116th Congress Begins during Longest Government Shutdown in History
The 116th U.S. Congress began on Thursday, January 3, ushering divided government back into Washington after two years of unified GOP control. The House of Representatives elected Rep. Nancy Pelosi (D-California) to be the Speaker of the House for the second time, ending years of speculation and controversy about whether the 78-year-old Pelosi could command support among her Democratic colleagues to once again lead the House. She won the election for Speaker with 220 votes (out of 430 who voted). Pelosi also got a rules package through the House with only three Democratic defections — another early signal of her ability to unify the most diverse House majority in history.
Pelosi took her gavel during what is now the longest government shutdown in American history, with 800,000 federal employees either working without pay or furloughed. Today marks the 24th day, and it remains unclear when it will end. The 116th Congress is also the first to begin during a shutdown — sapping lawmakers of precious time and energy needed to develop and push forward legislative ideas. Once funding is restored, however, the bipartisan legislative agenda for 2019 will likely include the following:
- Bill to implement the new North American trade agreement. Congress must ratify the U.S.-Mexico-Canada Agreement (USMCA) in order for the agreement to go into effect. Trump will likely cancel NAFTA, which would represent the first time the United States has left a free-trade agreement, and would give Congress six months to approve a replacement deal. Democrats will likely embrace the deal if enforcement of labor and environmental standards is strengthened. Once in effect, the USMCA will force auto manufacturers to use higher levels of North American content to qualify for duty-free treatment. German automotive companies without manufacturing capacity in North America could become disadvantaged. Likelihood of passage: High
- Bill to Lower Drug Prices. The Trump Administration and Congressional Democrats both want to play hardball with the drug manufacturers and other actors in the pharmaceutical supply chain. This is a new area of bipartisan alignment, and Trump’s aggressive stance against the industry will bring other Republicans along. Elements of a bipartisan bill could include mandatory price transparency, strengthening antitrust enforcement of agreements between brand and generic companies, and removing the prohibition on drug importation — which the new Senate Finance Committee Charles Grassley (R-Iowa) support. Trump has also proposed to set prices based on an international pricing index, which is embraced by Democrats. Likelihood of passage: High
- Russia sanctions. Congress will likely revisit Russia for the first time since August 2017, when it passed sweeping bipartisan anti-Russia sanctions, virtually unanimously. A new package of sanctions would presumably seek to address Russia’s interference in prior and future U.S. elections, as well as its role in the ongoing crises in Ukraine and Syria. Congress could look to elements of the principal bills filed in the last Congress (the ESCAPE Act, the DETER Act, and the DASKA Act), which also include mandatory penalties for businesses facilitating the construction of the Nord Stream 2 pipeline between Russia and Germany. Senator Mitt Romney (R-Utah), now a member of the Senate Foreign Relations Committee and a supporter of a “unified and strong Europe,” will likely play an active role. Likelihood of passage: High
- Budget. Congress will likely seek to bypass mandatory budget caps enacted in 2011, for the fourth time. Congress has done this three times before (in 2013, 2015, and 2018), and each time with more new spending and fewer offsetting spending cuts. The bill would allow Congress to continue historically high levels of both military and non-military spending in 2020. Likelihood of passage: High
- Immigration. Congress continues to struggle with its years-long effort to reform U.S. immigration. Immigration is at the core of the current shutdown; President Trump is insisting that Congress add $5.7 billion to a spending bill to build a border wall on the U.S.-Mexico border, which Congress has not delivered. Democrats have offered $1.3 billion for border security, ruling out its use to construct a physical barrier. In February 2018, the White House killed the most recent bipartisan deal that had a shot of passage, which contained $25 billion for border security, and legal status for young people illegally brought to the United States as children. One can envision some version of an immigration deal ending the shutdown, or else passing at a later date. Likelihood of passage: Medium
- Infrastructure. A bill to spend $1 trillion or more to rebuild American infrastructure was a central campaign theme of both President Trump in 2016, and House Democrats in 2018. The U.S. Chamber of Commerce, America’s most powerful business lobbying group, also supports it. Senate Majority Leader Mitch McConnell (R-Kentucky), however, has cast doubt on whether Congress can pay for the proposal. Likelihood of passage: Medium
- Data Privacy – Congress wants to catch up to both California and the E.U. in their efforts to protect the use of online personal data, and invested substantial bipartisan time and effort holding hearings and drafting policy in the 115th Congress. One scholar at the Brookings Institution has a comprehensive summary here. Likelihood of passage: Medium
Status of Trade Agenda
U.S.-China. Trade delegations from the United States and China last week met formally (Jan. 7 through Jan. 9) in Beijing, for the first time since their 90-day detente reached at the G20 in December. The parties added the third day to the meeting spontaneously — viewed as a sign of progress toward an agreement. In a statement released after the talks, the U.S.T.R. described “China’s pledge to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services from the United States.” This will be of particular interest to American farmers, who have lost Chinese markets and whose relief payments have stopped during the government shutdown.
