What the U.S. Election Means for Country Risk

The Implications of a Biden or Trump Win for the Indo-Pacific, the Middle East and Turkey, Russia, and Latin America


As we offer this white paper, with the U.S. Presidential election mere days away, the world is anxiously anticipating the result—with good reason. The clear distinction in the policies and world views of the two candidates promises vastly different paths not only for the U.S. but for its many allies and adversaries—paths that will greatly affect the economic risks and outlooks of those countries. What will another Trump term mean for Turkey? How will Biden view Brazil? From Mexico to the Middle East and from the IndoPacific to Iran, this paper is a guide to what is possible and probable under these divergent paths.

As this paper shows, country risks around the world have increased since the 2016 U.S. elections as a consequence of abrupt and significant changes in U.S. economic and foreign policy. Several trade pacts were re-written or dropped, the U.S. unilaterally withdrew from the Paris Agreement, national security investigations into exports were launched against allies and adversaries, a full-blown trade war was triggered with China, U.S. sanctions have been sharply expanded, and geopolitical uncertainty from the Middle East, South Asia, and the Korean peninsula have risen. Some of these developments have already had a material impact on important economies, trade relations, and financial markets, while the longer-term impacts of others are still unknown.


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Country Risk: The Impact of the U.S. Presidential Election on Countries Around the World

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. 

Canada

If Biden wins:

If Joe Biden wins the U.S. Presidential election, Canada would likely benefit from fewer trade tensions, more orthodox diplomatic relations, and increased predictability in U.S. policy. Biden and Prime Minister Justin Trudeau, leader of the Liberal Party, would be more politically aligned.  Canada's economy is highly trade reliant, and the U.S. is by far Canada's biggest trading partner.  Therefore, the effects on trade policy of the U.S. 2020 presidential elections will by far be the most impactful to Canada.  However, there would be areas in which Canada would not benefit from a Biden election.  Biden has stated he would reverse President Trump's Keystone XL pipeline approval. Former President Barack Obama rejected the portion to be in the U.S., then Trump approved it, but it has been held up in courts and still has not been built.  President Trump has also been more open to allowing U.S. residents to import pharmaceuticals from Canada at cheaper prices.  A Biden victory could bring reversal of this stance, which would affect Canada's pharmaceutical industry.

If Trump wins:

Much of the trade impacts seen since President Trump came to office are now codified in the USMCA.  However, surprises continue.  As recently as August 6, Trump surprised the world by announcing reinstatement of aluminum tariffs that would include Canada’s aluminum exports.  This exemplifies the general practices of Trump not working through traditional channels that enable behind-the-scenes negotiation and predictability needed to support long-term investment.  Canadian sectors affected by Trump’s trade policy include Canada's auto industry; Canada’s dairy industry; and Canada's lumber industry, which are subjected to tariffs that raised disputes still unresolved even after passing the USMCA. 

Russia

If Trump wins:

Russia has a lot at stake in the 2020 U.S. Presidential election, with a clear divide having formed between Republicans and Democrats regarding the threat posed by Russia since the 2016 elections. With Trump having been reluctant to take any significant actions against Russia, including to condemn Russian actions as set forth by the U.S. intelligence community, a second term for Trump would likely see the U.S. continue to take a laissez-faire stance and diverge further from its traditional allies on its policies towards Russia. In addition, Trump’s seeming admiration of Putin’s tactics, his unwillingness to take any meaningful action to punish Putin’s regime, and his various statements creating a moral equivalence between U.S. and Russian political values have allowed Russia to justify its own actions in various domestic and international arenas.

If Biden wins:

A Biden presidency would likely have significant impacts on the course of U.S. policy towards Russia, with this shift more pronounced should the Democratic Party take both houses of Congress. Although, a Biden victory may also remove current limitations Republican policymakers may perceive on their ability to take action against Russia.

Biden’s political career has included a focus on foreign policy with a liberal internationalist bent. This includes working through international organizations and the international legal order. His administration would likely take a much harder line against Russia, providing support of NATO expansion and greater defense of current NATO members against Russian incursions or interference, and/or maintaining Russian suspension from the G8 due to violations of international law in the Ukraine.

Following a carrot and stick approach by taking the lead with allies imposes costs on Russia for its violations of international law and other countries’ sovereignty, including by maintaining and potentially imposing new sanctions on Russia and Russian oligarchs who support Putin, in contrast to actions by the Trump administration to try to lift existing sanctions and oppose newly planned sanctions. This would include opposing Russian interference in the Ukraine, Balkan States, Syria, etc.

In addition, Biden has put forth a proposal to label authoritarian resurgence as a key foreign policy priority for his administration, which would theoretically put the U.S. in a position to confront the current Russian administration on a multitude of additional policy issues. To the extent that the U.S. is able to rekindle existing alliances and build a coalition of the willing, there could be significant pressure brought to bear on Putin’s administration.

China

The outcome of the U.S. Presidential election may make the biggest difference to East Asia and China but neither outcome offers easy hope of improved relations between the two countries. The big question is whether the worsening trend in the US-China relationship over the last three and a half years can be altered or if it has reached a kind of self-perpetuating momentum. Trump portrayed China as a tough economic competitor that doesn’t always stick to the rules at the beginning of his term; currently, he portrays China as incorrigibly adversarial and responsible for any number of the US’s ills (e.g. the extent of the US COVID-19 outbreak).  President Trump has also invited a group of extreme China hawks into the White House who have re-calibrated China policy to relentless confrontation at every level. The combination of Trump’s rhetoric and the shift to an across-the board anti-China stance among the Washington establishment (intelligence, state department, defense etc.) has led to a similar shift of mainstream political and public perception.   For many, China has gone from being viewed as an emerging competitor to posing an existential threat to the US and its way of life.  

