Industrial Securities: Outlook on U.S. Politics, Midterm Elections, and Sino-U.S. Bilateral Relations in 2026

1. The Basic Situation of U.S. Politics and Midterm Elections in 2026

The midterm elections are for the U.S. Congress’s House of Representatives and Senate, scheduled for November 3, 2026. The House has 435 seats, with members serving two-year terms and all seats up for election every two years; the Senate has 100 seats, with members serving six-year terms and one-third of seats up for election every two years. The U.S. Congress operates under a single-member district system, meaning the entire country is divided into 435 districts, each electing one representative. Senate seats are evenly distributed among the 50 states, with each state having two seats.

(1) House of Representatives: Current polls and historical elections both show an upward trend for Democrats

In the House, Republicans currently hold 220 seats, while Democrats hold 213, meaning Democrats only need to net a few seats to flip control. Therefore, the national political cycle has a greater impact on their prospects. According to current polls and the “midterm curse”—the tendency for the opposition party to perform better in midterms—Democrats may be experiencing an upward trend.

1. The impact of party support on midterm elections

Although midterms are local elections for Congress, party support rates remain a key determinant of election outcomes. Political cycles tend to be synchronized nationwide; Trump’s approval ratings and previous election trends strongly influence midterm results. First, midterms are viewed as a trust vote in the ruling party, and Trump’s approval rate changes directly guide the election outcome a year later. Second, current American politics are dominated by polarization. For example, mainstream voters in deep-red areas tend to vote consistently for their side across mayoral, gubernatorial, House, Senate, and presidential elections. Third, lower turnout in local elections means candidates often rely on endorsements from Washington political celebrities, further strengthening the link between voter turnout, party support, and presidential approval.

Various polls show that Trump’s approval ratings in his first year in office are not high. Looking back at 2025, economic issues continued to be the most important for voters. However, tariffs, immigration policies, and the polarization of the U.S. economy (K-shaped recovery) have made it difficult for Trump’s economic image to be sustained. Trump’s net support declined throughout 2025. State-by-state, deep-red states like Nebraska, Kansas, North Dakota, and Arkansas saw support decline toward the end of the year. Demographically, support for Trump remains divided across gender, education level, race, and party lines. Only Republicans and less-educated white voters show positive net support; support among other groups has turned negative.

2. The influence of media narratives on midterm elections

The correlation between national and regional election outcomes is high, mainly affected by media “echo chambers.” Over the past 50 years, trust in mainstream media among Americans has declined. Supporters of the Republican Party trust mainstream media even less, with confidence levels at 51% among Democrats and only 8% among Republicans, both reaching new lows. Within mainstream media, a clear trust divide exists between the parties.

3. The impact of statistical patterns on midterm elections

Statistical patterns show opposition parties tend to perform better in the House. Since 1946, only in 1998 and 2002 has the ruling party gained House seats in midterms; in all other years, the ruling party lost seats. Out of 39 midterm elections since the Civil War, the ruling party lost the House 36 times, a 92% rate.

(2) Senate: Republicans are likely to hold their majority; Democrats need to win in shallow-red districts to flip

1. Republicans currently lead in the Senate, holding 51 seats in non-competitive and red-leaning districts

The current Senate composition is 53 Republicans and 47 Democrats. Democrats need to net four seats to reach 51 and become the majority. In 2026, 33 Senate seats are up for election; since Vance and Rubio are entering the cabinet (creating two vacancies), a total of 35 seats are contested. Among the 65 seats not up for election, Democrats hold 34, Republicans 31. Of the 35 seats contested, Democrats lead in 11 districts, Republicans in 20. Under baseline assumptions, Republicans would secure at least 51 seats (31 “incumbent” wins plus 20 districts leaning Republican), while Democrats would get at least 45 (34 “incumbent” wins plus 11 districts leaning Democratic). To flip control, Democrats must win at least six districts currently leaning Republican.

