Washington Weekly: US-China "Phase One" Deal

The House passed legislation on insider trading, voting rights and sanctions on Chinese officials for alleged human rights violations of Uighur Muslims (see below). The Senate passed legislation extending funding to historically black colleges and universities and approved various Trump administration nominees.

The House will pass legislation to reform how prescription drugs are priced. The Senate will vote on various nominations. Both the House and Senate will continue to work on government funding issues.

Regulatory Spotlight.

Democrats and Republicans put forward competing views on financial regulation as federal banking regulators and Treasury Secretary Steven Mnuchin testified before Congress this week. It was the regulators’ first appearance since finalizing a rule in October to implement regulatory relief legislation that Congress passed last year. In response to criticism from Democrats, Federal Reserve Vice Chairman Randal Quarles emphasized that its efforts have focused on streamlining and tailoring regulatory requirements without decreasing the overall level of capital requirements. Democrats also expressed concern about potential financial stability risks arising from rises in leveraged loans in a week in which the Financial Stability Oversight Council (FSOC), which is headed by the Treasury Secretary, finalized plans to shift away from designating individual nonbank financial companies as systemically important towards addressing risky activities across firms. Republicans pushed the Federal Reserve to go further and faster in terms of advancing reforms to bank stress testing requirements and to consider changes in liquidity requirements in light of recent dislocation in the repo market. Amidst some discordant messages coming from Congress, the regulators will continue to pursue incremental changes while the financial industry will monitor closely developments in the presidential race given the potential for the results to shift the overall regulatory environment.

Impeachment Push.

As a prelude to writing articles of impeachment against President Trump, the House Judiciary Committee held a hearing this week with four law professors to assess their views on whether there is a legal justification for impeachment based on existing evidence. No one should be surprised that the three Democratic witnesses felt there was such a justification, while the lone Republican witness felt there wasn’t. Like the earlier hearings in the House Intelligence Committee, this week’s hearing didn’t alter the political dynamics of a vote on impeachment. Democrats still support it, while Republicans still oppose it. Speaker Pelosi indicated this week that a full House vote on impeachment by year’s end is all but certain, and we believe the Speaker’s goal is to have this vote by December 20. This timetable could slip somewhat, but a vote by the end of the year seems inevitable.

Spying Charges Coming.

The Department of Justice’s Inspector General on Monday (December 9) will release his findings on whether the department acted properly in conducting surveillance of a former Trump campaign aide during the 2016 presidential election. While there have been leaks over the past few weeks on what this long-anticipated report says, we don’t know yet what the report’s final conclusions will be. The report is expected to raise issues relating to potential bias in the FBI against Trump during the campaign and the legality and appropriateness of some of its surveillance efforts. Our sense is that this report will give Republicans a little more ammunition in citing some hostility from the “deep state” toward candidate Trump, but it likely won’t allege widespread bias at the FBI or broader Justice Department. Moreover, this report could easily get lost in the louder impeachment noise after a day or two of media coverage.

US-China “Phase One” Deal.

Negotiators from the US and China continued their talks this week via phone, focusing on efforts to narrow their differences over a potential “phase one” of a trade agreement. This doesn’t mean a deal will materialize, but it does indicate the seriousness in which both sides are pursuing a deal. That can only be positive, though the process has been frustratingly slow. There are two milestones to watch for over the next ten days that will give us a better sense of whether a deal is imminent. The first is December 15, which is when the next round of higher US tariffs is currently set to go into effect. Given that both sides are interested in avoiding these tariffs for their own reasons, negotiators are very aware of the calendar, and the existence of this unofficial deadline has injected some needed urgency into these talks. The second would be any agreement by the two sides to meet in person. This could indicate an imminent agreement on a deal in principle that could be signed at the meeting. Negotiators will continue to talk over the next week, and these two milestones will be important as measuring sticks for a possible deal.

US-China Complications.

We have often spoke of how the conflict between the two countries is about much more than trade. It is about the broader economic and security rivalry between the two countries. As such, non-trade issues will help determine whether a trade deal can be made. Late last month, President Trump signed into law a bill to require a more formal US reassessment of Hong Kong’s preferred trade status. This week, the House passed legislation to sanction any Chinese officials connected to the alleged human rights violations of Uighur Muslims in northwest China, and the Senate will likely follow suit soon. These issues have raised the ire of Chinese officials. While they haven't yet prompted China to walk away from trade negotiations, how these and other issues outside of trade are resolved could be very important in determining the success of the trade talks.

Social Security.

House Democrats have rallied around a proposal by Congressman John Larson (D-CT) to save Social Security from an expected insolvency in 2034. The plan would increase the payroll tax rate over time from the current rate of 6.2 percent to 7.4 percent. It also would raise the threshold at which payroll taxes no longer apply from the current level of $132,900 ($137,700 next year) to wages above $400,000. These changes would fund a 2% increase to current benefits and a more generous COLA increase in future years. While supporters have claimed that the plan would extend the solvency of Social Security for 75 years, new estimates by the Congressional Budget Office project a much shorter extension of a few years. House Democrats had hoped to bring this bill forward for a vote, but these projections are muddying the waters and its future is now in question. Moreover, given its lack of bipartisan support, the plan primarily functions as a campaign proposal. We do not expect any major action on Social Security until we get closer the 2034 insolvency date.

Women in Congress.

Earlier this week Governor Brian Kemp (R-GA) appointed Kelly Loeffler to the Georgia Senate seat that will open after Senator Johnny Isakson (R-GA) retires at the end of the year. Loeffler will be the first female senator from Georgia in history (excluding Senator Rebecca Felton who was appointed to the seat for a day in 1922). In addition to being a first for Georgia, it would also be another small step toward diversifying a Congress that has a record number of women after the 2018 election results. Most of those women are Democrats, which is a cause for concern for Republicans (there are 13 Republican women in the House and 7 in the Senate) and an area of focus in the 2020 elections. So far, 163 women have already filed to run as Republicans for Congress in 2020, a record number that the GOP hopes will increase diversity in its ranks and win control of the House. Regardless of which party controls the House and Senate following the 2020 elections, we expect there will be a new record of women serving in the House come January 2021.