Bank of Lithuania
2020-11-02
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Joe Biden’s, who is currently ahead in the polls, victory in the US presidential election is likely to bring about significant changes in the US domestic and foreign policy. However, in some policy areas the continuity of Donald Trump’s policies would potentially be maintained. This includes a strong stance on China and the US industrial policy geared towards economic autonomy. As regards fiscal issues, a Biden-led administration would seek a more progressive approach, leading to more spending and higher taxes. In contrast to Trump’s policies, climate change mitigation would become a priority, and the US would seek to regain leadership in the international arena as well as normalise relations with European countries.

Comment by Linas Mickus, Senior Economist at the Economic Policy Analysis Division of the International Relations Department of the Bank of Lithuania

Different taxation and climate policies

While Biden aims to raise taxes on business and combat tax evasion, Trump’s tax policy favouring big business is being heavily criticised. Biden’s plans include an increase in the corporate income tax to 28% (it was cut from 35% to 21% in 2017), changes in taxation of profits generated by foreign branches of companies and fighting against the use of “tax havens” for tax evasion purposes. In addition, taxes for the wealthiest part of the population are set to increase. It is estimated that the expected tax changes would have the greatest impact on the highest-income households, and as much as 80% of all additional budget revenue would be collected from 1% of the wealthiest people in America.

The Democratic candidate’s economic programme pays particular attention to climate change, which has been basically denied by Trump. The ambitious goal is to make US a climate-neutral country by 2050. A total of $2 trillion is to be devoted for climate change mitigation over the 4-year term of office. The climate change plan envisages achieving zero carbon emissions in electricity generation by 2035, developing the public transport system, setting up 500,000 electric car charging stations, etc. It should be noted that the climate change mitigation target matches the EU’s commitment to ensure zero net greenhouse gas emissions by 2050. 

Industrial policy to follow Trump’s line

Biden aims to bring industry back to the US and ensure the security of critical supply chains. The rhetoric is close to that of the current administration: economic globalisation has hurt American workers, since many jobs have been lost in the industrial sector and income inequality has increased. To change the current situation, $400 billion is to be invested through the government’s public procurement tenders for US-origin materials, products and services. $300 billion will be allocated for innovation and research, which should result in the development of products to be made within the country. In general, Biden’s programme criticises the trend that has prevailed in recent decades, when the US has carried out only research and development activities to create new products, yet they have been manufactured in third countries with lower manufacturing costs.

The US industrial policy is at least partially in line with the EU’s goal of strategic autonomy that was prioritised by the European Commission (EC) in its political agenda in the face of the COVID 19 pandemic. This suggests that we will see the continuing trends of economic deglobalisation during the upcoming years, with the world’s major countries and regions seeking to ensure the security of supply and production chains by moving industry “closer to home”, and thus reducing the risk of production disruptions due to reliance on third countries. 

No major changes towards China to be expected

Under Trump, the US-China relations have become particularly hostile. Tensions peaked in 2018, when Trump imposed tariffs on two-thirds of Chinese imports, thus triggering the “trade war” that led to a rather fragile ceasefire after the “phase one” trade agreement was reached at the end of last year. 

However, major changes towards China should not be expected after the election. Today’s perception that China is the biggest threat to the economic, technological and military US dominance is not exclusive to Trump’s administration. There is a bipartisan consensus that China poses a threat to global US positions. Therefore, a critical approach towards China prevails in Biden’s programme as well, where he stresses the need for a tough policy towards China to combat technology and intellectual property theft, state subsidies to companies that distort competition, etc. It can be said that the key difference between the two candidates is not in what policy should be pursued towards China, but how it should be done. In this regard, Biden’s foreign policy is expected to have a much deeper international dimension, seeking to find partners and form a multilateral position to better counterbalance China.

Accordingly, this is likely to lead to a partial continuation of the “Pivot to Asia” foreign policy launched by the Obama administration. Biden’s administration is likely to take a much more active approach in developing trade, investment and defence cooperation with Asian countries. It cannot be ruled out that Biden may bring the US back to the Trans-Pacific Partnership Agreement (TPP), from which the US withdrew after Trump was elected. According to Biden, it is necessary to renegotiate some of the provisions of the existing agreement with a greater emphasis on environmental and labour market standards, yet the TTP is largely seen as a way to offset China’s growing regional dominance. 

