U.S. policy: Pandemic puts the heat on China while tech regulation simmers

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BMO’s global multi-asset team typically gathers in person every September to discuss and update our three- to five-year outlook. With COVID-19 preventing our usual in-person meeting, and with the rapidly changing macro outlook presenting important thematic ideas, we plan to hold a series of virtual mini-forums on key topics. Our first session focused on four areas of U.S. policy crucial to our near-term economic outlook: fiscal stimulus, U.S.-China relations, regulation of technology companies and the 2020 U.S. elections.

Fiscal stimulus

To this point, fiscal stimulus has sailed through Congress in surprisingly bipartisan fashion. The devastating effect of COVID-19 on both Americans’ health and the U.S. economy seems to have awakened both parties to the need for cooperation. We expect this spirit to continue in the short term, though the 2020 presidential election is a crucial point in the longer-term outlook for stimulus. COVID-19 has forced presumptive Democratic nominee Joe Biden to focus his campaign on stimulus plans, which include traditional components such as a jobs program but also funding for areas that may be more politically contentious such as hospitals, renewable energy and rural broadband access. We view the highest probability election outcome to be a Biden win coupled with Republicans retaining control of the Senate. This result may slow down stimulus, especially if Biden intends to raise taxes (a low probability with a Republican Senate) and cut defense spending in order to pay for it. Fiscal discipline, which has been largely abandoned as a plank in the Republican platform as rebuilt by President Trump, may become important to the party again if it faces a Biden administration.

U.S.-China relations

President Trump’s confrontational approach with China seems to have opened the door to another bit of bipartisanship: two parties that in the recent past were likely to argue over whether water is wet now seem to agree that China’s challenge to U.S. supremacy in technology and military power needs to be checked. Politicians in both parties are increasingly striving to distinguish themselves on China policy. While the U.S. actors still have partisan agendas, there is some agreement that supply chains are the first priority.

We have already seen companies voluntarily moving in this direction as strategic planning shifts from efficiency and cost to safety and security. In a post-COVID-19 world, it is easy to understand why companies and nations would be more interested in supply-chain transparency for a large range of items from ventilators to vaccines. The pandemic ensures that health care will be targeted first, but other industries are in the crosshairs as well. The 2019 National Defense Authorization Act requires U.S. military contractors to sever supply-chain connections to Chinese technology firms by August 2020, and the Trump administration is poised to use executive orders to accelerate “onshoring” of other goods such as semiconductors. We expect President Trump to continue to keep the focus on China in the lead-up to the election, as he perceives this to be a weak spot for Biden. However, Biden is unlikely to passively cede control of the China issue, especially considering his support from organized labor in the Rust Belt swing states.

Negative views of China continue to grow in U.S.

Negative views of China continue to grow in US - Chart image

The percentage who say they have an unfavorable opinion of China has steadily increased since 2018. Note: “Don’t know” responses not shown. Source: Pew Research Center, Survey of U.S. adults conducted March 3-29, 2020. Q5b.“U.S. Views of China Increasingly Negative Amid Coronavirus Outbreak”

Regulation of technology companies

Domestically, we’ve seen some political unification against another common enemy: big technology companies. We expect regulation of these companies, especially the big four of Amazon, Apple, Facebook and Google, to increase on some level with bipartisan support. While recent election seasons have brought calls to “break up” these companies, we believe antitrust actions and tax changes are the most important factors for investors to monitor. Google is already named in an antitrust suit by all fifty states’ attorneys general, another display of unanimity that seemed unthinkable until recently. President Trump’s draft order that would narrow liability protections for some technology companies is another indication of the broader political will to increase regulation. Though these companies now face stronger headwinds in the U.S., new regulation is still likely dependent on the speed and magnitude of economic recovery after COVID-19. Moreover, these companies possess almost limitless lobbying budgets and are likely to argue that stringent regulation and higher taxes will only impede innovation in the race to stay ahead of China on technology.

DOJ annual anti-trust investigations

DOJ annual anti-trust investigations - Chart image

The number of Sherman Anti-Trust Act investigations has generally trended downward since 1970. Source: Department of Justice.

2020 election season

Market volatility is a concern for any sitting president, but this is especially true during an election season. A rising S&P 500 in the three months prior to November has been reliable predictor of incumbent victories since 1984. President Trump seemed willing to accept the volatility caused by tariffs earlier in his presidency under the belief that unemployment was at an all-time low and the administration could “turn off” a trade war come election time. A dubious plan to be sure, but COVID-19 rendered it moot. Even if re-opening the U.S. economy (a subject that restores one’s faith in a stark red/blue divide) goes flawlessly and a recovery begins later in 2020, the unemployment rate may remain uncomfortably high for the Trump campaign. An extension of the Paycheck Protection Program and expanded unemployment benefits would be to Trump’s advantage here, as these measures keep the economy treading water while buying time for a potential scientific breakthrough on COVID-19 before the election.

2018’s mid-term results (the so-called “blue wave”) in several swing states are also worrisome for the president. Biden’s bar for an Electoral College win was already relatively low due to Trump’s narrow margin of victory in the key swing states of Wisconsin, Michigan and Pennsylvania in 2016. Heavy turnout, especially by traditionally Democratic-leaning groups such as young people and African-Americans, could provide a boost to the Biden campaign.

If Trump wins re-election, we do not expect new taxes but will mark our calendars for July 31, 2021. The U.S. debt ceiling will need to be raised by this date if spending and stimulus are to continue unencumbered. Politicians could leverage this date to dramatically decrease the fiscal deficit, which would have significant implications for the U.S. economy’s recovery from this recession.

Prior to COVID-19, the Trump administration’s actions toward China were more transactional within the context of a trade deal. The growing hawkishness regarding technology, military power and investment we have seen as a result of the pandemic could carry into a second Trump term and become a longer-term headwind for equities. The ratcheting up in tension could widen the technology-platform chasm we have discussed in previous Global Investment Forums, with China and countries within its sphere operating on one platform and Western countries on a completely separate platform with little integration between the two.

A Biden administration would also have to deal with broader anti-China sentiment, not to mention longstanding Democratic objectives regarding thornier issues such as human rights. Biden’s ascendancy does marginalize the more economically challenging domestic agendas of candidates such as Bernie Sanders. With “Medicare for all” likely off the table, a Biden victory may actually be positive for sub-industries within health care such as managed care or life-science companies. While Biden is almost certain to pursue raising the corporate tax rate, he would probably need a Democratic majority in the Senate to lift the rate to the levels articulated by his campaign. A split government where Republicans retain control of the Senate would likely limit the scope of any tax hike and provide some support to equities. One potential beneficiary of a Biden victory could be the EU, as Biden would likely renew the U.S. commitment to engaging and supporting multinational organizations.

With China hawks increasing their numbers across the U.S. political landscape, a victory by either Trump or Biden is unlikely to deter the retreat from globalization that has intensified in the wake of COVID-19.

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