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Geopolitics
Democrats have dealt Trump a crushing blow. Here’s what it means for business leaders
With Democrats seizing control of Congress, IMD’s experts unpack what business leaders should expect on tariffs, AI, and corporate scrutiny (plus how to respond).
Rapid read:
- Democratic control of Congress could make US trade policy less aggressive, but businesses should not assume tariffs or geopolitical uncertainty will disappear.
- AI and data center investment could face tougher scrutiny, while companies that struck deals with the Trump administration should prepare for greater congressional oversight.
- Business leaders should build flexibility into long-term investments, prepare for policy swings, and consider how their decisions support strong institutions and the rule of law.
Donald Trump has been dealt a crushing blow in the US midterms, with Democrats winning both chambers of Congress, setting up a potentially bruising contest with lawmakers over the final two years of his presidency.
President Trump’s trade war had made imports more expensive and kept inflation sticky, while his war with Iran sent energy prices spiraling – squeezing companies and their customers alike. Long-term borrowing costs had also shot up.
A divided government, however, is usually a boon for markets, and US stocks rallied as investors bet Congress could rein in President Trump’s erratic policymaking that has complicated business planning. The S&P 500 climbed 1.6% on Wednesday in its strongest daily showing since August, although the rally proved short-lived, with the index falling 4.4% on Thursday, erasing its post-election gains.
Oil prices, meanwhile, came tumbling back down to earth as expectations rose that the defeat would pile pressure on Trump to end his war with Iran, lifting hopes of relief from steep energy bills.
But it was a mixed bag for the AI industry: investors piled into Big Tech but dumped shares in chipmakers and companies banking on new data centers, with Democrats expected to clamp down on construction – potentially forcing companies to rethink where they build.
In Europe, many political leaders cheered the prospect of more placid ties with the US, offering businesses hope of less transatlantic friction. However, German Chancellor Friedrich Merz said he expected Trump to keep using executive orders to circumvent Congress.
Markets may be betting on calmer times ahead, but business leaders cannot yet bank on an end to steep tariffs, lasting relief from high energy costs, or better relations with the US government. Some companies could also find their dealings with Washington hauled into the spotlight.
IMD’s experts unpack what the results mean for trade, AI investment, and corporate scrutiny – and why business leaders should defend the rule of law.
This election was different: trade wars and tariffs, as well as the war with Iran, drove up costs for households and made the affordability crisis worse.
Relief on trade could go hand in hand with tougher scrutiny of AI
Usually in US elections – and particularly in midterm elections – foreign policy is not a deciding factor. This election was different: trade wars and tariffs, as well as the war with Iran, drove up costs for households and made the affordability crisis worse.
The conventional wisdom is that a lame-duck president – one approaching the end of their term – turns to foreign policy because domestically it’s harder to get things done. An interesting question is whether that will be true here, or whether there will be pressure to make US trade policy more predictable and wind down the war with Iran.
I am more hopeful about this given the size of the Democrats’ victory. If US policy moved in the right direction, it could be quite a relief for businesses around the world. For AI, though, the outlook could be tougher.
Over the last six weeks or so of the campaign, AI and data centers emerged as major issues. Democrats are going to be much more critical of the speed of the AI rollout that some business leaders have been pushing. Many of those tech companies had been overtly supporting the administration: donating money and, in the case of Elon Musk, giving massive amounts of money to the Republican campaign.
Democrats have the public behind them as well as some tech companies as their new adversaries or alter-egos – that will lead to more discussion around AI regulation than there was before. It raises the question of whether some of the valuations that we have seen will be justified if the rollout and buildout of AI slows as a result of a re-energized political movement critical of AI.
David Bach, President of IMD and Nestlé Professor of Strategy and Political Economy.
Tariffs are now politically unpopular in the United States. Americans blame them for higher prices.
Tariffs are becoming a political liability – but don’t drop your guard
For geopolitics and business, two midterm outcomes matter: tariff toxicity and the presidential veto. Together, I believe they will reduce the geopolitical uncertainty facing business and may lead to the reversal of US tariffs on some allies.
