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

1. 2026 U.S. Political and Midterm Election Fundamentals

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, with 435 districts nationwide, each electing one representative. Senate seats are evenly distributed among the 50 states, with two seats per state.

(1) House of Representatives: Current polls and historical elections show Democratic gains on the rise

In the House, Republicans currently hold 220 seats, while Democrats hold 213, meaning Democrats only need to net a few seats to flip control. This indicates that national political cycles have 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. Party support and its impact on midterm elections

Although midterms are local elections, 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 serve as a direct indicator of next year’s results. Second, current U.S. 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 were low. In 2025, economic issues continued to be a top concern 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 sustain. 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 highly divided across gender, education, race, and party lines. Only Republicans and less-educated white voters show positive net support; support among other groups has turned negative.

2. Media narratives and their influence on midterm elections

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

3. Statistical patterns and their impact on midterm elections

Historical data shows 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 control; 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; with Vance and Rubio vacating their seats for cabinet positions (creating two vacancies), a total of 35 seats will be contested. Among the 65 seats not up for election, Democrats hold 34, Republicans 31. Of the 35 seats contested, Democrats currently lead in 11 districts, Republicans in 20. Under baseline assumptions, Republicans would secure at least 51 seats (31 incumbents plus 20 districts favoring them), while Democrats would get at least 45 (34 incumbents plus 11 districts). To flip control, Democrats would need to win at least six districts currently leaning Republican.

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

Among the 35 contested districts, only Georgia (Ossoff’s district), Michigan (open seat), Maine (Collins’s district), and North Carolina (open seat) are truly competitive. Democrats would need to win all four swing districts and flip at least two Republican-leaning districts—such as Ohio (Husted), Iowa (open), and Texas (Cornyn)—which heavily favored Trump in 2020 and 2024. Achieving this requires Democrats to gain significant social and political support. Additionally, flipping the 17 deep-red seats in the current Senate is even more challenging amid intense polarization. Currently, the most vulnerable Republican seat outside the swing districts is Ohio-Husted, which Trump won with 53.3%-45.2% in 2020 and 55.1%-43.9% in 2024.

Part Two: Key Variables Shaping U.S. Politics and the 2026 Midterms

(1) Healthcare remains a battleground, with Republicans increasingly taking the lead on proposals

1. The Affordable Care Act (ACA) and healthcare as 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 but also contributed to rising premiums.

To expand coverage, the ACA extended Medicaid to low-income adults earning below 138% of the Federal Poverty Level (FPL); allowed those under 26 to stay on parental plans; and mandated employers with over 50 employees to provide insurance. As a result, uninsured rates dropped sharply from about 16% pre-2010 to a historic low of 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, prescriptions, rehab, labs, preventive services, and pediatric care; preventive services are free, including vaccines and screenings.

2. The core fiscal component of the ACA: Premium Tax Credits (PTC)

The ACA offers standardized plans (bronze, silver, gold, platinum) and provides tax credits (PTC) to households earning 100%-400% of FPL, covering a portion of premiums. During open enrollment, applicants estimate their income with assistance from brokers or agents. Based on tax filings, subsidies are paid directly to insurers monthly. This government subsidy model has increased government spending on healthcare, making premium subsidies a significant fiscal burden.

3. Enhanced Premium Tax Credits (ePTC) and their fiscal impact

During the pandemic, the Biden administration introduced temporary enhanced PTC (ePTC) policies, benefiting middle-income groups but also raising premiums and costs. Originally, households above 400% FPL received no subsidies (“subsidy cliff”). The 2021 American Rescue Plan expanded these benefits, allowing those at 100%-150% FPL to access free silver plans and providing 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 sharply—by over 75% on average—driving up actual out-of-pocket expenses. Initial rate proposals from 312 insurers suggest an 18% median increase for 2026, double last year’s 7%.

Therefore, 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 that are fiscally sustainable and politically appealing. Under current subsidy inertia, Americans are unlikely to bear the costs of multiple premium hikes, and healthcare costs will be shared across the federal budget, with crisis management or technological progress addressing the issues.

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

Trump’s image as an economic expert helped him win the election, but the “cost of living crisis” now acts as a liability. Perceptions of inflation in housing, premiums, student loans, energy, and groceries are highly persistent.

In economic policy, Trump’s approach of “free-market growth with administrative measures to curb inflation” is taking effect. This hybrid, sometimes called “right-wing liberalism with leftist intervention,” involves deregulation and tax cuts on one hand, and direct administrative actions—such as negotiating drug and food prices and using tariffs as bargaining chips—on the other.

On prices, 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; 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 gains

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 decisive. Redistricting decisions involve mobilizing resources from courts, governors, legislators, and congressional leaders. Democrats need to target competitive districts to regain the House; Republicans aim to leverage redistricting to solidify power and break the cycle.

2. House seat redistribution occurs every ten years based on census data

The Constitution mandates a decennial census to allocate House seats proportionally. The 435 seats are apportioned among states based on population, with districts drawn to contain roughly equal populations. States then divide their apportioned seats into districts. Gerrymandering strategies—packing (concentrating opponents’ voters) and cracking (dispersing supporters)—are used to create “safe seats” for one party, influencing long-term partisan control.

3. Current partisan balance and the critical role of redistricting

Among six states with new district maps, Republicans net three seats; Democrats could net over three seats in states yet to finalize maps. In the five states with finalized maps, Republicans gained three seats—Texas (+5), Missouri (+1), North Carolina (+1), Ohio (+2)—while Democrats gained six—California (+5), Utah (+1). In the remaining states, Democrats are favored to gain at least four seats, notably in Maryland, Virginia, and Illinois. Legal challenges to district maps—such as in Texas and California—add uncertainty, with partisan and judicial battles ongoing.