2. Democrats have a possible but challenging path to flip the Senate

Among the 35 contested districts, only four—Georgia (Ossoff’s district), Michigan (open seat), Maine (Collins’s district), and North Carolina (open seat)—are evenly matched. To flip the Senate, Democrats must win all four swing districts and also flip at least two Republican-leaning districts. Specifically, districts like OH-Husted, IA-Open, and TX-Cornyn (or the district’s current senator if they do not run for re-election) heavily favored Trump in 2020 and 2024. Democrats would need to make significant gains in public opinion and sympathy to win at least two of these red-leaning districts. Additionally, flipping the 17 deep-red seats involved in the midterms is even more difficult given current polarization. Currently, the district with the smallest Republican advantage is OH-Husted, which voted for Trump with margins of 53.3%-45.2% in 2020 and 55.1%-43.9% in 2024.

Part Two: Key Variables Affecting U.S. Politics and the 2026 Midterm Elections

(1) Healthcare remains a battleground issue, with Republicans beginning to take the lead

1. The Affordable Care Act (ACA) has made healthcare a fiscal issue

The current healthcare disputes stem from the 2014 passage of Obamacare. The ACA, also known as the “Patient Protection and Affordable Care Act,” aimed to make health insurance more affordable for Americans but also contributed to rising premiums.

To expand coverage, the ACA included low-income adults earning below 138% of the Federal Poverty Level (FPL) into Medicaid; young people under 26 could stay on parental plans; and employers with over 50 employees were required to provide insurance. After expansion, the uninsured rate dropped sharply from about 16% pre-2010 to a historic low of around 7-8%.

Insurance companies cannot deny coverage or charge higher premiums based on pre-existing conditions; all plans must cover ten essential health benefits, including outpatient, emergency, hospitalization, maternity, mental health, prescription drugs, rehabilitation, labs, preventive services, and pediatric care; preventive services are free, including vaccines and screenings.

2. The core fiscal provision of the ACA is the premium tax credit (PTC) policy

The ACA offers standardized insurance options (bronze, silver, gold, platinum) and provides tax credits (PTC) to families earning 100%-400% of FPL, covering a portion of premiums. During open enrollment, applicants estimate their income for the upcoming year, and based on their tax filings, subsidies are paid directly to insurers monthly. This government subsidy model increases government spending and is a significant fiscal burden.

3. The expansion of ePTC worsens fiscal burdens, while its cancellation increases individual costs

During the pandemic, the Biden administration introduced enhanced premium tax credits (ePTC) as temporary aid. ePTC benefits middle-income groups but also raises premiums and government expenditures. Under original ACA rules, families earning over 400% FPL were ineligible for subsidies, creating a “subsidy cliff.” The 2021 American Rescue Plan allowed those earning 100%-150% FPL to access free silver plans and extended subsidies to families earning above 400% FPL if premiums exceeded 8.5% of income.

Looking ahead, if premium increases and ePTC cancellations occur simultaneously, household premium costs could rise significantly. If ePTC expires, average out-of-pocket premiums could increase by over 75%, raising total healthcare costs. Initial rate proposals from 312 insurers for 2026 show a median increase of 18%, more than double last year’s 7%.

Overall, extending ePTC enjoys bipartisan support. Over 84% of enrollees favor its extension, including 72% of MAGA supporters and 75% of non-MAGA Republicans. Even if Republicans oppose extending ePTC, they must propose alternatives with sufficient fiscal backing and voter appeal. After years of subsidies, Americans are unlikely to bear the full burden of rising premiums again. Healthcare costs are now a shared fiscal responsibility, with both parties likely to manage them through budget adjustments, crisis resolution, or technological progress.

(2) Despite declining inflation figures, “living costs” remain a dominant campaign theme

Trump won the election with an image of economic mastery, but “cost of living crisis” has become a negative asset for his popularity. Perceptions of inflation in housing, premiums, student loans, energy, and groceries are highly persistent.

Regarding the economy, Trump’s “free-market growth with administrative intervention to curb inflation” policies are gradually taking effect. This hybrid approach, sometimes called “right-wing liberalism combined with left-wing interventionism,” involves deregulation and tax cuts on one hand, and direct administrative measures to lower drug and food prices, including tariffs, on the other.

On price control, Democrats emphasize income subsidies, while Trump focuses on wealth effects. Both parties recognize the worsening financial situation of voters and see controlling prices as crucial for electoral gains. Democrats advocate higher taxes on the wealthy and large corporations to fund healthcare, while Trump emphasizes the investment value of the stock market. Currently, Americans expect economic conditions to worsen over the next year, but a record-high proportion still see stock investments as valuable. They anticipate declining incomes but rising wealth, aligning with Trump’s narrative of boosting the economy through stock and crypto wealth effects.

