For the US, 2021 is a seminal year. Not only does the world’s economic powerhouse need to recover from the COVID-19 pandemic, it has a very different president in Washington, a deteriorating relationship with some of its allies and China, and polarisation across the political spectrum.
Like all democracies, the ruling party in Washington plays the most influential role. There is a Democratic president and now, a slim majority for the Democrats in the Senate, which means that the Democrats have a better chance of passing their own policies, rather than if Congress were to have split control between the Democrats and the Republicans.
However, any change to policies will be gradual, and new legislation (especially around potential taxation hikes for households and corporates) may be tempered by more moderate or conservative Democrats.
Some of Biden’s proposed measures look likely to make it through in the short term – such as at least another US$1 trillion in fiscal stimulus, probably inclusive of $2,000 stimulus payments to a large share of US households1. This is on top of the US$900 billion (or 4 per cent of GDP) stimulus already passed in December2. Following this round of fiscal stimulus, the next stage of stimulus may come in the second half of the year focused towards infrastructure and climate-related spending which will be “paid” for by higher taxes on corporates and high-income individuals.
Biden has also garnered a reputation as an environmental warrior, having outlined a US$2 trillion plan to fight global warming during the election campaign3. “Some of the energy players could take a hit because of the expectation that a Biden Administration is going to be harsher on high polluting types of companies. While they may benefit a bit from any fiscal stimulus, they could face more regulation. That’s something to consider during the second half of 2021,” says Diana Mousina, Senior Economist at AMP Capital.
“That could happen around the tech names as well, though it may take longer. No matter what administration is in power, the world is moving towards greater regulation of the tech industry. We are seeing that in the US and in Australia, with more regulation around Facebook and Google.”
In the US, the Federal Trade Commission and around 40 states have accused Facebook of buying up rivals to quash competition. In Australia, the government has introduced legislation into federal parliament that would enshrine a code of conduct for the large technology platforms, and force Google and Facebook to pay for the content created by media companies, and available on their platforms4.
No matter what administration is in power, the world is moving towards greater regulation of the tech industry. We are seeing that in the US and in Australia, with more regulation around Facebook and Google.”
– Diana Mousina, AMP Capital
Infrastructure is literally nation building, and a great way of boosting an economy while bringing people together. It too will be impacted by the new Administration.
“Biden has a very big infrastructure agenda. I think that could probably get bipartisan support for that maybe the second half of the year.”
Under the Trump Administration, the US held a more aggressive trade policy particularly with China. The president followed a buy-America policy and accused China of unfair trading practices and intellectual property theft. For many, the perception in China was that America was trying to curb its rise as a global economic power.
“I think the overall stance around being tough on China is still likely to continue,” Mousina says. “When Biden was vice president to Barack Obama, that was the type of position he held,” Mousina says.
“He is unlikely to be rolling back tariffs. They still want to reduce the trade deficit that the US runs with China. They will continue to put pressure on Chinese firms that are operating in the US. But the Biden Administration may not actually ramp up tariffs and is more likely to work with allies to negotiate with China around its trade policies and regulation.
“That may not be favourable for Australia. Obviously, Australia is in a tough position with China. If the US asked us to back them on some type of anti-China negotiations, that wouldn’t be positive for Australia,” she adds.
“But, at least, there’s a benefit for equity markets under the new Administration. Investors don’t like tariff wars because it increases costs for businesses and tends to be seen as negative for economic growth. But if its just rhetoric, equity markets won’t necessarily be spooked by that. It would be much more negative if there were direct tariff wars.”
Biden has said he will take a more multi-lateral approach to global politics, re-committing to the World Health Organization, the Paris Climate Agreement and potentially the Trans-Pacific Partnership after the Trump administration cut ties with these organisations, citing few benefits versus costs to the US from its membership.
So could 2021 be the year in which the economic powerhouse mantle is passed from the US to China?