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International Relations

Asia fears Trump doubling down on trade war after mixed midterms

US Republicans block Democratic sweep to retain the Senate

Experts warn that Tuesday's outcome could embolden Trump to harden his stance on China.   © Reuters

TOKYO -- U.S. President Donald Trump's Republican Party fended off Democratic challengers to keep its Senate majority in the U.S. midterm elections Tuesday, an outcome that would enable him to keep up, or even intensify, his hard-line stance against China on trade.

"It was a big day yesterday. Incredible day," Trump told reporters at a White House press conference on Wednesday. Talking about his campaign rallies, where he repeatedly emphasized his "America First" stance, the president said, "This vigorous campaigning stopped the blue wave that they talked about. I don't know if there ever was such a thing, but ... if we didn't do the campaigning, probably, there could have been."

The Republicans ceded control of the House of Representatives but avoided a so-called "blue wave" of Democratic gains, as it looked set to increase its majority in the Senate. The results suggested that the president is still backed by a large portion of the U.S. population after two years of divisive rule.

"The risk is that Trump gets more aggressive in terms of his stance toward China," said Sue Trinh, head of Asian foreign exchange strategy at RBC Capital Markets in Hong Kong, adding that the president has bipartisan support on the trade front.

The Democratic takeover of the lower chamber of Congress in midterm elections Tuesday opens the way for investigations into his scandal-tainted administration, and allows Democrats to take him to task in hearings on foreign policy from the trade war to talks over North Korea's nuclear program.

"Foreign policy is one area where the Trump administration will come to understand what it means to have the opposition party control one house of Congress," said University of Missouri Professor Peverill Squire. "House Democrats will be able to hold hearings to investigate foreign policy decisions in a manner that the Republicans refused to do over the last two years."

But Herve Lemahieu, director of the Asian power and diplomacy program at the Lowy Institute in Sydney, said that Trump's hard line approach on trade, security and climate change will continue.

"Trump appears to have enough support at home to continue to drive the America First agenda in the world," Lemahieu said.

The trade dispute has prompted talk of a new Cold War, as Washington slapped punitive tariffs on about half of all U.S. imports from China and pressed America's trade partners not to pursue any deals with China without Washington's consent.

Any hopes in China that a major Republican loss would prompt a change of course on trade have been dashed, and analysts say that Asia should brace for continued tension between Washington and Beijing.

Chinese Foreign Ministry spokeswoman Hua Chunying declined to comment directly on the election results on Wednesday, adding that "the two governments and the two peoples all want to maintain the sound and steady development of bilateral relations," according to The Associated Press.

The Democratic takeover of the House of Representatives has "no influence whatsoever" on the Trump administration's hawkish stance on trade matters, said Hannah Anderson, global market strategist at J.P. Morgan Asset Management in Hong Kong, noting that the executive branch effectively runs U.S. trade policy.

"Everything that investors were worried about on China trade policy before the elections -- they should still be worried about," she said.

In Wednesday's press conference, Trump said that he hoped to be able to work together with the Democrats on issues such as economic growth, infrastructure and trade. "These are some of the things that the Democrats do want to work on, and I really believe we'll be able to do that," he said.

Brian Schaffner, a professor at Tufts University said that infrastructure could be an area for bipartisan cooperation. "There aren't too many places where I think the president will find common ground with Democrats in the House, but one such area could be infrastructure, something that both parties have cited as an important need," he said. 

China's benchmark Shanghai Composite Index dipped in afternoon trading Wednesday, dragging down investor sentiment across the region. Japan's Nikkei 225 index fell toward the end of the session and ended 0.3% lower, after rising more than 1% in the morning. Indexes in South Korea and Hong Kong also declined in afternoon trading.

Trump's push for a deal with North Korea is set to go on the back-burner. Experts say that the U.S. slapping a ban on Iranian oil imports this week shows that Tehran has become a more important issue for the president than the isolated East Asian nation.

Planned talks between Secretary of State Mike Pompeo and a senior North Korean official in New York this week were abruptly canceled Wednesday. The U.S. State Department gave no reason for the postponement.

U.S. President Donald Trump walks with North Korean leader Kim Jong Un during their June summit in Singapore.   © Reuters

The Democratic takeover of the House is likely to have a bigger impact on domestic policy issues, which also have a major impact on global markets.

Trump is now more likely to be constrained in Congress, and find it harder push through major fiscal stimulus programs or make big tax cuts for the elderly.

"Asian currencies have been under selling pressure from rising U.S. interest rates, which have been partly driven by Trump's expansionary fiscal policy," said Hirofumi Suzuki, a Singapore-based economist at Sumitomo Mitsui Banking Corporation. "If a split Congress makes it difficult for Trump to implement more tax cuts and other fiscal stimulus measures, it will be a tailwind for Asian currencies."

Separately, the Democrats gained at least six state governor seats in Tuesday's elections. One was in Wisconsin, a Midwestern state touted by Trump as a successful example of his strong-armed trade tactics.

Wisconsin last year attracted a $10 billion investment from Taiwanese electronics manufacturer Hon Hai Precision Industry, as the president pressured major corporations to make investments and create jobs in the U.S.

But that deal is now likely to come under more scrutiny. Republican Governor Scott Walker, who offered incentives worth billions of dollars to lure Hon Hai, lost his bid for a third term to Democratic challenger Tony Evers -- a skeptic of the deal.

Nikkei staff writers Wataru Suzuki and Dean Napolitano contributed to this story

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