(3) Fierce competition over district redistricting, with significant implications for House control

1. Redistricting can create unfair advantages for partisan competition

The sharp decline in competitive districts due to increased polarization makes redistricting a key battleground. As polarization consolidates core supporters, the number of truly swing districts has fallen to about 40, making redistricting outcomes critical. Redistricting decisions influence long-term party competitiveness and involve mobilization of resources from courts, governors, legislators, and congressional leaders. Democrats need to focus on competitive districts to regain the House; Republicans aim to break the cycle through a power grab.

2. Redistricting occurs every 10 years based on census data, with districts apportioned accordingly

The Constitution mandates a decennial census to allocate House seats proportionally. The 435 seats are divided among states based on population, with districts drawn to contain roughly equal populations. The process involves state legislatures and commissions, which can manipulate boundaries through “packing” (concentrating opposition voters) or “cracking” (dispersing supporters) to create “safe seats” for their party.

3. Current partisan balance in House districts makes redistricting a key factor in future elections

In six states with new district maps, Republicans netted three seats; in six states with pending maps, Democrats could net over three seats. Among the six states with finalized maps, Republicans gained in Texas (+5), Missouri (+1), North Carolina (+1), Ohio (+2), while Democrats gained in California (+5) and Utah (+1). In the six states still drawing maps, Democrats are expected to gain in Maryland (+1), Virginia (+3), and Illinois (+4). Democratic lawsuits challenge Republican-drawn maps in Texas and California, leading to intense legal battles.

4. The expansion of Trump’s executive power and intergovernmental conflicts may intensify

Trump’s second term has seen a significant increase in executive orders, surpassing his first term. As of December 18, 2025, he has signed 225 executive orders, 55 memoranda, and 114 notices—more than his first term. Major legislative goals, such as the “Big and Beautiful” bill and the 2026 Continuing Appropriations Act, have been achieved mainly through executive action, including tariffs and deregulation.

The Trump administration’s “fast-paced, slow-acting” approach means Congress and courts struggle to keep up. For example, tariffs enacted via executive orders on fentanyl and China are subject to legal challenges, potentially leading to court reversals. Other policies on taxes, immigration, election rules, and rights also require congressional approval. By issuing many executive orders quickly, Trump has reshaped many aspects of U.S. society.

In addition to executive orders, Trump frequently uses memoranda and notices to signal policy directions. These are issued to agencies, published in the Federal Register, and often lack the legal standing of formal executive orders. In 2025, Trump used 55 memoranda to promote deregulation in energy, social issues, immigration, and trade, pushing the boundaries of executive authority. If he loses control of one or both chambers after the midterms, his executive power may further expand to counterbalance legislative constraints, risking a further erosion of checks and balances.

Midterm elections may serve as a trigger for further restrictions on Trump’s executive authority

If executive powers are curtailed—such as tariffs shifting from presidential to congressional authority—the scope of executive action could shrink, with increased judicial review. For example:

• Tariff authority, originally granted to Congress under Article I, Section 8 of the Constitution, could be reasserted if courts find Trump’s tariffs unconstitutional. The Supreme Court’s decision in the LoperBright case in June 2022, which limited administrative agencies’ interpretive authority, signals a trend toward restricting executive discretion.

• Congress may further limit the White House’s legal authority, as seen in the LoperBright ruling, which ended the Chevron deference doctrine. This could reduce the scope of executive actions.

• State lawsuits against federal policies—such as those challenging the termination of birthright citizenship or foreign aid restrictions—may increase, consuming administrative resources and prompting legal battles.

3. The U.S. political landscape and midterm elections’ impact on U.S.-China relations

(1) Overall assessment: U.S.-China competition remains balanced; bilateral relations are likely to remain relatively stable throughout the year

1. China needs to maintain stable U.S. policies in semiconductors, high-end machinery, and finance

In semiconductors, the U.S.-China Strategic Competition Committee reports that China imported nearly $38 billion worth of advanced process semiconductor equipment in 2024 and recommends multilateral efforts to control exports and monitor equipment.

In biotech, U.S. lawmakers have repeatedly attempted to pass “Biosecurity Acts,” but none have succeeded until the NDAA 2026 (Section 851), which became law on December 18.