(4) Trump’s expansion of executive authority and intergovernmental conflicts

Trump’s second term has seen a significant increase in executive orders, surpassing his first term. By December 2025, he had signed 225 executive orders, 55 memoranda, and 114 notices, compared to 220 orders in his first term. Major legislative goals, such as the “Big and Beautiful Act” and the “2026 Continuing Appropriations, Agriculture, Defense, and Veterans’ Legislation,” have been achieved mainly through executive actions. Deregulatory policies in tariffs and market liberalization are also implemented via executive orders.

The Trump administration’s “fast-paced, slow-acting” approach means Congress and courts often lag behind executive actions. For example, tariffs imposed via executive orders—such as those targeting China—face legal challenges, with courts potentially overturning them. Major policies on taxes, immigration, election rules, and rights require congressional approval. By rapidly issuing numerous executive orders, Trump has effectively reshaped many aspects of U.S. society.

Beyond executive orders, Trump frequently issues memoranda and notices to signal policy directions. Unlike executive orders, these do not require formal publication or legal standing, and the Office of Management and Budget (OMB) does not issue budget impact statements for them. In 2025, Trump used 55 memoranda to promote deregulation in energy, social policy, immigration, trade, and investment, often crossing the boundaries of executive authority. If Trump loses control of one or both chambers after midterms, his executive power could further expand to counterbalance legislative constraints, risking a further erosion of checks and balances.

(5) Pre-midterm, Trump’s “abuse of executive orders” could trigger renewed restrictions on executive power

If executive authority is curtailed—such as tariffs or diplomatic powers shifting from the president to Congress and courts—this would narrow the scope of executive action and strengthen judicial review. Specifically:

• Tariff authority: Under Article I, Section 8 of the Constitution, Congress controls tariffs. If the Supreme Court rules executive tariffs unconstitutional, Congress may reassert control.

• Legal limits: The 2024 Supreme Court decision in Loper Bright limits agencies’ interpretive authority, ending the Chevron deference doctrine, which previously allowed agencies broad discretion. This could restrict future executive actions.

• State-federal conflicts: States may file more lawsuits against federal policies, such as those challenging birthright citizenship or aid restrictions, consuming administrative resources and increasing judicial oversight.

3. Impact of U.S. politics and midterms on U.S.-China relations

(1) Overall assessment: U.S.-China competition remains balanced; bilateral relations likely to stay stable

1. China must 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 chip manufacturing equipment in 2024 and recommends multilateral efforts to control exports and monitor equipment.

In biotech, U.S. lawmakers have attempted to pass “Biosecurity Acts,” but none have succeeded until the December 18 inclusion of the act in NDAA 2026 (Section 851).

In finance, U.S. sanctions impact bilateral investments and threaten dollar clearing. The Biden administration’s “Invest in America” memo restricts certain investments, affecting U.S. pension funds and university endowments in China. The U.S. also threatens to sanction Chinese banks and exclude them from dollar payment systems, but such measures are unlikely to be implemented widely due to legal and strategic considerations.

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

2. Trump’s need to coordinate China’s export controls and antitrust policies

China’s exports of rare earths, graphite, superhard materials, and electronics dominate U.S.-China trade. Small commodities and electronics benefit from supply chains and cost advantages, influencing U.S. consumer markets and inflation. Restrictions on these could impact Trump’s midterm support.

China can also use anti-monopoly investigations to negotiate or accelerate domestic substitutes. In imports, China holds leverage over U.S. films, energy, soybeans, and aircraft. For example, in April 2025, China announced plans to reduce U.S. film imports. It can also adjust energy and agricultural imports to counterbalance U.S. policies, leveraging its large market.

3. Overall, U.S.-China relations during the midterm year face more favorable than unfavorable factors

• Tariffs’ political constraints intensify during midterms: Deterioration could lead to trade disruptions, raising inflation and slowing growth, which may hurt Republican prospects. Conversely, a rollback would contradict Trump’s exaggerated “win-win” narrative, weakening his image.

• U.S. hawks cannot prevent Trump from engaging with China: Despite congressional oversight and media scrutiny, Trump’s broad executive powers and electoral mandate give him significant freedom to set policy. His “America First” approach and personal diplomacy mean he can pursue a more pragmatic or friendly China policy regardless of party pressures.

• Trump’s “enemy-friend” view of China: Trump emphasizes internal enemies—Democrats, judiciary, critics—and external rivals—North Korea, Russia, Iran, EU, Japan, India, Canada, Brazil, and strategic competitors like China. He sees external rivals as zero-sum, but China as a potential “big cake” for profitable deals. His repeated statements about “hoping China does well” reflect a transactional view rather than viewing China as a systemic strategic adversary.

(2) If reciprocal tariffs are deemed unconstitutional, U.S. may impose alternative tariffs, increasing uncertainty

• If the International Emergency Economic Powers Act (IEEPA) is ruled unconstitutional, the U.S. might resort to tariffs under other laws, such as Section 122 of the Trade Act of 1974 or Section 338 of the Tariff Act of 1930.

• Section 122: Allows the president to impose tariffs up to 15% on all imports during trade deficits, without investigation, but is short-term (up to 150 days) and requires congressional renewal.

• Section 338: Permits discriminatory tariffs up to 50% on specific countries, but has never been used and carries higher legal risks.

• Trump might combine these tools or pursue other measures, which could further complicate U.S.-China trade relations. Beijing may see IEEPA’s invalidation as an opportunity to de-escalate tariffs, but if Trump insists on alternative tariffs, bilateral tensions could rise again.

Risk Warnings

Resumption of U.S. export controls; tariffs exceeding expectations; significant changes in external geopolitical situations.

(Source: Industrial Securities)