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US Foreign and Trade Policy: Navigating the straits of bipartisanship

With Congress split between a Republican Senate and a Democrat House of representatives, there are three key areas where the changing US political dynamic will affect trade – attitudes to Russia, China and the role of the new IDFC. For anyone seeking safe passage through these unpredictable times – a nuanced understanding of these key points and the chief policymakers is a must.

While division is nothing new in the arena of US foreign and trade policy, the US midterm elections have cleaved Congress in two, leaving the Republicans in control of the Senate whilst handing control of the House of Representatives to the Democrats.

The effect that this will have on foreign and trade policy is difficult to gauge. They have always been a complex matrix of shifting theories, alignments, and priorities, with multiple factions existing within – and often straddling between – the two different political parties.  We can expect this to continue within the current Congress. 

And while bipartisanship is at a low ebb, we are likely to see moments of cooperation between the GOP and the Democrats to oppose actions of the White House, particularly when it comes to policy on Russia. This is not to suggest that the keynote of the current Congress will be constant tension between Trump and Congressional Republicans: the two camps are aligning on China, as well as certain trade initiatives, such as the US International Development Finance Corporation (IDFC).

To complicate matters further, some Democrats – especially those that prefer protecting workers – will back Trump’s tariff policies; opposition will be stronger among pro-business Republicans. 

Out of the maelstrom, the Trump administration will still have wide discretion to execute foreign policy as it sees fit, at least until there is unified Congressional opposition. Of course, where there is alignment between the Trump administration and Congress, policy will be more sustained and long-lasting. But the recent news that the US is set to revoke the preferential treatment enjoyed by Turkey and India under the US Generalized System of Preferences demonstrates that the executive branch can achieve plenty without the input of Congress.

For observers, there are three key areas where the changing political dynamics can be observed: clashes between Congress and the White House over the Russian relationship and wider issues of trade; unity between the legislative and executive branches on tacking the thorny issue of Chinese influence and economic practices; and the potential role of the new IDFC in expanding US private investment internationally. For anyone seeking safe passage through these stormy days – a nuanced understanding of these key points and the chief policymakers will prove indispensable. 

The clashes

Trump’s Russia policy is seldom out of the headlines. While the results of the Moeller investigation will give the President more freedom to push his pro-engagement agenda, confronting Russia’s aggressive foreign policy is one issue that unites all factions in Congress and will remain a source of fierce tension with the White House. 

In particular, a group of US Senators, fronted by Lindsey Graham and Robert Menendez, introduced the Defending American Security from Kremlin Aggression Act (DASKA) on February 13th in response to malign Russian activity, particularly in Ukraine and Syria. If passed, this bill would impose new sanctions on a multitude of Russian companies and actors, as well as their supporting companies outside of Russia. The bill also looks to establish new policies and avenues to respond to Russian actions in the future.

It is important to note that this bill, in its targeting of European energy projects, would likely go further than the sanctions currently being debated by the US and the EU in response to the Russian seizure of Ukrainian ships and navy personnel in the Kerch Strait.

While Congress may have both the ability and the political will to expand sanctions, the ongoing Deripaska affair proves that President Trump is equally capable of strong action in this arena, albeit in the opposite direction. In lessening sanctions on Russian giants Rusal and EN+, in return for owner Oleg Deripaska selling his controlling share in both, the White House has shown that it is unafraid of drawing further ire from those who claim the President is unduly soft on Russia. Recent news that on March 15 Deripaska filed a lawsuit against the US Department of the Treasury, in a bid to force them to drop his name from sanctions lists, has only sharpened interest from Congress on the matter.

That Congress has a mind of its own, and a willingness to act on Russia, is clear. But we may see similar tension emerge in the area of trade. Of course, it is perfectly possible that intense political acrimony will prevent widespread Republican and Democrat cooperation, but this does not mean that all will be easy sailing for President Trump.

Trade: shifting alignments

President Trump’s habit of radically reformatting existing trade deals continues to make waves throughout the political machinery in Washington and the world. The more traditional actors in Washington see the aggressive renegotiation of existing deals via the threat (or effect) of tariffs as potential sources of serious harm to both individual businesses and the larger economy. 

One key effect of this division is that congressional approval of the US-Mexico-Canada trade agreement (USMCA), also known as Nafta 2.0, is by no means guaranteed. In recent months, Democrats have delayed approval of the new agreement until specific concerns are addressed, especially those related to tariff rates, labor standards, and Section 232 investigations against Canada and Mexico. In response, President Trump has repeatedly threatened to withdraw from Nafta without congressional approval of the USMCA, forcing Congress to approve the deal within six months or interrupt free trade across North America. If Congress refuses to pass the bill, or is unable to reach agreement, the administration will have to decide whether to follow through on this threat, or return to the negotiating table. 

