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Trump’s trade wars put US capital markets at risk

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Last week marked what looks like the death of the Trans-Pacific Partnership (TPP), a comprehensive trade agreement that would have heralded closer integration between the US and the high growth economies of the Asia-Pacific region.

Congress, once widely supportive of TPP, has now made clear that it will not consider it during a lame duck session following the election of Donald Trump. White House officials conceded in the wake of last Tuesday’s election that Trump’s win renders TPP dead in the water.

Capital market players would have been significant beneficiaries of the treaty given that many US markets this year, especially in securitization, have been propped up by Asian investors.

While managers have been able to attract investors without a free trade deal, TPP would have essentially given US issuers equal regulatory treatment as their Asian counterparts, making marketing and selling deals easier.

The treaty would also have meant that no company would be discriminated against when offering goods or services across the trade block, and it would have given companies legal recourse against governments if they felt that was the case.

The Securities Industry and Financial Markets Association (SIFMA) has been a vocal proponent of the treaty, which it says would be a boon for US financial institutions.

“This agreement will provide increased access and opportunities for the US business community, including the financial services sector, within a group of economies in the Asia-Pacific region representing nearly 40 percent of global GDP,” it said in a statement earlier this year.

TPP’s seemingly inevitable demise under President Trump is just the start of what seems like an attack on global free trade from the president-elect.

Trump was swept to power on a highly isolationist platform and the abandoning of TPP could well be followed by a renegotiation, or even dismantling, of the North American Free Trade Agreement (NAFTA). Europe’s hopes of a deal with the US under the Transatlantic Trade and Investment Partnership (TTIP) also look likely to peter out under the new administration.

Aside from specific trade deals, isolationist and hostile rhetoric from Trump during the election campaign, if followed through on, could lead to tariffs once again being used to protect US domestic interests.

The possibility of nasty trade wars are already bubbling up. This week has already seen talk from China over retaliation should President Trump make good on his pledge to “get tough” on Asia’s largest economy.

China is seen as an untapped frontier for US capital markets participants, and it recently embarked on initiatives to loosen restrictions on domestic investors buying foreign-issued securities.

US CLOs for example have experienced booming demand from Chinese investors, and managers are eager to continue to grow that base. While China was not a subject party to TPP initially, there was a belief in Washington that it could be brought in at a later date.

Even leaving TPP aside, if there is a trade war between the US and China then capital markets would likely lose access to the billions of dollars of Chinese investment, which many had hoped would flood the US market.

Japan has also sought to advise the president-elect on the importance of free trade and the benefits of TPP. Japanese investors have been an engine of CLO issuance volume this year, with large orders from Japanese institutions often a make or break factor for managers.

Prime Minister Shinzo Abe is scheduled to meet with Trump this week, and reports suggest that he will continue to promote the benefits of TPP to the incoming president.

However, Japan has also found itself in the crosshairs of Trump’s fiery campaign. The country could soon come under similar attack as China, given the trade deficit between the two nations and his comments during the election on renegotiating trade deals to favour US domestic interests.

“They send their cars over by the millions, and what do we do? When was the last time you saw a Chevrolet in Tokyo? It doesn't exist, folks. They beat us all the time,” Trump said in a campaign speech in 2015, speaking of the strength of Japanese manufacturing and the supposedly weakened position of the US.

In the event that tariffs are imposed on Japanese markets, CLO managers could begin to find it very difficult to sell to Japanese investors, as there would almost certainly be tariffs imposed on US goods and services in response.

Any other Asian economies which have a trade deficit with the US could face similar attacks from the new president and could be driven to imposing tariffs of their own.

America has cozied up to protectionist politicians before, and failed to see the policies bear real fruit. However, Trump’s election and the UK Brexit vote have shown that public opinion in developed economies for the moment has turned against free trade, globalisation and the financial institutions that have benefited from the liberalisation of the world economy.

If tariffs and trade wars return, capital market players and financial institutions will be among the biggest losers.

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