Published 28th October 2022

Why a Republican midterm victory matters for Australia

With Republicans now ahead in the election race, there’s a growing expectation that the US could become a lot more aggressive when it comes to China.

Australian Financial Review | October 28, 2022

Over the past few months, Australians were 20 times more interested in the world’s richest person Elon Musk than in the US midterm elections, according to Google Trends.

But when the results of the November 8 midterms are declared, including 34 Senate seats and all 435 House seats, interest from Australians in the elections will rocket to about four times that of Musk, search data is expected to show.

That’s because Australians know that whoever takes control of Congress has significant sway over US legislation – which can affect everything from the global shipping lanes of the Taiwan Strait, the rare earths deposits of the Australian outback, to superannuation investments.

A Republican victory in the midterm elections will likely deliver tougher action on China, greater support for fossil fuel and critical mineral development, and a shift in the way the US views privatisation, according to two former US congressmen – Democrat Bart Gordon and Republican Jeff Denham. After a collective 36 years in government, they are now senior employees at Washington-based law firm K&L Gates.

So far, more than $US1.3 billion ($2 billion) has already been spent on election campaigns and, as the polls stand, the Republicans may now defeat the Democrats in the House and the Senate.

A new balance of power in Congress is likely to deliver plenty of domestic changes, ranging from renewed support for Donald Trump to the handling of immigration. But the areas that will really matter for Australians if Republicans do take control will be China, energy independence and privatisation.

China is top draw issue

Denham says the new House and Senate members will be more hawkish on China. “While President Biden needs to be more diplomatic with China, I think a lot of new members coming into Congress will be less diplomatic when it comes to China,” he says. “There will be a lot of Republican members that are very, very vocal on making sure that we’re growing our economy, with fewer imports from China.”

“That means making sure that we’ve got our own computer chips that we’re going to need for our manufacturing growth, and that means making sure we are addressing rare minerals. We are going to be looking outside the US for rare minerals that we’ll need for many of our different manufacturing products and that means Australia will play a bigger role. The US will invest in Australia’s critical minerals under a Republican congress.”

US Commerce Secretary Gina Raimondo committed this year to help finance Australian critical minerals projects through America’s export financing arms, while Australian-backed companies were among the winners of $US2.8 billion ($4.5 billion) in grants from the Department of Energy.

Gordon thinks potential increased Republican power will be met co-operatively by Biden on China issues. “That partnership will certainly work together in trying to reduce or stop some of the Chinese aggression.”

Two former Australian ambassadors to the US, Joe Hockey and Kim Beazley, agree on the importance of the midterms for Australians. For Bondi Partners’ Joe Hockey and former Australian defence minister Kim Beazley, a Republican-controlled Congress will mean Australians should get ready for more China challenges.

“One thing we will see is the unification and increased agitation around China between Democrats and Republicans,” Hockey says. “It’ll be one of the few things that will get unity across the aisles, particularly if Xi Jinping becomes more aggressive on Taiwan, or becomes more aggressive in manipulating the reliability of the supply chain from China to America on critical goods,” Hockey says.

“In my view, Congress is much more forward-leaning over Taiwan than the president or the administration. This all means that legislation around AUKUS will be wrapped up in the growing agitation about the United States’ exposure to China’s supply chain, and the risks associated with the Indo-Pacific.”

The centrepiece of AUKUS, which is the transfer of nuclear submarine technology, still requires support from Congress. The US has to provide exemptions on export controls and intellectual property transfers on the sensitive technology, as well as balance language around nuclear non-proliferation sensitivities and exemptions under the International Traffic in Arms Regulations. Republicans are likely to hasten support for this.

For Beazley, the political disruption Republicans could cause for Biden could impede progress on important military matters involving Australia.

“In security terms we have not been so reliant on the Americans since World War II, so we have a direct interest in American political effectiveness,” Beazley says. “The Republican mood seems to be to optimise trouble for Biden. Particularly this will be a problem as Biden approaches funding issues. The Republicans are unlikely to be disruptive where this affects competition with China; but where Biden pursues subtle policy here, they will not.”

Australia Chair at the Centre for Strategic & International Studies Dr Charles Edel also suspects that under Republicans “important initiatives like AUKUS are likely to proceed apace.”

“However a Republican Congress would bog the Biden administration down with investigations and inquiries, distracting the administration and limiting its flexibility and capacity for leadership,” Edel says.

Energy on the agenda

Australian mining and energy companies in America can expect to spread their wings a little more. From big companies such as BHP, South32 and Rio Tinto, to smaller players such as Ioneer, they could all themselves in a better, faster environment for mine permitting and development.

“Republicans want to see more drilling and fossil fuels made available, Democrats will want to see more clean energy. But I think they will probably compromise on just having more energy in both ways for energy independence,” Gordon says. “Certainly, the rare minerals that are available from Australia would play a big role in that.”

President Biden’s first big move when he came to power was to suspend new oil and gas drilling on government land and cancel the Keystone XL pipeline, reversing the agenda of former president Donald Trump.

Denham says Republicans are going to make good on their election promise of encouraging more investment in America’s fossil fuel energy.

“Republicans are going to focus on not only reducing inflation, but becoming energy independent again. So a lot more exports on gas, new pipelines, new natural gas,” he says.

Some are nervous that Republican state representatives, some of which have pulled billions of dollars of funds from BlackRock because of the asset manager’s ESG investment policies, will reverse government incentives for clean energy investment. Oregon’s cap-and-trade program, Maryland’s net zero emissions targets, and Arizona’s solar subsidies could be decided at these midterm elections.

Australian billionaire Andrew Forrest’s Fortescue Future Industries (FFI) is confident that Republicans won’t change the mix of subsidies for the new energies his company is trying to build.

“FFI’s green mission to revolutionise the way we power our planet is good for all Americans – Republican and Democrat,” an FFI spokesperson says. “We want to create highly paid, green jobs by building domestic energy manufacturing and supplying the world with reliable, low-carbon energy sources. That transcends politics because it is good for everyone.”

Privatisation opportunities

One area where Australian investors are likely to see some real progress is in privatisation, where the US is not as progressive as Australia. Much of that is because Democrats and unions want higher company taxes to pay for infrastructure, while Republicans want more private-sector involvement such as user-pay charges and asset recycling, which involves state-owned assets being sold or leased and the proceeds used to fund new infrastructure.

Denham says the Republicans will insist on more oversight and control in the rollout of any new Congress legislation that has big dollars attached to it.

“The perfect example is how the US has looked at the gains Australia has made when it comes to financing and taking public assets and putting private dollars behind them,” Denham says. “One of the bills that has to come out next year is our Federal Aviation Authority bill. That is going to address all of our airports across the country. And that would be a perfect opportunity where you can do asset recycling.”

Hockey agrees and says Congress has to consider asset recycling.

“The US will get more bang for its buck if you involve the private sector in infrastructure investment,” Hockey says. “When you get the private sector in, you share the risk and the workload.”

Infrastructure specialists such as Macquarie, IFM Investors and Transurban, who invest on behalf of Australian superannuation funds, are lined up to take part in any opportunities.

American Chamber of Commerce in Australia chief executive April Palmerlee has hosted several high-level Congressional delegations this month as she prepares for major changes in the US.

“The midterms matter for Australia because the result will be indicative of where the US is headed in the upcoming presidential election.”

She thinks there is still a chance Democrat voters could surprise the world.

“If voters are reacting to the SCOTUS decision to overturn Roe v Wade, we could see an historical anomaly of the president’s party gaining seats at the midterms.”

Published by the Australian Financial Review.

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