Overall, there are two opportunities for us in the event of a possible change of power in the White House. First, Biden is not a free trader. He too wants to “protect” American workers from job losses caused by imports. But it stands for a calm foreign and trade policy. Unlike Trump, he would not threaten Europe but, together with the EU, put pressure on China to end unfair Chinese practices. Transatlantic calm and a coordinated approach towards China would be good for world trade and for Europe, which is particularly dependent on world trade. The economic downturn that brought us Trump’s trade wars in 2019 long before the 2020 pandemic would not repeat itself in this way.
Second, Biden would rejoin the Paris Climate Agreement. Greener US policies would be good for the climate. In addition, constructive cooperation by the USA would make it easier to put other climate offenders in their place, for example through coordinated import duties for products manufactured that are harmful to the climate.
But in connection with the US elections on November 3rd, we also face three risks.
Risks all around the choice
In the short term, a close election result, in which Trump’s doubted postal votes in key states such as Florida or Pennsylvania would have to make the difference, could lead to unrest in the USA. The mood in the USA is more tense than ever before. On the one hand, peaceful protests by the Democrats could be hijacked by radical left stone throwers and looters, who are as willing to use violence as the chaos who hit Hamburg in 2017 on the occasion of a G20 summit. On the other hand, armed right-wing militias may feel encouraged by Trump to intervene violently. The risk would be particularly great if Trump initially refused to acknowledge a narrow defeat.
Short-term unrest of this kind would probably soon subside. Despite Trump, the US institutions are strong enough to weather such turmoil. When the result is officially and definitively determined, possibly only after a ruling by the Supreme Court, things would probably calm down shortly afterwards. Trump, too, could not ignore a final decision if the worst came to the worst. The financial markets have already adjusted to increased volatility in November.
In the long term, we could face two completely different risks. For decades, Trump has been annoyed about German cars in front of Trump Tower on Manhattan’s Fifth Avenue. Despite many threats and a few small steps, Trump has so far held back much more against the European Union than against China. His advisors have probably made it clear to him that a trade war against Germany and thus the EU could cost him votes in the US. Trump supporters also like to drive German cars and would suffer from higher prices due to customs duties. Americans enjoy working at BMW in South Carolina or Volkswagen in Pennsylvania. But after re-election, Trump would have less reason than before to let his advisors hold him back. In a second and final term in office, Trump would increase the risk that he could drag a trade war over Europe as well as China, to the detriment of all countries involved and the global economy as a whole
In the opinion of some observers, there could also be a significant risk if Biden wins the election. Biden himself is rightly considered an old school pragmatist. But as an expression of the increasing polarization of US politics, parts of his Democratic Party have moved to the left. Should Biden actually tighten the tax screws for small and medium-sized businesses and cripple the labor market with excessive regulation, this could seriously affect the growth potential of the USA. That would have an impact on the world economy and probably put the world financial markets in unrest.
As Biden’s lead has increased, the first two risks have decreased. If, for example, the election results in the contested states such as Florida, Pennsylvania and Wisconsin were so clear on election evening that the later counting of the postal votes would no longer matter, this would significantly limit the risk of a long shaky game with the corresponding potential for unrest.
Majority for Democrats in the Senate
With a clear election victory for Biden, the Democrats would likely also get a majority in the Senate and thus in both houses of the US Congress. This would enable them to shape not only foreign, trade and regulatory policy, which is largely in the hands of the president, but also tax and spending policy, which ultimately has to be decided by Congress. However, the risk that if the Democrats were to march through would actually lead to such a pronounced wave of taxes and regulations that, in addition to some sectors of the US economy, the world markets and the world economy would also be affected, is rather small. Even in the best-case scenario for the Democrats, they could at most achieve a slim majority in the Senate. This means that they would have to rely on the moderate representatives of the people in their ranks, who – like Biden himself, apparently – do not share the ideas of the left wing. In addition, significantly higher taxes would not be compatible with the continued difficult economic situation due to the corona for the foreseeable future. At least for the time being, Biden will probably only raise taxes moderately.
The focus of the Democrats’ economic and social policy is therefore likely to be on some regulations and largely sensible reforms in social and health services. In addition, there would be additional government spending if the deficits remained high. In the long run this also poses problems. But that wouldn’t be any different if Trump were to win the election. Because despite some rhetoric by the Republicans, in recent years it was Trump who, with his increasingly compliant Republican Party, had already pushed the US public deficit up to 5% of economic output before Corona.
Even if a clear election victory for Biden would mean anything but sunshine for Europe, one conclusion is obvious: Europe would vote for Biden. Whether America will go along with it remains to be seen in three weeks. Despite the current advantage for Biden, the election is not over yet. After all, Hillary Clinton was clearly ahead three weeks before the date in 2016.
Holger Schmieding is the chief economist at Berenberg Bank. He writes here regularly on macroeconomic topics. More columns by Holger Schmieding can be found here