(UBS)
Reconciliation in Limbo. The House passed four major bills this week, including an annual defense policy bill, a bill to restrict lawmakers from trading stocks (see below), a bill to fund government agencies at the same level through December 4, and a fiscal year 2027 budget resolution to lay the groundwork for a roughly USD 95 billion reconciliation package. The budget resolution instructs four House committees to draft a reconciliation bill to provide USD 73 billion in defense funding (mostly for the cost of the war in Iran), USD 12 billion in farm aid, and USD10 billion for election security measures (parts of the SAVE Act). However, Senate Majority Leader John Thune (R-SD) has said that he does not plan to vote on the resolution until the Senate finds a bipartisan agreement for government spending before current funding expires on September 30. While the House passed a funding extension to December 4, this also is unlikely to fly in the Senate at this point. Thune is not keen on bringing up a reconciliation bill before the election because it would subject vulnerable Republicans to tough votes posed by Democrats on various amendments. Despite passage of a budget resolution by the House this week, the reconciliation effort seems poised to be put on the backburner until after the elections.
Iran Costs. The resumption of attacks between the US and Iran risks a broader theater of conflict in the Middle East that not only could imperil trade in the Strait of Hormuz, but also the Strait of Bab el-Mandeb, another key chokepoint in global trade. In the US, there are growing concerns about both the loss of US service members and the economic impact and costs of the war. This week, the House and Senate each held votes on war authorization. While Republicans mostly continue to support publicly the administration’s war effort, four Republican House members joined Democrats in voting to oppose the war. Another question is the fiscal cost of the war and how Congress will pay for it. The Pentagon’s official estimate is USD 37 billion, but outside analysts have had significantly higher estimates. The partisan budget proposal that the House passed this week includes USD 73 billion for the war and other national security needs, but it remains to be seen whether the reconciliation effort will be viable in the Senate. If it isn’t, there will need to be an effort to build bipartisan support for a supplemental bill for war funding after the elections. While the costs of the war are coming more into focus, a durable settlement and exit strategy has not.
Tariff Return. The Trump administration was left scrambling earlier this year after the Supreme Court s decision to strike down the lion s share of the tariffs it had imposed using emergency economic powers. In response, it pivoted to imposing temporary 10% tariffs under another authority that had never been used before. Those global tariffs are set to expire today. The Trump administration has used these tariffs as a means of buying time to apply tariffs using other legal authorities on a more longstanding basis. Since then, it has been building cases to apply broad-based tariffs in response to unfair trade practices. The administration today is applying a set of tariffs that would apply to approximately 60 countries on the grounds of forced labor (broadly construed to include the use or trade of products made with forced labor in other countries). It is also considering additional tariffs on certain countries for their application of policies that have created overcapacity in certain industrial and technology sectors. The Trump administration this week also used a tariff authority (never used before) to impose 50% tariffs on certain products from Canada, but these tariffs are seen largely as a means of pressuring Canada as part of a review and renegotiation of the US-Mexico-Canada trade agreement (originally struck by President Trump in his first term). It remains to be seen how much public concerns about inflation and affordability will restrain the scope and size of new tariffs.
Download the full Washington Weekly report, or visit the website for more.
