Specific Economic Impacts Of The US Election
We have made the obvious point that 2024 will be a year of important elections. But what are the potential implications of these elections when it comes to the actual economy?
It is a bit early and we have already written about one topic - harmful and counterproductive tariffs - that we think will continue regardless of the outcome.
But there are also specific industries and companies which could pay a high price if the US election goes against their business interests.
Here are two:
Battery firms' profits.
US liquid natural gas exports.
On the first point, one of the big shifts of the last 4 years has been that many battery companies, most of them Asian in origin, have committed to spending billions of dollars building electric battery manufacturing capacity around the US.
The likes of Japan's Panasonic or South Korea's LG Energy or even China's CATL and BYD have agreed to invest billions of dollars to expand US battery production capacity.
The sums are simply enormous:
Just three Korean firms - LG, Samsung, SK - alone are spending over $44 billion building out new battery capacity, most of it in the US.
This isn't happening in a vacuum. Rather it is happening because of political decision making and also politically driven spending. These Asian giants have jumped into building batteries for electric vehicles domestically in the US precisely because they are being paid to do so. These battery plants are buoyed along by a blizzard of state, local and federal subsidies and tax breaks.
The misnamed Inflation Reduction Act has been responsible for the lion share of those subsidies and investment. These sums are also sizable:
Over $128 billion has been already invested since the passage of the Inflation Reduction Act, or IRA, in 2022.
The contribution to the bottom line of battery companies is also significant. As of the last quarter, Panasonic made a quarter of its profits from direct subsidies just from the US Federal Government. Furthermore, their forward guidance suggests that this should continue throughout 2024.
Now the unpleasant question is beginning to be asked:
Are these plans and also these profits under threat?
Put more baldly: what does a second Donald Trump presidency mean for these plans? And these profits?
There is no getting around the fact that this is a significant business risk for all Asian battery firms.
The biggest issue might be a classic Trump-problem: we actually don't know his actual politics, let alone policy specifics, on the IRA or EVs. Yes, it can be considered a near certainty that Donald Trump isn't a big fan of EV subsidies or tax credits for Asian multinationals and he has criticized the EV industry before but what he would actually do about the new EV manufacturing capacity is very unclear.
Prolonged policy uncertainty can be a killer in the same way that a negative policy can be. It can chill investment, cancel plans and alter strategic visions.. If the likely Republican nominee had a clear policy position on EVs or subsidies for Asian firms companies could plan and mitigate.
At present that is simply impossible since the answer for what a Trump administration's EV policy would look like is, in every case but the most general, no one knows.
That is a serious issue as it means that the entire EV industry is now in wait-and-see mode.
This isn't the only challenge either. Excess capacity is already a worry as EV vehicle sales disappoint and more and more production comes along at just the wrong time. But the real challenge for the Asian battery giants may be that the political and economic winds could shift in favor of combustion engines once again.
A second Trump term isn't the only threat out there however. In many ways this US election proposes an equal number of risks to US businesses, it just depends on which industry is negatively affected by which side wins come November.
Therefore, what about the Democrats? Who's profits are they threatening?
Funny you should ask....
Less than 24 hours after we published a celebration of US energy production last week the Biden administration announced a "pause" for any future export permits for liquid natural gas.
Oh.
This was a shocking development considering the benefits we outlined just last week on US production and especially US exports maintaining global energy flows and the very benefits to the US, economically, politically, strategically etc.
The government claims that it simply needs to update the underlying economic and environmental rules for whether or not to permit an export facility to go ahead and be built.
But the real reason is most likely to provide a win to the climate activists who have been dismayed with the Biden administration's approval of various energy projects and lack of serious measures against domestic energy production. An election year means rewarding the most active (and even extreme) members of your own political alliance as well as going after independents.
"Getting out the vote" has multiple meanings.
The problem is, as we argued just last edition, that US energy exports are hugely beneficial and important right now.
So this is a mistake economically but what about environmentally?
It is likely an error on that front as well. As we also pointed out last week, the nice thing about Western energy production (or exporting) projects is they are subject to Western energy regulations and standards. Here is what the US Energy department said just last year on this very topic:
The authorization overhang “may serve to discourage or delay potential new entrants to the U.S. export market—including those that seek to use newer technology and to adopt better environmental practices.”
Relying on older facilities and foreign producers that do not have the same environmental regulations or the latest technology is worse for the planet as well as worse for the economy and our allies.
It doesn't take a huge leap to see that, should Joe Biden win the Presidency for a second term he will likely further restrict US energy exports and also therefore, US energy production.
Regardless, this recent decision from the Biden White House will no doubt put a serious dampener on new projects and commitments by energy firms to even try to develop new projects. They will adopt a wait and see approach before November.
And increasingly we wonder whether that will be the case for lots of businesses that will be nervous about committing billions of dollars when there is so much political risk around the election outcome?
This makes intuitive sense to us. Do you have a strong lean on the election? Would you be willing to risk a large sum of your savings before November? It seems unlikely. This will have implications throughout the economy as businesses, large and small adopt that attitude.
Economic weakness in the second half of 2024 incoming? If that happens will it finally give the US central bank cause to cut rates?
*******
Have questions? Care to find out more? Feel free to Download our App (!!) or reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome. You can also get our newsletter as an RSS feed.