The deadline for a deal remains March 2. U.S. Trade Representative Robert Lighthizer (who is leading the talks) continues to push a hard line, urging President Trump to accept a deal only if China makes substantial concessions that are verifiable and can be monitored over time. Trump, on the other hand, is wobbling as pressure mounts from Wall Street to accept a less ambitious deal that he can nonetheless market as a win to the public, easing market turmoil and saving face. Although Trump has shown ability to withstand widespread public opposition, he is “obsessed with the market” and is eager to get a deal that will boost U.S. stocks, which experienced historic volatility in December. Some of Trump’s key advisors (e.g. Treasury Secretary Steven Mnuchin and Economic Advisor Larry Kudlow) are more Wall Street-oriented than Lighthizer and may pressure him to accept a less ambitious deal than Lighthizer is pushing for.
Ultimately, we still believe that Lighthizer’s vision will predominate, but that extracting enough concessions from China to meet U.S. demands by March 2 is unlikely. This could cause the parties to agree to an extended deadline, or else lead to the imposition of new tariffs. A Chinese delegation is expected in Washington on January 30 to continue talks. Notably, the current government shutdown will cause the U.S.T.R. to furlough most of its staff today.
U.S.-Europe. E.U. Commissioner Cecilia Malmström traveled to Washington last week for the fifth round of meetings with Lighthizer and their Japanese counterpart Hiroshige Seko, on modernizing rules for the WTO — in particular in the areas of forced technology transfer and industrial subsidies. Malmström said in a speech Thursday that the European Commission is almost finished drafting a negotiating mandate to put to the EU member states, which would authorize the Commission to enter into trade talks with the United States. Until the mandate is agreed to, the two parties are limited to their ongoing efforts to reform the WTO and to harmonize regulatory standards — and can’t begin talks about tariffs on industrial goods.
Europe and Germany are still anticipating the possibility of automotive tariffs from the U.S., based on national-security grounds. The sudden departure of James Mattis as Secretary of Defense is notable, given that he opposed using national-security tariffs for allies. U.S. Commerce Secretary Wilbur Ross kept speculation about the tariffs alive over the Christmas holiday. We continue to believe, however, that the threat of automotive tariffs is merely a lever to extract concessions, and that the likelihood of the White House actually imposing them on automotive imports from Germany and E.U. countries is low.
Anti-Russia Sanctions
The U.S. Treasury, Office of Foreign Asset Control (OFAC) is set this week to terminate sanctions imposed in April 2018 against aluminum manufacturer Rusal, as well as two other companies belonging to Russian oligarch Oleg Deripaska — En+, and JSC EuroSibErgo. Absent Congressional intervention, the sanctions are set to lapse on Friday, January 18, which will stabilize the global supply chain of aluminum, to the benefit of its customers (e.g. BMW AG and Airbus SE), as well as over 1,000 workers in Germany in Rusal plants. Though imposed in April 2018, OFAC had delayed their effective date while Deripaska relinquished degrees of control and ownership over the companies.
Congressional Democrats are questioning OFAC’s decision, given Donald Trump’s ties to Russia. Senate Minority Leader Chuck Schumer (D-New York) has introduced legislation to block OFAC’s decision, and House Democrats summoned U.S. Treasury Secretary Steven Mnuchin to Capitol Hill on Thursday for a classified briefing — providing an initial glimpse into the vigorous oversight that the Trump Administration can expect over the next two years. Schumer plans to force a vote on the issue this week in the Senate.
Notably, the European Union and Germany have voiced their support for the Administration’s decision in a letter to Senator Schumer. Two former OFAC officials also released an analysis on Friday positing that the delisting is appropriate and should not be viewed as a pro-Russia move.
State of the Union Speech
Donald Trump will deliver the annual State of the Union speech on Tuesday, January 29. Among items important to German business, Trump is expected to ask Congress to approve the U.S.-Mexico-Canada trade agreement (USMCA). Trump is also expected to ask Congress for new authority to prosecute his trade agenda, which Congress will reject. Under the U.S. Constitution, Congress has the power to regulate commerce with foreign nations, and many (including Senate Finance Chairman Chuck Grassley) believe that Congress should delegate less power to the White House — not more.