Tariffs are now politically unpopular in the United States. Americans blame them for higher prices. A recent poll showed that 74% of registered voters said Trump’s tariffs had increased the prices of things they bought in stores, including 66% of Republicans, 73% of independents, and 84% of Democrats.
If they could remove them, Democrats could score quick political points by showing they were directly confronting America’s affordability crisis by lowering tariffs and, potentially, prices.
But they do not have the power to do so on their own. A presidential veto could prevent Democrats from removing the tariffs through legislation. The reason is simple: Congress could pass a bill to lower tariffs, but if President Trump vetoed it, Democrats would need the support of two-thirds of those voting in both the House and Senate, including Republicans, to override the veto.
Geopolitical consequences could follow from this new domestic political reality. Tariff toxicity raises the political cost of imposing new tariffs. Congressional Democrats can raise that cost further by forcing Republicans to defend them publicly. That could make Trump less willing to carry out tariff threats. And threats that are less likely to be carried out may be less effective at extracting concessions from foreign governments.
The Democratic victory will not directly end President Trump’s war on trade or restore predictability to US trade policy.
Yet the domestic political toxicity of tariffs, combined with pressure from congressional Democrats, could make US trade policy less aggressive and less volatile. Democrats might even force a retreat.
Nonetheless, this is not the time for business to let down its guard. US trade and investment policy remains weaponized. What the midterms changed was the domestic political cost of firing those weapons.
Richard Baldwin, Professor of International Economics
Companies that struck special deals with the White House should prepare for those deals to come under public scrutiny.
Brace for scrutiny today and policy swings tomorrow
Companies that struck special deals with the White House should prepare for those deals to come under public scrutiny. Democrats will gain investigative power in the House and Senate, and Robert Garcia, the expected incoming chair of the House Oversight Committee, has already warned: “Lawyer up.”
What to watch for: which sectors and companies get pulled in. Likely candidates are Tech and AI; pharma, where some companies traded pricing deals and investment commitments for tariff relief; media, where settlements came before merger approvals; law firms that made pro bono pledges as part of agreements with the White House; steel, chips, and critical minerals, where the government took shares in companies; crypto; and companies that received a tariff exemption.
Hearings can turn one company’s special deal into a story about an entire industry. If you have exposure, brace for possible public and political backlash, and brief your board so it can plan a response (if your competitors have exposure and you do not, this could create opportunities).
The planning horizon changes as well. There is a real chance of very different US policy from January 2029, when there will be a new president. Investments that run past 2029 should be flexible enough to accommodate those possible changes – namely a Democratic administration or continued Republican control of the White House under a Trump ally.
What to watch for: the economy. If things get worse, the pendulum could swing back to the Republicans in the 2028 race for the White House. Stability could favor the Democrats and give them time to rebuild some of what’s been torn down. One wrinkle: with Democrats taking control of Congress in January, voters will split the blame for whatever goes wrong. Watch energy prices, inflation, and whether the AI boom starts paying off beyond a handful of firms.
Timothy Quigley, Professor of Strategic Leadership and Governance
The US midterms show that democracy works.
Speak up for the rule of law – and put your business behind it
The US midterms show that democracy works. Despite pressure from parts of the media, lobbies, and powerful political and economic interests, voters have made their voices heard. Questions about the financial interests of Trump and his family have added to the sense that those in power are looking after themselves. Voters have shown that their expectations matter. When institutions are strong and protected, citizens can hold leaders accountable for failing to fulfill their promises.
Business leaders also have a stake in strong institutions and respect for the rule of law. When governments disregard international law and replace honest debate with falsehoods, businesses also pay a price. It becomes harder to make decisions and plan for the future when the rules are uncertain or no longer respected.
As people learn more about what is happening around the world, many are speaking out against injustice. They expect those with power and influence to take responsibility, too. Business leaders need the courage to speak up for human rights, international law, and the institutions that protect them. Their actions should support their words.
For executives, that means examining which customers to serve, which suppliers to work with, and which markets to enter or leave. These choices can be difficult and may come at a cost. They also give business leaders a way to contribute to a fairer world, support prosperity, and refuse to be part of injustice.
Arturo Bris, Douglas Geertz IMEDE 1988 Professor in Geopolitics and Business, and Director of the IMD World Competitiveness Center
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