Washington Weekly: US-China Competition Issues

The Senate confirmed various Biden administration nominees and debated a bill to bolster US competitiveness in science and technology (see below). The House approved a Senate-passed bill that addresses hate crimes and violence targeted at Asian Americans and Pacific Islanders, which President Biden signed into law yesterday. The House also passed legislation that would establish a commission to investigate the January 6 riots at the US Capitol (see below).

The Senate is expected to wrap up its work on the bill relating to US competitiveness in science and technology issues. The House will have committee activity but is not scheduled to have floor votes.

Bipartisan Infrastructure Bill? 

While Congress remained focused on trying to develop a bipartisan compromise on infrastructure investment, there wasn’t much in the way of tangible accomplishments on this issue. Democrats and Republicans are still not close to agreeing on either the cost or scope of such a bill. Negotiations will continue into next week. Beyond these key issues, lawmakers also will need to address the always vexing question of how to pay for the bill. Even if they agree to finance most of it as deficit spending, it still will be difficult to find agreement on any revenue raisers. Both parties have established strong red lines in connection with various revenue proposals, and there is yet to be agreement on any single proposal to raise revenues. If no agreement is made by the end of next week, our sense is that Democrats will pivot to introducing and advancing their own bill in June that will offset some of the spending via increases in corporate and individual tax increases.

US-China Competition Issues. 

The Senate is poised to pass a comprehensive and bipartisan bill that will bolster US competitiveness with China in science and technology advancements, including semiconductor and computer chip production. The bill provides significant federal investments in pursuit of these goals, a somewhat ironic solution given longstanding complaints from the US about China subsidizing its leading industries. The bill could have a significant long-term impact beyond its more near-term impact on segments of the technology industry. That being said, the bill doesn’t address the more immediate trade and security issues (like tariffs and the trade agreement) that have created tensions between the US and China over the last few years. US positions on those issues have been slower to materialize under the Biden administration, but we believe the US will try to advance more specific policy positions on these and other measures to counter China on trade and broader national security issues at international fora like the G-7 and NATO meetings in June.

Scaled Back Tax Bill? 

We detected growing skepticism among lawmakers in Washington this week that Democrats in Congress will be able to pass a significant tax bill into law anytime soon. We still believe that Democrats are more likely than not to pass a bill into law, but we are seeing signs that it may have to be significantly scaled back from previous expectations. Why? As Democrats have gone through their internal deliberations, there has been some resistance to certain tax proposals made by either President Biden or senior Democratic lawmakers. To address this resistance, Democrats may need to drop or ease some of their key proposals to increase taxes. Democrats also have yet to address the threshold question of how much revenue they will need to raise to help offset their spending proposals. A growing number of Democrats indicate that they do not have to fully offset new spending, while some have said that the bill doesn’t have to be paid for at all. We still believe Democrats will seek to raise about $1 trillion in new taxes, which is far lower than the $4 trillion that had been previously under discussion. We think a scaled back, but yet still impactful, tax bill will emerge over the next month.

Capital Gains. 

A scaled-back tax bill likely would include an increase to the tax on capital gains. For those worried about the effective date of such a provision, it’s important to watch the progress (or lack thereof) of a bipartisan infrastructure bill (mentioned above). If there is agreement this month, a bill to increase the tax on capital gains likely will be delayed until July or perhaps September. If such an infrastructure bill fails, however, a bill to increase the cap gains rate could be introduced as early as next month. The timing of the bill’s introduction could be critical. Democrats are likely to make such a tax effective either when the bill is introduced or signed into law since making such a tax increase prospective would encourage realization of gains at a lower rate earlier and cost Democrats billions of dollars in additional revenue. Investors should consider that cap gains taxes could technically rise for certain individuals in the coming weeks. This is an extremely fluid situation and will depend in part on the progress of negotiations on a bipartisan infrastructure bill.

SPAC Scrutiny. 

The House Financial Services Committee next week will hold a subcommittee hearing on special purpose acquisition companies (SPACs), which are shell companies that raise capital through public offerings in order to acquire companies. While SPACs have been around for a few decades, they weren’t a major vehicle for capital formation until recently (there was over $80 billion of SPAC issuance last year, an amount that was exceeded in the first quarter of this year). In addition to receiving significant media attention, the surge in SPAC issuance has also gotten the notice of regulators and lawmakers. The SEC has issued several statements and investor advisories on issues relating to SPACs, including SPAC disclosures and potential conflicts of SPAC sponsors. Some lawmakers next week will voice concerns about the adequacy of SPAC disclosures and about the potential for bad acquisitions, though others will caution against overregulation, citing the burdens of being a public company that make SPACs an attractive alternative. While there are legislative proposals relating to SPAC disclosures and legal liability, policy action likely will come through the SEC and its urgency to act will depend in part upon market developments as SPAC issuance slows down.

COVID Vaccine Patent. 

President Biden’s agreement to an international plan to waive intellectual property protections for the makers of COVID vaccines has triggered significant resistance in the US. Proponents believe that waiving these protections would prompt other companies all over the world to produce similar vaccines and alleviate global shortages. However, the current vaccine manufacturers claim this plan won’t speed up the global manufacturing process and that their vaccines can’t be duplicated easily or timely by other companies. They also argue that the vaccines are their creations and that they can ramp up their exports to address shortages. There are also concerns that a forced technology sharing with other countries like China would give them an unnecessary advantage in benefitting from that technology. Given the controversy, the administration may soon take a step back from the plan. While both the US government and vaccine-producing companies are ramping up their exports of vaccines, the effort to strip their owners of intellectual property protections will remain a publicly disputed issue.

January 6 Commission. 

The House passed legislation this week creating a bipartisan commission to study the events surrounding the US Capitol on January 6. All House Democrats voted for the measure, while 35 House Republicans bucked their party leadership to support it. Opposing Republicans wanted to expand the scope of the commission’s work to also address violence and crime at other political protests. January 6 continues to be an anchor around the political neck of many elected Republicans in competitive districts and states. Although the House bill will likely not get the needed 60 votes in the Senate to pass, the political sting from the issue will persist for many Republican lawmakers. Congressional hearings will be held on the subject as long as Democrats have majorities in the House or Senate, while the trials of many of the hundreds of protesters who were charged with a crime will also be held in public forums over the next two years. Many voters in both primary and general elections next year will still be interested in the decisions of individual Republicans to defend former President Trump or distance themselves from him.

Widow’s Succession. 

Earlier this month, Susan Wright advanced as the winner in a crowded primary field in a special election for Texas’ 6th Congressional District, a seat previously represented by her now-deceased husband, Congressman Ron Wright (R-TX). Historically, political parties have seen an advantage in having a spouse run for the seat of a deceased partner given that he or she already had name recognition, was likely to receive a boost from sympathetic support and, in many cases, had been instrumental in getting the spouse elected in the first place. In fact, the practice was so common that it became colloquially referred to as the “widow’s mandate” or the “widow’s succession” in the 1930s. As political campaigns have become increasingly more expensive and all-encompassing, the practice has been less common in recent years. Only a single spouse, Congresswoman Doris Matsui (D-CA), represented a district that was vacated by a deceased partner before this year’s special elections. In addition to Wright’s hope to replace her late husband later this year, Congresswoman Julia Letlow (R-LA) won the special election in Louisiana’s 5th Congressional District to succeed her late husband, Congressman-elect Luke Letlow (R-LA), earlier this year. After a several decade lull, it appears the widow’s mandate is making a comeback.