, which is often seen as limiting policy actions. Specifically, the prospect of additional fiscal stimulus has faded. This has caused the markets to price from a headwind to a neutral factor. This has caused the yield curve to flatten as the Fed continues on its gradual rate path, raising the short end of the curve, but the long end drops as slower potential growth is priced in.

The results of the midterm elections also have implications internationally. The drop in U.S. yields have provided a reprieve to emerging market currencies, which have been battered by a divergence in monetary policy. However, one of the exceptions to this has been the Mexican peso. Congress still has to approve the United States-Mexico-Canada Agreement and a Democratic-controlled House raises questions around this ratification process.

There also remains questions around what the implications will be for the White House's ongoing trade negotiations. Recent reports have indicated that progress has been made with China —President Trump reportedly asked for a draft of a possible trade deal with China. However there are reasons to be skeptical.

Given a split Congress, President Trump's hand in negotiations could very well be weakened, giving China incentive to push for even more concessions leading up to the Trump-Xi summit at the end of the month. Further complicating the situation is the prospect of more unilateral White House actions, via additional tariffs that would ramp up tension if Congress is unable to agree on legislative action.

Moreover, the U.S.-China trade deficit is expected to widen. While much of this has to do with the U.S. economy continuing its above trend growth — which stimulates the demand for more imports — the current administration sees trade deficits as a negative.

Our view: While the completion of the midterm elections has taken some uncertainty out of the markets, it has also added new wrinkles to the equation. The scheduled Trump-Xi summit at the end of the month remains a key event, but many complicated obstacles remain. The trade issues the U.S. has with China are more structural and complicated than issues the U.S. has with other trading partners. All of this suggests that the best we can hope for is a symbolic handshake agreement of limited scope.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447 4133.

Thank you for subscribing!
Error. This is not a valid email address. Please try again.
Error. Please make sure all fields are filled out and try again.
Subscribe to Our Newsletter