November 22, 2022
How Will the U.S. Midterms Affect Global Trade?
The results of the midterm elections have the potential to shift the balance of power in Washington. Flexport’s State of Trade Webinar on November 15, 2022 led by Phil Levy, Chief Economist at Flexport, Darien Flowers, Head of Government Relations at Flexport, and seasoned Capitol Hill veteran Michael Smart, Managing Director at Rock Creek Global Advisors, unpack the election results and share their insights on how they might impact global trade policy.
The midterm election results in a nutshell
Based on current election projections, it seems that Republicans will control the gavel in the House of Representatives. By obtaining a House majority, even if by a slim margin, Republicans will have the ability to set the agenda of all of the committees—something that may cause significant changes.
Understanding the Senate Finance Committee
The Senate Finance Committee has jurisdiction over trade policy including customs, collection districts, ports of entry and delivery, reciprocal trade agreements, tariff and import quotas, and the transportation of dutiable goods. It has majority and minority party subject matter experts that assist the Senators in conducting the committee’s business. The Senate Finance Committee is a highly sought-after committee assignment in Congress because of its jurisdiction. At this time, several Republican members are retiring, leaving seats open for new leaders. It is anticipated that in the 118th Congress (2023 - 2025), the Committee will work to find a middle ground where both parties can agree on multiple trade policies, according to Michael Smart, a former Finance Committee senior staff member.
We want to aim towards compromise. I think the way the leadership is set up now gives us a very good chance of that happening.
- Michael Smart, Managing Director, Rock Creek Global Advisors
A closer look - public sentiments on trade policy
Election results often reflect the sentiments of the public. One area that’s been well-covered this election cycle relates to industrial policy. As Smart explains, a significant percentage of the public feel quite good about the agenda—from the Bipartisan Infrastructure Act to the Inflation Reduction Act. While there is no formal definition, industrial policy commonly refers to a comprehensive, deliberate, and consistent set of government policies designed to change or maintain a particular pattern of production and trade within an economy.
The public appreciates expression of support in these strategic areas. The government needs to be more involved and committing more fiscal resources and paying more attention.
- Michael Smart, Managing Director, Rock Creek Global Advisors
Americans stand united on industrial policy
According to Darien Flowers, Head of Government Relations at Flexport, industrial policy encompasses a large range of political ideologies, making it an opportunity for greater cooperation. He explains that, “the left generally prefers industrial policy to advance climate priorities in things like EVs. Republicans like it because it enables a hawkish posture towards near peer adversaries like China and Russia.”
There's a uniqueness where America does not feel particularly united in the political realm, but the sentiments around trade actually might be one of the few things that Americans are united on.
- Darien Flowers, Head of Government Relations, Flexport
Crystal ball time - what's on the agenda for trade policy?
We are currently in the “lame duck” period which is traditionally a time when Congress crosses things off its “to-do list.” Issues related to trade solidly live in the “maybe” category in terms of Congressional action. Our experts delved into several topics they think will be topics of discussion between now and January in Congress and at the beginning of the new session:
- Implementing a new process for businesses applying for 301 tariffs. More than 90 senators voted for a new process allowing businesses to apply for exclusions from section 301 tariffs. Smart believes there is a decent chance that that idea will be revived, but predicts we won’t see much activity within the next two years.
- Addressing a potential national railroad strike. Right now, three national railroad bargaining units have voted to reject the labor agreement brokered by the Biden administration prior to the election. A work stoppage in the national railroad system could cause serious economic impacts on global trade. All twelve unions involved in the negotiations must agree to ratify new contracts, or a strike could take place, devastating supply chains and the economy at large and costing an estimated $2 billion a day. Congress is expected to get involved if a work stoppage is triggered, but multiple unions have agreed to continue negotiating into early December.
- Creating a package designed to improve global trade. Smart predicts improvements would be limited to an extension of the Generalized System of Preferences (GSP) program, an extension of Miscellaneous Tariff Bills (MTBs), which provide duty free treatment for products, inputs to non-U.S. manufacturing, and trade adjustment assistance with retroactive relief.
- Refining economic security issues. We can expect more export controls and sanctions based on bipartisan congressional support for better U.S. security.
- Progressing on digital trade. Although polarizing between parties, many members view digitization as a way to help a broad selection of U.S. companies that rely on free flows of data.
- Increasing nearshoring. Many members agree that the U.S. needs to bring some stages of the supply chain closer to home and rely on allies to “friend-shore” needed goods. Friend-shoring or ally-shoring has become a means for policymakers to influence firms to move their sourcing and manufacturing sites to friendly shores—often back to the same shores in the case of the U.S. The purpose is to insulate their supply chains from less like-minded nations, such as China.
- Modernizing customs legislation. Flowers believes a customs modernization bill could be the only significant trade legislation to move in the 118th Congress and be enacted between 2023 and 2025.
What does the future hold for the state of trade?
Based on the unpredictable state of the world over the last three years, we should expect the unexpected. According to our experts, we can anticipate Congress to push for more economic security measures in the U.S., as well as greater coordination with allies and increasing industrial policy. We can also expect Congress to search for areas of bipartisanship, such as upstream research and implementing the recent semiconductor legislation.
Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.
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