Joe Biden on the other hand, as recently as May 2019, preferred to characterize China as still far behind the US and the challenge posed by its rise, as one of many foreign policy challenges but certainly not the most important. For example, climate change and relative U.S. economic decline loomed far larger. However, the public shift in opinion especially over recent months has risked making that position look naïve. Therefore, Biden has pivoted to a position on China which – rhetorically at least – has become almost indistinguishable from Trump’s about the severity of the problem posed by China. The difference lies in the mode in which he intends to deal with the perceived threat.  

If Trump wins:

Scenarios of relations with China in a second Trump term require less discussion because they will likely be some kind of extension of the trends of the first term. The base case is a continuation of Trump's first term focus on “trade numbers” with much accompanying rhetoric and bluster.  There would be talk of a Phase 2 trade deal but chances of that are quite slim due to the deterioration of relations since Phase 1 and the low probability of the Chinese fulfilling their obligations under that deal. At the same time, hawks in the cabinet continue to sharpen policies on defense and intelligence, but particularly economic and technological decoupling. A continuous deterioration of the relationship does not lead to actual conflict but is clearly headed that way.  

There is however a tail risk of a second term Trump supercharging the China confrontation with an even more aggressive push on multiple fronts. Catastrophic economic decoupling and even military skirmishes especially in the South China Sea become a distinct possibility. This scenario becomes more likely if Trump wins the coming election by escalating tensions with China, and as a result comes to believe that he has received a hard-nationalist mandate. Confronting China becomes both his political fuel and his political objective. The unlikeliest scenario is that of Trump getting exhausted or bored of constant confrontation with China and focuses instead on other topics. He appoints a new cabinet with fewer China hawks. This results in slight improvement in the tone of the relationship but is essentially a mini détente. This scenario becomes slightly more likely if the COVID-19 situation gets worse again. Trump may simply lack the political capacity/resources to continue maximalist confrontation with China.   

If Biden wins:

Biden’s China policy is far from clear cut and is still evolving. However at the core his approach would likely seek to recalibrate US policy, de-emphasizing public rhetoric and “trade wins”, focusing instead on multilateral economic containment of China in which some of its more controversial policies (e.g. IP theft) would be opposed by a US-led group, but in a way that is less disruptive to the global economy. He would also seek to leverage his personal relationship to Xi. While Biden is very likely to attempt to revive the post-war US-led coalitions, this model faces some quite significant challenges, such as US and European growing disagreements that pre-date Trump; mistrust from Asian allies regarding the extent of US commitment to Asia in the long term; and a China that is unwilling to engage even when faced with broad-based pressure.  In addition, both the US and its allies may have to come to terms with the ongoing diminution of relative US power. The US still enjoys primacy in a number of aspects, including the ability to project military power over large distances, its position at the very apex of the development of key technologies (although this is also under threat), and through its control of the US dollar. However, in relative terms, it simply no longer has the broad-based economic might, the administrative capacity (as demonstrated with COVID-19) or the moral high ground it once enjoyed.  

There is also an upside scenario where China turns out be interested in re-setting relationships with the rest of the world in the attempt to avoid having to face another Trump in the future. In this scenario, the US and its allies strike some sort of uneasy “grand bargain” with China. Great powers have been able to do so at times in the past, think “detente”, “concert of Europe” or the “holy alliance”. In some cases, delaying deterioration of relationships for decades. Unfortunately, a formal division into spheres of influence is unlikely, mainly for military reasons. China will not sign anything that accepts continued US military presence on it its doorstep and the US is unlikely to loosen its commitments to Taiwan, which would be a key Chinese demand. More limited agreements such as the 2015 Obama-Xi cyberwarfare ceasefire are eminently possible. However, such agreements are also unlikely to last if that one did.

Whom Would China Prefer?

Throughout the first three years of the Trump presidency, a counterintuitive view took hold in Beijing, namely that Trump was good for China. Gradually it was becoming clear that Trump was unable or unwilling to inflict any real immediate economic damage on China. The trade tariffs were largely self-defeating, and despite threats to the contrary, there was going to be no abrupt decoupling.  However, Trump’s wholesale undermining of US alliances in Europe and Asia as well as his weakening of multilateral institutions (WTO, WHO etc.) has affected China far more than the headline grabbing rhetoric and minor trade balance shifts.  It has become increasingly clear that China has grown powerful enough to resist bilateral economic pressure from any country including the US, and the only hope left of containing China is by setting clear limits and enforcing those limits with a united global front.

Since the pandemic broke out at the beginning of the year, Trump’s rhetorical attacks have stepped up, US naval operations in the South China Sea have increased and the pace and aggression of techno nationalist decoupling has accelerated (TikTok and Wechat bans).  To be fair, the most destructive initiatives do still seem to be on hold; Chinese leaders need to engage with the possibility that Trump could set something in motion from which it is impossible to step back.

Hence, the Chinese government probably has no strong preference of presidential candidate right now. A Biden presidency could be the beginning of a much tougher international environment for China (if the revival of US alliances is successful). On the other hand, a second Trump term is looking more and more like it could do irretrievable damage, not only to the bilateral US-China relationship but to the international environment that has been instrumental to China’s success.

European Union, United Kingdom, and NATO

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 US 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 US 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 US 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 US and the EU.