WASHINGTON — An unforeseen secondary effect of President Trump’s “America First” policy toward international trade could upend the United States' leading position in global finance, according to a research note published Thursday.
Federal Financial Analytics, a financial research and consulting firm, said that while Trump has generally directed his protectionist rhetoric toward foreign manufacturing competitors with the aim of boosting U.S. industrial capacity, he may unwittingly be inviting an era of balkanization in the global financial system that could have far-reaching implications for domestic financial firms.
“Even though trade in financial services is not the focus of the administration at the present time, you cannot do what they are focusing on — in terms of trade in goods — without dire consequences for trade in financial services,” said the firm's managing partner, Karen Shaw Petrou. “The issues are tied at the hip.”
The report, produced on the firm’s own initiative, argues that as the Trump administration pursues protectionist policies and the independent banking regulators continue to pursue international harmonization, the already brittle multilateral Basel accords will “end in practice in 2017 and then by decree in 2018.”
As the rules governing activities like mergers and acquisition, subsidiarization and corporate governance become more stark between jurisdictions over time, foreign financial firms will face greater penalties when attempting to do business in the U.S.; foreign governments, then, will respond in kind against U.S. financial firms.
The increase in prices from those trade protectionist principles will then give the Fed incentive to raise interest rates, at which time “an array of profitability, stability, and distributional challenges result” — the severity of which will depend on how extensively regulatory relief has progressed.
Banks and other financial institutions should prepare for that outcome by abandoning any growth strategy that relies of the advancement of international free trade deals like the Trans-Pacific Partnership or its European counterpart. Further, Trump may advance his campaign pledge to pull the U.S. out of the World Trade Organization — a process that would require congressional participation and that would usher in a “chaotic” political climate where even bilateral trade deals with longtime allies may be uncertain.
“Transactions with problematic nations from the manufactured-goods and/or currency-valuation perspectives will be particular targets, but harsh rhetoric about longstanding allies such as Germany, Canada and Australia suggests no one should feel safe,” the report said.
The report concludes by noting that however drastic and emblematic of the global emergence of economic nationalism may be, it is still political in nature and therefore subject to abrupt change. But banks and other firms should no longer assume that the body politic is unwilling to kill globalism in order to preserve any of the benefits of that financial system.
“Donald Trump may be the newly elected economic nationalist with the biggest stick, but Brexit and other populist initiatives quickly gaining ground around the globe show that the fundamental assumptions on which cross-border finance is premised are facing the sternest test since the 1930s,” the paper concludes. “For cross-border financial companies, this is a critical strategic dilemma even as it is proving a structural challenge to the economies that depend on them for financial intermediation and the rest of the basic clockwork of spending, saving, insuring, and prospering.”