US Foreign Policies: America First or Build Back Better?
In a nutshell:
- Trump and Biden are divided in their views and priorities on several foreign-policy issues
- Their stances on engaging and competing with China may lead to a “decoupling” of US-China sectors
- Biden pledges to reverse some of Trump’s policies on immigration and withdrawal from international organisations
- Both are expected to tackle issues in Russia, Middle East and Canada/Mexico
- Markets are expected to move for counters with exposure to defence, oil and gas, Russia and Canada
President Donald Trump and Democratic candidate Joe Biden take fundamentally different views on a wide swathe of foreign policies. In a poll by Pew Research Center earlier in August 2020, 79% of the US registered voters said the economy was very important for their voting decisions while 68% cited healthcare [1]. Foreign policy fell in the middle of the spectrum, with 57% considering it to be very important. Foreign policy is often intertwined with and influenced by domestic considerations such as safeguarding the economy, border control and even climate change. Here, we look at the perspective of each party and how their foreign policies might affect markets.
Trump’s foreign policies during his first term took many turns and twists. These included his high-profile tit-for-tat tariffs against China that started an infamous 2-year trade war. Trump has also enforced a series of tariffs on its European Union allies and renegotiated the North American Free Trade Agreement (NAFTA) into a new United States-Mexico-Canada Agreement (USMCA). He has also had no qualms embracing relations with the likes of President Putin, Kim Jong-un and Saudi Arabian Crown Prince Mohammed bin Salman.
On the other hand, Biden has pledged to reverse some of Trump’s policies and “restore dignified leadership at home and respected leadership on the world stage” [2]. He boasts experience from his eight years as Vice-President in the White House under Obama and Chairman of the Senate Foreign Relations Committee. The crucial question is, is it feasible to undo what the Trump administration enacted?.
China
Trump
Throughout his term, Trump played tug-of-war with China. After pushing forward with Phase 1 of the trade deal, his administration is still struggling to close out a final deal with China. Check out our timeline of US-China trade developments here [3]. In the aftermath of COVID-19, US and China relations have soured and their recent tussle over tech firms has set back any progress. In multiple instances, Trump threatened to punish China for its “unfair trade practices”. He told reporters that “we are going to end the reliance on China because we can’t rely on China”.
While the threat of decoupling looms under a second Trump administration, identifying which businesses could suffer and which benefit is not so straightforward, given the sheer volume of historical trade between the two countries. Nevertheless, one of the sectors that we think may potentially be affected is the trade of rare earth minerals. The US is one of the largest consumers of rare earth minerals and relies heavily on imports from China. A lack of trade will likely hit the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX).
Biden
In his campaign, Biden says he will counter abusive Chinese economic practices. Biden helped to craft and promote the original Trans-Pacific Partnership trade deal. He now wants to renegotiate certain aspects of that. This suggests that tensions with China will not vanish overnight, even if Biden wins. It will be tricky for Biden to consider immediately lifting existing tariffs without imposing any other measures.
Will a Biden win result in a stern but less aggressive stance? We expect Biden to re-evaluate existing levies, turn to US allies to put pressure on China and counter the rise of China through a collective reduction in dependence on it for its supply chains. Asian equities in general could see some near-term relief, though we do not expect a straightforward thawing of relations between the two countries.
Russia
Trump
Trump’s stance on Russia teeters between downplaying allegations of Russia’s interference in the 2016 US election and contradictory penalties on Russia. This has created confusion over how he will continue to handle Russia and President Putin [4]. It is this ambiguity and lack of response that suggest Trump may abstain from eliciting a response from Russia. Or he may soften his stance on Russia over its continued aggression in Ukraine and disregard for NATO. A Trump win, thus, could potentially boost Russian equities. One possible ETF to look at is the VanEck Vectors Russia ETF (RSX). This is a diversified ETF with exposure to Russia and fossil fuels.
Biden
In contrast, a Biden win could be unfavourable for the Russian economy. Biden views Russia as “an opponent” whereas he only views China as “a serious competitor”. Biden has pledged to hold Russia accountable for its interference in the 2016 US election as well as purported Russian bounties to Afghan militants for killing US troops in Afghanistan [5]. He also warns Russia not to meddle in the upcoming 2020 elections.
