The House was out of session and will return to Washington next week. The Senate approved various judicial nominations.
The House will consider legislation to reauthorize the Export-Import Bank. The Senate plans to vote on various government funding bills for fiscal year 2020.
Financial Services Issues
China Pension Limits.
A bipartisan group of US Senators led by Senator Marco Rubio (R-FL) this week introduced legislation to limit federal pension funds’ investments in Chinese companies. The legislation is part of a public campaign by these Senators to pressure the Federal Retirement Thrift Investment Board, which administers a major federal government pension plan, to reverse a prior decision it made in 2017 to offer plan participants an international investment fund that contains exposure to China. The pension plan currently has no investments in Chinese companies. The 2017 decision is to be implemented next year, but the board has been wavering and will be meeting next week to discuss the legislation. The introduction of this bill comes at a time when the Trump administration and Congress have been considering other limits on US investments in China, in particular the delisting of Chinese companies on US exchanges. While the stated intent of these actions is to address concerns about the failure of Chinese companies to comply with US auditing requirements, they are emerging as a potential new front in ongoing US-China struggles on economic and security interests. The pension board will be under mounting political pressure to reverse course on its China investment decision.
Other Issues in Play
The House Intelligence Committee held more closed hearings this week as part of the ongoing impeachment inquiry. The process will move to a more public phase next week when the committee initiates open hearings that will feature witnesses who have already testified privately. House Democrats hope the open hearings will bolster their case for impeachment, though we don't anticipate any bombshells or even much new information to be revealed at the sessions. A House vote on impeachment still seems inevitable. Though the exact timetable remains uncertain, we expect a vote sometime next month. The House may end up scheduling a vote around the time of another big event like a potential government shutdown, a “phase one” trade deal signing with China (see below) or the year-end holidays. There is not really any good time for a vote like this.
Progress continued this week as the two countries narrowed the list of items to be included in a “phase one” agreement that likely will be finalized in December. Both countries are very close to agreeing to specific provisions relating to large Chinese purchases of US agriculture, currency protections, additional market opening measures for foreign financial services providers in China, modest intellectual property protections and a reduction of some higher US tariffs. Additionally, higher US tariffs on Chinese consumer goods planned for December 15 will likely be delayed. The phase one agreement, if it is finalized, will be very modest in view of the more comprehensive universe of grievances and problems that divide the two countries on trade, but the markets don’t care. For now at least, they see any pause in the US-Chinese trade tension as very positive. This limited agreement will provide some good news and a respite from tensions as the tougher and more contentious issues are left to future negotiations (see below).
A Broader Deal.
A phase one agreement seems imminent, but what about a second, third or final phase? Will any of those phases materialize? We are skeptical they will before next year’s US presidential election. The next phases will focus on more difficult and sensitive issues. And even getting to discussions on these issues will require no backtracking on phase one commitments, which is hardly a given. Moreover, both sides will need to feel political pressure for a bigger deal — Trump likely from cash-strapped farmers and Chinese President Xi from an economic downturn. The market will welcome the phase one deal, but that positive reaction may be short-lived. We see continued friction ahead. As early as the first quarter of next year, renewed bickering may stall progress on a phase two agreement even as the administration continues to feel the need for a more substantial deal. Pressing China makes for good politics in the US, and phase one probably needs to be built on for President Trump to get any political credit for taking this fight on in the first place. So, enjoy the celebration over the phase one agreement when it happens, but beware of the volatility ahead as the negotiations move into their next chapter.
Fall-back on Medicare for All?
Even under a potential President Warren or Sanders in 2021, the chances of passage of the Medicare for All proposal in Congress are low. It simply costs too much money and is not supported by a majority in the House and Senate. This is why so much attention is being paid to bipartisan efforts in the House Ways and Means Committee on a more modest expansion of Medicare. Under a Democratic win next year, this Medicare expansion could serve as a potential compromise position for Democrats not ready to embrace Medicate for All. Legislation that recently advanced in the committee expands vision, dental and hearing aid coverage under traditional Medicare. Covering these services fills a gap that many have cited as missing in Medicare. Hearing loss alone affects more than 40% of people over 60, 60% over 70 and almost 80% of those over 80. Other lawmakers will have other ideas to expand Medicare, and they will be considered as well. While these ideas are popular with much of the public, the difficult challenge of paying for them in a way acceptable to voters will be the sticking point on any Medicare expansion proposal. Nonetheless, look for this debate to intensify under a possible Democratic administration next year as alternatives to Medicare for All are sought.
Committees in both the House and Senate have held multiple hearings to address the rise in youth e-cigarette use. Congress is trying to respond to the recent increase of vaping-related lung illnesses, which have killed 39 people and sickened over 2,000 more. The House last week passed a bill that would restrict online sales of e-cigarettes and is expected to pass another that would tax nicotine used in e-cigarettes. There are a number of other related bills being discussed by lawmakers, including those to raise the age of buying tobacco products to 21, extend federal rules for tobacco sales and advertising to e-cigarettes and ban flavored e-cigarettes. The Trump administration announced last month that it is also working on its own plan to ban flavored e-cigarettes. This issue offers the potential for bipartisan solutions and much will depend on what Senate Majority Leader Mitch McConnell (R-KY) will allow in the Senate. Although his home state of Kentucky is the second largest tobacco producing state in the US, he is championing the bill to raise the age limit for those who can purchase tobacco products from 18 to 21. That bill will likely pass next year and the others could as well if they secure McConnell’s support, which so far they have not.
The Final Word
This past Tuesday featured a number of elections around the country, including high profile gubernatorial elections in Kentucky and Mississippi as well as state legislature races in New Jersey and Virginia. While no election result from this week will likely serve as a precursor to next year’s elections, the results are noteworthy for two reasons. First, Republican candidates fared poorly in suburban areas (particularly among women), a continuation of a trend that began in state elections in 2017 and was prevalent in the 2018 mid-term elections. One of President Trump’s greatest re-election challenges will be to neutralize this trend. Second, voter turnout this week was very high from base Democratic and Republican voters. Notably, Kentucky experienced its highest turnout in the past three decades, while turnout in Virginia rivaled that of the 2017 elections, which featured statewide races. Republican turnout was actually higher than Democratic turnout, yet Republicans lost in most contests or won by smaller margins than usual. Neither of these trends bode well for Republicans next year. We expect that the voter turnout and engagement for 2020 will be greater than 2016, and once again the deciding factor will be the suburbs.