Greater US involvement in economic, political and security affairs of Asia-Pacific countries is likely to lead to the growing China’s dissatisfaction. Moreover, the situation may be exacerbated by Biden’s tougher stance on human rights. Given China’s sensitivity to such criticism, seen as interfering in its domestic politics, one can expect further deterioration in bilateral relations.

Different approach to international institutions

Trump’s “America First” policy meant that the US has largely given up its role as a global leader. International institutions and multilateral formats have been heavily criticised. During his term of office, Trump withdrew from the Paris Agreement as well as the agreement with Iran on its nuclear programme development, which is of high importance for Europe. In the heat of the COVID-19 pandemic, the US also withdrew from the World Health Organisation (WHO). During Trump’s term, the activities of the World Trade Organisation (WTO) were disrupted, when the US blocked the appointment of members of its Appellate Body, making it dysfunctional. European diplomats also expressed dissatisfaction with the country’s representation at the Organisation for Economic Cooperation and Development (OECD) which has so far failed to reach an agreement on a digital services tax – largely due to the strong US opposition. Finally, Trump has repeatedly criticised NATO because, in his view, this organisation is more beneficial to Europe than the US.

If Biden were to become president, the US position on international organisations and institutions would change fundamentally. He argues that America needs to regain its global leadership role, stressing the importance of institutionalised cooperation and rules. The current approach to the EU and NATO prevailing in the White House would also change. Trump views the transatlantic relationship primarily from an economic perspective. Accordingly, Europe is seen more as a competitor than a strategic partner. In this regard, Biden strongly supports the EU’s political idea and argues that the EU is not only an economic union but also a guarantee of peace on the continent. He also strongly supports NATO, by stressing its importance in ensuring security and the democratic political system.

US and Europe: less tension but agreeing on trade will not be an easy task

During Trump’s presidency, the transatlantic relationship has become particularly complicated. Import tariffs on steel and aluminium, imposed at the beginning of his term of office, were applied to the EU countries as well. The US imposed duties on French wine, Italian cheese and other goods imported from the EU. Trump has consistently threatened to introduce an import duty on EU cars, based on national security considerations. He has also expressed great dissatisfaction with the EU’s trade policy and market access restrictions, stating that the EU was even worse than China. 

Biden is expected to maintain much closer ties with European countries and seek to normalise economic and trade relations. Accordingly, the threat of an EU-US trade war, which has constantly lingered in the air under Trump, should wane. There is also no doubt that the US and the EU would strengthen policy coordination on climate change, as Biden has promised to rejoin the Paris Agreement. More constructive cooperation between the US and the EU would also be expected under the OECD format (e.g. on digital services tax), within the framework of the Iran agreement as well as in terms of other issues. 

Changes in the White House could also enable the EU and the US to work together towards reforming the WTO in order to make it more efficient. However, it would be hard to expect any significant progress in this area, as Biden’s industrial policy may be largely incompatible with the WTO’s goal of promoting deeper international economic and trade integration. 

Biden’s US industrial policy could also be an obstacle to resume the EU-US negotiations on the Transatlantic Trade and Investment Partnership (TTIP). Moreover, the US is likely to focus more on the Asian region, including potential negotiations on the Trans-Pacific Partnership, since the US interests there are affected not only by economic but also geopolitical factors related to the growing China’s power.

If Biden wins the election, the US foreign policy should become more consistent and predictable. Reduced uncertainty over the future and expected normalisation of the transatlantic relationship, including current trade tensions, could contribute to improving business expectations. In the post-pandemic period, this would be an additional factor that could contribute to the recovery of the EU, US and global economy. 

A more stable international environment would also benefit Lithuania. First, neutralised trade tensions between the US and the EU could lead to a more favourable external environment for a small open economy. Second, small countries always have more opportunities to represent their interests when there are clear international rules followed by all states. Third, greater confidence in international institutions would be beneficial for Lithuania in terms of national security, especially due to Biden’s strong position to meet commitments to NATO.