Cover Story: The economic impact of a Biden presidency

US President Donald Trump may not have exhausted all of his legal avenues to challenge the results of the recently held US presidential election, but most countries acknowledge Democratic Party nominee Joe Biden as the clear winner.

This is evident from the congratulatory calls the president-elect has received from world leaders such as UK Prime Minister Boris Johnson, Canadian Prime Minister Justin Trudeau, French President Emmanuel Macron and German Chancellor Angela Merkel.

If Biden were indeed to be in the Oval Office come Jan 20, he will be a president for unprecedented times as he will face the mammoth task of tackling the Covid-19 pandemic, the seriousness of which President Trump has repeatedly downplayed.

Tackling the pandemic

Experts believe the Biden administration is definitely better suited to handle the pandemic compared with its predecessor.

“The Trump administration does not have a strategy to defeat the pandemic. They have denied its importance, they have downplayed the role of science and tests, and they have assumed that herd immunity was a solution (without explicitly saying so),” says INSEAD professor of economics Antonio Fatas.

On the contrary, the Biden administration, he says, is likely to have a game plan that will place emphasis on masks, testing, incentives to isolate and minimising the possibilities of the disease spreading but without shutting down the economy. And without a doubt, it will rely on scientists.

“These strategies have worked in other countries and the US has the ability to scale up testing in a way that would make a significant difference. In addition, vaccines are coming, so efforts [need to be taken] to ensure approval, availability and then implementation,” says Fatas.

On the vaccine front, pharmaceuticals giant Pfizer announced last Monday that its experimental vaccine developed with BioNTech was more than 90% effective, making them the first to show successful interim data from a large-scale clinical trial of a coronavirus vaccine.

Gregory Poling, senior fellow for Southeast Asia and director of the Asia Maritime Transparency Initiative at Washington-based think tank Center For Strategic and International Studies, says he expects one of the first things the Biden administration will do is engage with the World Health Organization (WHO). This is in contrast to Trump’s announcement in July that the US will be withdrawing from the WHO.

“Hopefully, [the Biden administration] will commit to supporting the COVAX alliance to ensure access to Covid-19 vaccines for developing countries. This will be especially important to ensure that states like Indonesia and the Philippines, which have had little success in controlling the virus, will not be wholly reliant on China for vaccine access. Otherwise, Beijing will have an enormous amount of leverage over governments whose top priority will understandably be vaccine access,” he says.

COVAX is one of the three pillars of the Access to Covid-19 Tools Accelerator, which was launched in April by the WHO, the European Commission and France in response to the pandemic.

Healing the economy

A pandemic that is under control will enable the relaxation of restrictions on public gatherings, movement, social and business activities, travel and physical distancing that have crimped the economy, says Sunway University Business School economics professor Dr Yeah Kim Leng.

“With two-thirds of the US economy being underpinned by consumer spending, the confidence level has taken a big knock from the sharp escalation in job and income losses and uncertain recovery prospects, thereby depressing consumer spending further.

“Besides a better handling of the pandemic and an increased likelihood of a safe and effective vaccine, the new administration’s ability to pass a second stimulus package will enliven US economic prospects. The International Monetary Fund in its October outlook is projecting a growth of 3.1% in 2021, up from a 4.3% contraction expected this year. Recovery in the US, the world’s largest economy, will underpin global growth next year, thereby benefiting highly open economies in Asia, including Malaysia,” he adds.

The US economy contracted at an annual rate of 31.4% in the second quarter and rebounded in the third quarter, growing at 33%.

Though Biden is likely to be president, the US Congress is likely to remain split, with the Democrats retaining power in the lower house, the House of Representatives, but with a lower majority than before, while control of the upper house, the Senate, now comes down to two Georgia runoff elections in January.

A split Congress would further complicate the Biden administration’s efforts for additional fiscal stimulus. However, it is unlikely that the US will need it, says Natixis chief Asia-Pacific economist Alicia Garcia Herrero.

“I actually don’t think the US needs a massive stimulus any more as the recovery is under way. What the US needs is to control the second wave. The news about a vaccine coming sooner than previously expected is of course helping,” she reasons.

INSEAD’s Fatas says there will be a workaround solution for the Biden administration should a Republican-dominated Senate not approve the additional stimulus.

“There is room for some negotiation. Biden has to make a plea for a stimulus package in a way that the Republicans cannot just oppose any plan. There will be a compromise, for sure. Of course, monetary policy can also help without the need to have the Senate passing any package,” he adds.

Relationship with the Fed

The Biden administration’s relationship with the US Federal Reserve will also be closely watched given the central bank’s shaky relationship with the Trump administration. Fed chair Jerome Powell — who ironically was appointed by Trump — was often the target of the president’s constant tirades about the Fed being slow to act.

Professor Datuk Dr Rajah Rasiah, distinguished professor of economics at the Asia-Europe Institute of University of Malaya, says the Biden administration is not expected to make many changes when it comes to the Fed.

He adds that the Biden administration, however, is likely to uphold its international obligations to all countries, including honouring its debt with China.

Rajah explains that the Fed’s use of monetary policy, including the printing of US dollars to settle debts, has historically been employed without any major shift in policy stance by the different administrations.

“The extensive spread of the US dollar in international transactions has given the US a strong hand to appropriate benefits from the use of monetary policy. Interest rates are likely to remain low to stimulate investment in this contractionary phase caused by the Covid-19 pandemic.

“Hence, the US is unlikely to turn to raising interest rates, which was seen just as Ben Bernanke replaced Alan Greenspan as Fed chief. Interest rates then had risen from 0.5% to 5.5% as the Fed tried to contain inflation.

“These developments exacerbated the subprime mortgage crisis, which resulted in the expansion of money supply in the US,” he says.

Though the Biden administration seems to have its work cut out for it when it comes to fixing economic problems and mending international relations, it is the handling of the Covid-19 pandemic that will be its biggest task, and a deal breaker for its re-election to a second term. With 3.8 million active cases in the US as at last Wednesday, it is up to Biden, as the leader of the world’s largest economy, to guide the US and the rest of the world on the road to recovery.

Hopefully, this will have a positive spillover effect on Malaysia, which counts the US as its third largest trading partner, accounting for RM77 billion or close to 11% of the country’s exports from January to September 2020.

Biden’s approach to China following the last few years of frosty trade relations under Trump could have an impact on Malaysia, which has a thriving semiconductor industry. His policy on the environment could influence how oil trades too. The following stories will look into these sectors.

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