Democrats' Midterm Sweep Faces Gridlock, Tariff Limits and Trump's Veto Power

Markets opened the day after the US midterms with a dip, then recovered. Global stocks rallied as investors seemed to take some comfort in the Democrats' capture of both the Senate and the House of Representatives. For millions of voters, the economy had been the issue that outranked every other. The harder question, with two years left in President Donald Trump's term, is what the new Congress can actually do about it.

The short answer from analysts is: not much, at least not quickly. Democrats now hold comfortable majorities in both chambers, but they lack a filibuster-proof majority in the Senate, and Trump holds the veto. He has already said he intends to be "Mr Veto" and block whatever Democrats send him. Stephen Brown, chief North America economist at Capital Economics, wrote that the size of the gains does little to change the near-term policy outlook. Jacob Funk Kirkegaard, a nonresident senior fellow at the Peterson Institute for International Economics, was blunter, telling DW he expects two years of complete gridlock in which nothing of any kind gets done.

One place the vote may still bite is artificial intelligence. Large majorities of Americans have grown opposed to data centers, the infrastructure behind the AI boom, and that opposition helped carry many Democratic candidates. Some investors worry Democrats could push AI regulation, especially if they also win the White House in 2028. Kirkegaard, who is also a senior fellow at the Brussels think tank Bruegel, argues that even without legislation, local resistance will make data centers harder to build, which could pressure the valuations of big tech companies that have profited from the boom. The political foundation of aggressive AI growth, he said, is shaky; it won't stop or become illegal, but the dynamic has shifted. Brown added that a Democratic president in 2028 would be well placed for major changes, including possible tax increases on corporations and high earners, and regulation that could delay the AI rollout.

Tariffs were another driver. A Pew Research Center poll in early October found 56% of Americans expect Trump's tariffs to have mostly negative effects on the country, while 20% expect mostly positive ones. The sentiment appears to have helped Democrats most in states hurt by trade measures, including export-reliant Texas, Michigan, Iowa and Illinois, where counter-tariffs have landed, and in states with heavy trade with Canada.

Yet it is unclear how Democrats can force a change. Trump has favored tariffs since he first became a public figure almost 50 years ago. Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore, told DW earlier this year that Trump will not be moderated and should be expected to continue his tariff policies as long as he is in office. The Constitution gives Congress power over tariffs, but laws passed over the years let presidents impose them by citing conditions such as national security or economic emergency. Trump has used those routes despite some legal rebukes. Congress cannot necessarily end the existing tariffs, but it can now pursue further legal action to prevent escalation.

Oil prices and the war in Iran are a third front. Kirkegaard suggested the scale of the Republican defeat might make Trump less erratic, from his trade war with Canada to Iran. After the losses Trump said he would "work with" Democrats, and before the vote he told the Financial Times he was unlikely to escalate the war. A deal with Iran could bring down energy prices, a pivotal issue for voters worried about the cost of living. "You've got to get a deal with Iran, and you've got to bring down gas prices," Kirkegaard said. Deutsche Bank FX analyst George Saravelos noted that with oil flows through the Middle East largely recovered, the market is pricing in a large risk premium for re-escalation and supply disruption.

Corruption was also on voters' minds, particularly the belief that the administration has pursued personal enrichment in office. That opens the door to congressional investigations and potentially another impeachment, which could push Trump to bargain on economic issues. Kirkegaard asked whether 10 or 12 Republican senators might vote for articles of impeachment in the face of overwhelming corruption, saying he would not rule it out, and in that scenario Trump might become far more accommodating, even abandoning most of his tariffs.

For now, voters have clearly rejected Trump's economic approach, but the newly elected Democrats face an uphill battle in reversing it. Watch for movement on an Iran deal, any investigations or impeachment effort, and whether local opposition slows data center construction.