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Country Risk: The Impact of the U.S. Presidential Election on the European Union, United Kingdom, and NATO

As American citizens home and abroad cast their votes for the next President of the United States of America, the rest of the world must wait for results along with those who participated in the election. There remains a lot that can happen between now and the final outcome, and this group of sovereign rating experts are not in the business of predicting political outcomes.  We are, however, keenly interested in how a second term for Donald Trump versus a Joe Biden administration could impact economic, social, and foreign policy. This piece is a composition of views from the RMA Country Risk Steering Committee on how their differences in policy and approach could impact other countries or regions. 

The development of relations between the U.S. and Europe (taken to mean the EU and the UK for current purposes) will hinge on a variety of trade, economic, and geopolitical issues, each of which is either already a source of tensions or could become one in the future. These include, but are not limited to, various disputes on trade matters; the future of NATO; the degree to which the U.S. and Europe coordinate their approach to dealing with China, Russia, etc.; the UK’s positioning between the EU and U.S. orbits after Brexit; and the coordination of macroeconomic, ESG, and healthcare policies in the post-COVID-19 era.  To an extent, these are structural issues and pressure points, which will inevitably emerge regardless of which U.S. administration is in charge after November 2020. The containment of COVID-19 and partial economic recovery being in place is also critical in formulating a foreign policy view.

If Trump wins:

A second (and last) Trump term would likely bring a doubling down in the adversarial tone taken toward the EU, as well as an acceleration in punitive actions and retaliations over several issues (e.g., EU agricultural subsidies, proposed tax on digital services, Airbus versus Boeing). The U.S. administration could well continue holding up WTO processes like the appointment of judges to the appellate court and of a new director-general, which could throw further sand into the machinery of global trade.

Trump has threatened to leave the military alliance on multiple occasions, suggesting NATO is a financial drain on the United States. In May 2020, under the Trump presidency, the U.S. announced its withdrawal from the Open Skies Treaty, a 35-member treaty aimed at improving transparency and trust, and originally negotiated between NATO and Warsaw Pact countries. More recently, Trump’s announcement to withdraw close to 10,000 troops from Germany has served to further weaken the transatlantic alliance, attributing the action on Germany’s lack of defense spending.  A Trump win would mean continued criticism of NATO partners that they are not pulling their weight, although this is likely to be kept in check by continuing problematic relations with Russia, where Vladimir Putin is set to remain in power indefinitely, and China, which will become ever more assertive in the geoeconomic and technological spheres. Any U.S. administration, including Trump’s, will need to search out common ground with Europe, which will remain the U.S.’s closest ally in the face of threats elsewhere.

In regard to relations with the UK, Trump’s re-election would undoubtedly give a short-term boost to prospects for closer U.S.-UK relations (including trade). However, this would also hit against considerable constraints, and would be very much a function of factors such as the shape of UK-EU relations, opposition from members of Congress, etc.

Trump would also continue his general approach of seeking zero-sum, go-it-alone U.S. policies while leaving some room for deals and compromise in other fields. Coordination on ESG policies with the EU is unlikely, as the latter has taken a distinctly “greener” approach. Recent decisions to buy up entire global medicinal stocks to combat the U.S. COVID-19 outbreak and possibly pulling out of the WHO would point to a unilateral approach in the search for vaccines for the current and future strains of coronavirus.

If Biden wins:

Bearing in mind the fundamental constraints outlined above, a Biden presidency would undoubtedly enact a clean sweep of key economic and trade officials, and a more malleable U.S. trade rep than Robert Lighthizer would probably contribute to a less adversarial tone in trade talks with the EU. However, Biden’s allegiance would be with powerful U.S. industrial and agri-business lobbies, which have been agitating against EU trade practices for years. The Biden administration would probably seek to unblock WTO bottlenecks and defuse disputes in a multi-lateral setting, but significant concessions in order to resolve disputes with the EU and advance a comprehensive trade partnership would be challenging.

A Biden administration would also strive to maintain positive relations with the UK, although relations with the current Tory government would be more distant than under Trump. A comprehensive deal with the UK would not “go to the back of the queue” as under Barack Obama, but clearly there would be less urgency, and in fact it is very possible that behind the scenes Biden would seek to nudge the UK towards closer relations with the EU.

Biden would adopt a more collaborative and multilateral approach to a host of internationally sensitive issues, and would likely find it easier to seek common ground with both the EU and the UK in dealing with China and Russia.   

However, one possibly little-explored subject is macroeconomic policy coordination. Beyond 2020, the U.S. (like other countries) will be left with an increased debt load as a result of policies to combat the economic fallout from COVID-19, but a Biden administration may want to boost public spending further. At that point, the Fed’s policies may prove insufficient to cater for the administration’s fiscal wishes and there may be a concerted push for the Fed to enact even more unconventional policies to finance the huge federal deficit (helicopter money, MMT, etc.). That could, in turn, weaken the dollar at a time when other blocs (namely the Eurozone) try to export their way out of recession/weak growth, resulting in friction between the U.S. and the EU.