Page 16 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

“ Politically, the advantages of securing a deal in the short term are there for

both sides, but opportunity for miscalculation is heightened in the long term. ”

The President’s use of the National Emergency Act sets up legal Politically, the advantages of securing a deal in the short term are
challenges in the courts and by Congress over the next several there for both sides, but opportunity for miscalculation is
months. Under the act, Congress can pass a joint resolution to heightened in the long term. Reaching a deal provides a market
attempt to block the President’s action. On 26 February, the boost in the United States and plays well for China’s Xi Jinping for
House passed a resolution to rescind the President’s emergency preserving (for the time being) the relationship with China’s largest
declaration 245-182, sending a significant message. Somewhat market. In the longer term, incentives do not align as well. Xi
surprisingly, all Democratic House members voted in favor, being Jinping’s term as China’s leader will continue well beyond Trump,
joined by 13 Republicans. This is a significant development but the United States may experience a change in administration
considering many of the newly-elected Democrats come from with the 2020 election. From that perspective, the scope of China’s
previously Republican-held districts where immigration/border concessions and commitment can be limited if they decide to
security issues are an important voter matter. “weather the storm.” A less comprehensive deal or a backing away
from certain commitments may take us right back to tariff
The act required the Senate to vote on the measure within 18 days escalation or even significant other economic restrictions down the
of passage, which it passed 59-41. 12 Republican Senators line. This fight could re-emerge right in the heat of the 2020
disapproved of a move to activate national emergency powers, Presidential campaign, which can serve to damage Trump’s
and the Senate vote allowed them to challenge the President economic message or could provide a political incentive to once
on-record. However, the Congressional resolution had to be again increase pressure on China. We expect China trade headlines
signed by the President to become effective, and Congress did and the interplay with domestic politics to remain in focus for the
not have the numbers to overturn the Presidential veto on this foreseeable future, even with an initial deal struck.
issue by a supermajority vote. This will likely lead to a long court
challenge on the use of executive powers to allocate funds
without Congressional approval, which may ultimately stall any KEY TAKEAWAYS:
planned construction indefinitely. • One of the biggest debates we are having with investors
has focused on the president’s willingness to threaten
HOW DOES THIS PLAY INTO U.S.-CHINA NEGOTIATIONS? actions that could have significant economic and
There has been a major shift in the U.S.-China trade dynamic since market consequences versus his repeated use of the
the market sell off in December, which has once again led to a stock market and economy as a gauge of his success.
debate on how much the market plays into President Trump’s deal • The Congressional spending package was seen as
making. As the market was hitting new highs throughout 2018, politically damaging for the president because it
President Trump and others within his administration were did not deliver the win he sought on border security,
repeatedly taking a hardline stance with China, pushing for major prompting a national emergency declaration.
structural reforms and threatening an ever growing list of tariffs and
other punitive actions. More recently, there has been a push to strike • We expect China trade headlines and the interplay
a deal and ease some of the trade tensions. with domestic politics to remain in focus for the
foreseeable future, even with an initial deal struck.

15