In finance, U.S. sanctions on China threaten decoupling and dollar clearing. The Investment Priorities Memorandum allows restrictions on Chinese investments in private equity, venture capital, greenfield projects, and public securities, affecting U.S. pension funds and university endowments. The U.S. can also threaten to sanction Chinese banks, restricting dollar transactions and excluding them from the U.S. payment system, but such measures are unlikely to be implemented widely due to the risk of undermining dollar dominance.

To prevent adverse impacts on China’s development, Beijing remains motivated to stabilize bilateral relations.

2. Trump must also coordinate policies on export controls and antitrust investigations affecting the U.S.

China’s main exports to the U.S. include rare earths, graphite, superhard materials, and consumer electronics, which benefit from industrial clusters and supply chains. Limiting exports of core consumer goods and electronics could impact U.S. markets and inflation, influencing Trump’s midterm support.

China can also use its Anti-Monopoly Law to investigate U.S. firms’ monopolistic practices in China, creating leverage and promoting domestic substitutes.

In imports, China holds bargaining chips in energy, soybeans, and large aircraft. In April 2025, China’s National Film Administration indicated a possible reduction in U.S. film imports. China can also increase or decrease energy imports, and has significant influence over large aircraft and soybean markets, which can be used as strategic tools.

3. Overall, the U.S.-China bilateral relationship in the midterm year faces more favorable than unfavorable factors

• First, tariff constraints are likely to strengthen politically during the midterms. Deterioration could lead to a complete trade breakdown, risking inflation and growth slowdown before the election, which would hurt Republicans. Conversely, a significant rollback would contradict Trump’s exaggerated “win-win” narrative, potentially weakening his image. Overall, Trump’s government is more likely to maintain the current tariff framework, selectively applying tariffs to hedge economic and electoral pressures, with tariffs acting more as constraints than as tools for expansion.

• Second, U.S. hawks cannot prevent Trump from engaging with China amicably. While treaties require Senate ratification, most executive decisions are at the president’s discretion. Although Congress, interest groups, media, and public opinion influence policy, Trump’s strong electoral mandate and control over Congress and courts give him significant freedom. His “America First” approach and the broad support from the Republican base enable him to set the agenda independently, including on China. His positive statements about China reflect a pragmatic view of bilateral relations as opportunities for mutual benefit rather than systemic rivalry.

• Third, Trump’s “enemy-friend” view emphasizes domestic enemies—Democrats, judiciary, critics—rather than China as a geopolitical rival. His external opponents include Japan, South Korea, India, Canada, Mexico, Brazil, and the EU, mainly in trade negotiations, while North Korea, Russia, and Iran are strategic rivals. China is seen as both a trade partner and strategic competitor, but Trump’s primary goal is to extract maximum benefits from China, often expressing a desire for “good relations” with China. This indicates that he does not see China as a systemic adversary but as a potential “big cake” for deals.

If WTO’s Section 301 tariffs are ruled unconstitutional, the U.S. may impose alternative tariffs, increasing uncertainty in bilateral relations. Trump’s current comprehensive tariffs include 10% initial tariffs, 10% retaliatory tariffs, and 10% fentanyl tariffs, totaling about 30%. If Section 301 tariffs are invalidated, he might seek other legal bases, such as the Trade Act of 1974 (Section 122) or the Smoot-Hawley Tariff Act (Section 338).

• Section 122 allows the president to impose tariffs up to 15% without investigation, in cases of significant trade deficits, but the duration is limited to 150 days and requires congressional approval for renewal.

• Section 338 permits the president to impose tariffs up to 50% on certain countries that discriminate against U.S. products, but it is rarely used and carries higher legal risks.

If Section 301 tariffs are invalidated, Trump might:

• Use only Section 338 tariffs, risking legal challenges, as these are considered retaliatory and not unilateral measures.

• Combine Section 122 and Section 338 tariffs, with lower legal risk but reduced impact, e.g., imposing 15% tariffs under Section 122 and 39% under Section 338 on China.

Beijing may see the invalidation of Section 301 tariffs as an opportunity to de-escalate, but if Trump insists on alternative tariffs, bilateral tensions could rise in 2026.

Risk Warnings

Reintroduction of export controls; tariffs exceeding expectations; significant changes in external geopolitical situations.

(Source: Industrial Securities)