Disagreement in Congress, and between Congress and the White House, is also evident in the current renegotiation of US-EU trade. The long history of US attempts to carve a bigger space for agricultural products in the EU market – guarded as it is by welfare and safety guidelines that bar many US exports – has become the battleground in this instance. While the EU has declared agriculture to be a “red line” in negotiations, members of Congress have equally indicated that there is little chance of a new agreement gaining sufficient votes without the EU backing down over the issue. Brexit offers more promising potential for the US effort, as the UK seeks to negotiate a trade deal outside of EU auspices, but the Trump administration may face some searching questions about trade priorities as the relationship with some of the United States’ oldest trade partners is upended.

A natural response for Congress, regardless of bipartisan alignment or division, in the face of such disruption is to attempt to gain greater control over trade negotiations, perhaps via the Section 232 tariff investigation process. Senate Finance Chair, Chuck Grassley, has already declared that there is a need for more substantial Congressional oversight into the tariff process, while a bipartisan group of Senators overcame division to introduce legislation aimed at securing for Congress greater control over tariff creation, especially when national security concerns are invoked. Although the legislation is unlikely to be enacted – this issue is sufficiently divisive that we can still expect to see delays to the trade process as the President faces off against some of his staunchest allies in Congress.            

Conversely, one clear area of bipartisan cooperation is on China. Here Congress is also moving in lockstep with the administration. President Trump, national security hawks, and those seeking to protect US companies and workers have reached alignment. There is demonstrable support from the majority of policymakers across both parties that seismic change to the US trade and security relationship with China is essential. This has sparked changes to long-solidified defense and foreign policy, as well as prompted US trade negotiators, including current US Trade Representative Robert Lighthizer, to take a more hardline stance than their predecessors in other administrations. 

Investing anew

Even before last year’s midterms, in October 2018 President Trump signed into existence a new US investment agency that will be one to watch regardless of alignment and division within Congress. The new US International Development Finance Corporation (IDFC) will have a sizeable pot of $60 billion to pour into overseas investment, taking over from the existing Overseas Private Investment Corporation (OPIC) and doubling US investment capabilities in this arena – despite the Trump administration previously suggesting that OPIC should be mothballed. The IDFC will provide significant commercial diplomatic opportunities that the US has typically delegated to multilateral investment organizations and, by providing a range of development finance tools including equity investment; debt financing; risk insurance; first-loss guarantees; feasibility studies financing; grants for technical assistance; and development credits, marks a dramatic uptick in US commitment to overseas development. 

The predicted budget of $60 billion will increase the strength of the US finance arm significantly compared to OPIC’s existing infrastructure. This volte face in foreign policy is a reaction to the growing impact of China’s Belt and Road Initiative, which although mired in claims of ‘debt-trap diplomacy,’ has inundated developing countries with investments in infrastructure projects and made China the chief trading partner for many developing countries, and indeed the majority of African nations – an area where the White House has been criticised for its lack of coherent trade policy. 

The future will tell whether the IDFC will operate successfully and be able to compete with China’s growth in influence from the Belt and Road Initiative’s first-mover advantage, but the agency is likely to be supported by Congress due to the bipartisan agreement on tackling China. Tactical decisions will need to be implemented to ensure best efficiency from this new darling of foreign investment, especially as the US will not be able to compete with the staggering amounts of capital that China has pumped into Belt and Road. Co-investment between the IDFC and private partners could be instrumental, however, in accessing large amounts of wary capital in the private sector with the promise of shared risk. Could the US role in foreign investment and overseas development be revitalised in the future? Time will tell, but this is one area that will sit largely at the eye of the bipartisan storm, at least while more headline-worthy issues dominate.  

Bipartisanship has riven both the House and Senate in recent years, a state of affairs only exacerbated by the midterms splitting Congress and an executive branch often at loggerheads with those who should be allies. While Congress can unite on some issues – China and Russian sanction efforts foremost among them – the issue of trade policy prompts division, even within the Republican and Democrat caucuses. Long-term strategy is key to devising, and divining, trade policy, and the effects of this period of US political turbulence are not likely to be felt for years to come. 

What is certain is that the US is moving toward reengaging with overseas development and dedicated to tackling Chinese economic practices, even in the face of protectionist rhetoric and tariffs. A contradiction in terms, a shift to a new stance, or a case of the right hand fighting the left? Navigating the landscape without disaster will be a difficult challenge, but also one to offer new opportunities as past US practices and policies shift rapidly.

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