SINGAPORE (July 21): Despite investors fearing tax hikes from a Biden presidency, OCBC economist Wellian Wiranto does not foresee any drastic market correction should the Democrats retake the White House in November. Higher taxes would help balance the US budget deficit at a time of greater fiscal need and stabilise US foreign policy behaviour. 

In line with the Democratic Party’s pro-redistribution economic stance, Joe Biden is keen on increasing corporate income tax rates from 21% to 28% following Trump’s tax cuts in 2017. He also intends to raise the top income tax rate from 37% to 39.5% and  push for a US$15/hour ($20.86) minimum wage for American workers. 

“From the market perspective, in and of its own, the tax hike might be deemed as a red flag. For specific sectors that operate diametrically opposite from the green initiative – such as coal, oil and gas, etc. – Biden’s win might be deemed less favourable too,” admits Wiranto. 

The negative impact of planned tax hikes could, however, be counterbalanced by other more positive aspects of Biden;s platform. Biden’s “Build Back Better” plan, which has allocated US$400 billion to government purchases of American goods in his first term and US$300 billion in research and development on technology and clean energy. He is also planning to invest US$2 trillion on infrastructure renewal and energy in order to fight climate change and spur growth.  

Wiranto also expects greater trade and geopolitical stability, as Biden is likely to pursue a less belligerent attitude towards trade relations should he become president. While the US and China are unlikely to become friends immediately under a Biden presidency, unilateral trade escalations a la Trump will become less likely. Biden is likely to be a more “normal” US president and exercise greater caution in using tariffs or other tough tactics. 

A bipartisan belief in a “China threat” will make it difficult for Biden to reconcile with Beijing. In a divided US political system, one of the few things that Democrats and Republicans can agree on is that China is currently the greatest threat to the US. While a Pew Research survey found that 72% of Republicans had an unfavourable view of China, Democrats were not far behind at 62% -- significantly more than the 51% and 47% respectively in 2018. 

“Whereas Trump has pursued its foreign policy based on an America-first, go-it-alone, oftentimes erratic strategy – imposing tariffs not just on China but also its traditional allies alike – Biden’s administration would likely opt for a more predictable approach. He is likely to pursue his agenda via the multilateral forum, via WTO or by corralling US allies into an united (and potentially more effective) front,” predicts the OCBC economist. 

Interestingly, some Chinese officials have indicated that they prefer a second term for Trump rather than a Biden presidency precisely due to the former’s erratic and alienating foreign policy. “If Biden is elected, I think this could be more dangerous for China, because he will work with allies to target China, whereas Trump is destroying U.S. alliances,” Zhou Xiaoming, a former Chinese trade negotiator and former deputy representative in Geneva, tells Bloomberg. 

See: Chinese officials want four more years of Trump 

Fortunately for investors, Wiranto notes that Biden may be open to rejoining the Trans-Pacific Partnership (TPP) following a renegotiation of terms to balance China’s economic influence in Asia. Still, such a step is likely to be taken out of a desire to rebuild manufacturing and does not represent a return to the pro-free trade consensus of the 2000s, with current antipathy towards free trade making open borders difficult to advocate for. Still, a Biden presidency would be the best chance for the global economy to return to some semblance of free trade going forward. 

But it is still debatable if Biden will be able to win in November despite taking a commanding lead in current polls at 49.3% vis-a-vis Trump’s 40.3% of the vote. The race will boil down to Biden’s support in key swing states - Hillary Clinton lost the election in 2016 despite winning the popular vote as she lost seven swing states and thus, 100 electoral college votes. The accuracy of polls are also in doubt as they failed to predict Brexit and Donald Trump’s victory in 2016. 

“For the US race, in particular, polls had predicted Hillary Clinton’s wins in key Midwestern states of Michigan, Pennsylvania and Wisconsin. Indeed, out of the 104 polls conducted in those states… only 1 showed Trump coming ahead,” says Wiranto. These swing states will likely also decide the outcome of the 2020 election too. Biden now leads Trump by as much as 7% in states, with the latter also facing tighter races in once friendly Ohio, Georgia and Texas. 

Having previously ridden on strong US economic performance since his inauguration in 2017, Trump has now lost the feel-good factor of general prosperity as a result of the Covid-19 pandemic. The US looks set to enter a deep recession, with Bloomberg predicting a 10% contraction in 2Q2020 and a further 6% contraction in 3Q2020. Historically, incumbents who face recessions near the end of their terms like Jimmy Carter and George H.W. Bush fare badly at the polls, with both men subsequently becoming “one-term presidents”. 

“Still, if the US economy somehow managed to bounce back more sharply than expected in the coming months... the feelgood factor of that bounce...might well help to turn the tide for Trump,” remarks Wiranto. In spite of his disastrous handling of the US’s Covid-19 response, poll respondents by and large continue to prefer Trump’s economic policy over that of his opponent. Trump could also benefit electorally if his administration’s investment in vaccine research subsequently produces a viable vaccine to end the Covid-19 pandemic. 

While a Trump rally seems like a distant possibility at best at the moment, a circumspect Wiranto prefers to hedge his bets for now. “If 2020 has taught us anything, it has been a year of unpredictability, so I suppose anything is fair game,” he muses.