A Biden win could see collective sanctions with European counterparts on Russia. Should that occur, largely diversified counters such as Yandex (YNDX) could be hit. Yandex specialises in search engines and online services but has since diversified to taxi, e-commerce and media services. The Russian Ruble (RUB/USD) could also take a hit.
Canada / Mexico
Trump
Trump was very critical of NAFTA. He renegotiated with Canada and Mexico for a new USCMA trade deal to replace NAFTA. Previous trade tariffs imposed on both countries were lifted. The USCMA, however, has been criticised for being comparable to NAFTA; the two are perceived to be similar, except for cosmetic changes. Trump has also revived and repeatedly pushed for the Keystone XL pipeline, to the protests of environmental and indigenous activists. If he is re-elected, we can expect a boost for TC Energy Corp (TRP), although political and environmental considerations could still hinder overall progress. TC Energy Corp is in charge of the Keystone pipeline system, whose energy infrastructure cuts across Canada, the US and Mexico.
Biden
Biden has also pledged to revoke Trump’s policy on asylum seeking, stop further construction of the US-Mexico wall and “implement effective border screening” [6]. Further north, Biden’s campaign views resonate better with the Canadians on issues such as Russia, NATO, immigration and climate change. Apart from vowing to stop the Keystone XL pipeline, a Biden win is likely to improve bilateral relations with Canada.
If that happens, Canadian equities and the iShares MSCI Canada ETF (EWC) could get a lift. The EWC mainly tracks the performance of large and mid-cap stocks in Canada. A more aligned view on climate change could also boost the renewable energy sector. Renewable-energy counters with exposure to Canada include Canadian Solar (CSIQ) and Brookfield Renewable Corp (BEPC).
Middle East
Trump
Long highly politicised, the Middle East is subject to heavy external influences and interference. Its historically diverse and complex nature has given rise to extensive conflicts and issues. Trump did find some success in brokering a normalisation agreement between Israel and the United Arab Emirates. This led to a temporary truce and provisionally put on hold Israel’s intention to annex the West Bank and Palestine. However, as the Middle East has many other involved parties, this is likely to be just a small – though welcome – step towards Trump’s second-term plan of winding down on “endless wars”.
Trump has been steadily increasing military spending since assuming office in 2017 [7]. He has affirmed reversing defence-spending cuts by the Obama administration [8] and hinted at increasing the defence budget to further support the Space Force. The Space Force is the sixth branch of the US Armed Services and the first military service to be created since the Air Force was formed in 1947. We can expect defence and aerospace contractors like Lockheed Martin (LMT) and Raytheon Technologies (RTX) to fare well under another Trump term.
Biden
Biden does not seem to support raising the Defence Department’s budget. He thinks the US “needs to make smarter investments in military” and move away from investments that will not be relevant for tomorrow’s wars. Biden may thus prioritise spending on unmanned aircraft, cyberwarfare and IT but is not expected to slash the overall budget much.
Like Trump, Biden intends to reduce the US’ military footprint in the Middle East. He would still “keep a small force there to prevent extremists from posing a threat to the US and its allies”. He promises to cut off aid to Saudi Arabia over its war in Yemen and is in favour of rejoining the nuclear agreement with Iran. A Biden win could potentially see a lifting of oil sanctions on Iran in exchange for a nuclear deal. If that happens, an increase in oil production from Iran may translate into lower oil prices.
References:
1. https://www.pewresearch.org/politics/2020/08/13/important-issues-in-the-2020-election/
2. https://joebiden.com/americanleadership/
3. https://www.phillipcfd.com/us-china-trade-war-part-2
4. https://www.bloomberg.com/news/articles/2020-09-25/russia-and-joe-biden-if-trump-loses-it-s-probably-bad-news-for-putin
5. https://edition.cnn.com/2020/09/29/politics/trump-vs-biden-2020-election-policies/index.html
6. https://joebiden.com/immigration/
7. https://www.moaa.org/content/publications-and-media/news-articles/2020-news-articles/election-2020-presidential-candidates-answer-moaas-questions/#defense
8. https://www.bbc.com/news/election-us-2020-54060026
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