The Democrats’ midterm victory raises questions about the direction of the US economy, but it is unlikely to produce a sweeping reversal of President Donald Trump’s fiscal, regulatory or trade policies. Trump retains executive powers and the ability to veto legislation, limiting how far Congress can change course, according to economists cited in the report.
The result could, however, increase political pressure to lower some tariffs as the costs for American consumers draw more attention. Republicans lost support in states with substantial trade ties to Canada, while Trump’s effort to help Republican Senator Susan Collins’ re-election bid in Maine through tariff relief failed. Duties on aluminium are considered particularly damaging to US industry.
There is also a possibility that the administration will take a tougher approach. The US government has been investigating more than a dozen countries over alleged labour-rights violations and overproduction in sectors including chemicals and automobiles. With less need to prioritise inflation after the election, Trump could intensify his tariff policy, the report says.
Economists expect limited room for Trump to manoeuvre on trade and China, but not a radical change in direction. The report notes broad bipartisan scepticism toward free trade: former Democratic President Joe Biden retained many tariffs imposed during Trump’s first term. Democrats may seek closer cooperation with European and Asian allies to counter China, though it is unclear whether they can persuade Trump to follow that approach.
The election is also unlikely to resolve the US budget deficit. Both parties have been reluctant to propose measures to curb government borrowing, and spending plans backed by Democrats could push deficits higher if they win sufficient support.
Investors also face potential fiscal uncertainty before the new Congress takes office on January 3. Federal government funding is due to expire on December 11, while Trump is seeking an increase of nearly 60% in defence spending. The debt ceiling could become an issue again around the middle of next year, raising the prospect of a budget standoff, a government shutdown or a debt crisis.
The Democratic gains could also affect the expansion of artificial-intelligence infrastructure. Construction of new data centres has been halted in some places, and candidates seeking to slow the sector’s growth won in several states, including Texas. State tax breaks and subsidies for data centres could be reconsidered, while requirements for their energy and water use may become stricter.
Democrats are expected to use congressional investigations as another tool. Robert Garcia is set to take over the House Oversight Committee in January. The report says he is already examining an alleged deal involving former US ambassador to Greece Kimberly Guilfoyle and a Republican donor, and has sought information from Meta CEO Mark Zuckerberg over claims that the company suspended accounts critical of Trump. Elon Musk could also face scrutiny over Starlink’s use in Ukraine and his role in the Department of Government Efficiency and the closure of the US Agency for International Development.
Other potential inquiries could examine allegations of corruption in the White House and within Trump’s family, as well as claims that companies received favourable treatment in exchange for favours. The report says businesses involving Trump’s sons have received significant government support. Garcia responded to the election results on social media with the words: “Lawyer up.”
Trump will also need to reach compromises with Democrats in the Senate to fill government and judicial positions. The report notes that some members of his cabinet could leave after the election defeat and that Federal Reserve Chair Jerome Powell is approaching the end of his tenure.
Sources: FAZ.