Moritz Schularick, president of the Kiel Institute for the World Economy, views the United States midterm elections as a major turning point. According to the economist, this marks the beginning of the end for Donald Trump and his policies. He noted that the largest beneficiaries are American democracy and the rule of law. From an economic standpoint, he considers this positive because the system of checks and balances functioned effectively. Schularick believes that Trump’s scope for action in trade and China policy is certain to diminish, though he does not expect a radical policy reversal.
Clemens Fuest, president of the Ifo Institute, also shared his views. Given that the opposition Democrats gained a majority in both houses of Congress, a political stalemate is likely to emerge between the Republican president and the Democrats. Fuest explained that while Trump could block Democratic legislation using his veto, the Democrats lack the two-thirds supermajority required to override it.
Regarding economic policy, Fuest stated that neither further deregulation nor the tax cuts demanded by Republicans can be anticipated. Conversely, he also suggests that a shift toward higher taxes or increased social benefits is unlikely. Unfortunately for Europe, Fuest warned that relief in US trade should not be expected. He added that Trump retains executive powers and might face pressure to lower tariffs, as the economic costs of protectionism become politically more visible among American consumers. However, Fuest also speculated that given his domestic limitations, Trump might even resort to using tariffs more frequently than he has previously.
Achim Wambach, president of the Center for European Economic Research in Mannheim, noted that while Democrats are generally more interested in international cooperation than Trump, many within the Democratic Party view trade restrictions and subsidies as crucial tools for safeguarding against economic dependence. Wambach cautioned against the notion that a Democratic majority would lead to a fundamental return to free trade in the U.S.
In terms of China policy, Fuest confirmed there is a bipartisan consensus in the U.S. to treat China as a strategic and economic rival whose influence must be curtailed. The Ifo president expects that the Democrats will focus more on cooperating with European and Asian allies to limit China’s power, though he acknowledged that it remains uncertain whether they could successfully influence Trump to do so.
Finally, Schularick and Fuest expressed skepticism about the possibility of the U.S. decisively limiting its budget deficit following the midterms. Fuest reminded observers that President Joe Biden and the Democrats had already significantly increased US national debt. Schularick added that deficits could actually rise if certain Democratic spending plans managed to gain enough legislative support.
