If there is One Thing Investors and Foreign Officials should Know about the US…

Domestic issues have dominated the news of
the first 50 days of the Trump Administration.
With the German Chancellor’s
trip to Washington tomorrow, Secretary of State Tillerson in Asia, and the G20
meeting, foreign affairs may knock the debate about the US budget and health
care off the headlines.

Investors and policymakers appear aware that there are different views in
the Trump Administration
. They are not all what
has become known as alt-right, or subscribe to the populism. Partly, Trump’s
(and Bannon’s) worldview does not appear to
find many adherents among the pool of potential candidates for Cabinet and other senior posts.  Another
consideration is the Republican Party is
itself a large coalition.  In the Netherlands, there are more than two
dozen political parties, half of which will be
represented
in the new parliament.  The US political culture is
different and what might have been political parties elsewhere are factions
within a larger party.

Although Trump has not held public office, his views are well known and were not entirely made of new cloth for the
campaig
n.  He has been critical of the liberal globalism for which
there has been a rough consensus since the end of WWII.  He consciously
harkens back to an era before WWII.  In particular, the slogan
“America First” is a throwback to the 1920s and 1930s. 

That was an America that turned its back on its president’s proposal for
the League of Nations.
  Many historians talk about this period as isolationism,m but it is neither fair nor
accurate.  Foreign leaders and investors are mistaken to think that the
Trump Administration is isolationist.  

It is true that the draft 2018 budget calls for large cuts in the State
Department (28% cut from FY2016 levels). 
  It is also true that
the Trump Administration let it be known
that it is not obligated to follow WTO rulings.   Trump has also been
critical of the IMF and the UN.  Some analysts and politicians are talking
about these measures and others as evidence of isolationism;
they
are better understood as part
of the tilt toward unilateralism.  

Some of the cuts in discretionary spending Trump is proposing is for
aid, which comes different forms and is peppered through numerous agencies.
  
For example, Trump is proposing eliminating the McGovern-Dole International
Food Education program ($182 mln).  Consider where Trump is willing to
spend more money:  Pentagon and security.  Despite the name
(Department of Defense), military
spending is partly about enhancing the ability to project power.  

Consider what has already happened, which has been overshadowed by other issues in the domestic press. 
A week-long bombing raid in Yemen
recently was larger than annual bombing during the Obama Administration. 
He also authorized a large-scale commando raid.  The Commander-in-chief
has deployed Marines and special operation forces to Syria.  Reports
suggest he may send more troops to Afghanistan.  

While most of the focus ahead of the G20
meeting is on trade and currencies, the issue of bank regulation.
 
Many in the Trump Administration wants to roll back
Dodd-Frank.  However, this is an area in which without global
coordination, financial institutions will be incentivized to engage in
regulatory arbitrage.  An issue that may come up at the G20, and then
again next week at the Basel Committee on Banking Supervision is the global
bank capital rules.  Germany, the host of the G20 in hopes to formally reach an agreement at the heads of state summit in July.  
While a disagreement between the US and Europe have been hampering an
agreement,  a more immediate problem is the US team is not in
place.  

One important disagreement is over the use of internal bank models to
measure asset risk.
    US regulators have been more skeptical
than European (and Japanese officials).   More broadly, there have
been some suggestion that the Trump Administration is reluctant to implement
Basel III framework.  If this is the case
then Europe, which has been more critical of the changes (hits European banks
harder), would not adopt the new framework.  

Ironically, the US often led efforts to erect global rulemaking.   If the US no longer supports
such efforts, what will happen?  To some extent, others may try to fill
the void.  China’s free-trade initiative in Asia received a boost from the
US withdrawing from the TPP talks.   At the same time, unilateralism
by the US could foster unilateralism by others. 

Some in the Trump Administration have been critical of Germany that it is
managing Europe through the EU and the ECB. 
What they might not fully
recognize or appreciate is that some in Europe and Asia feel about the US and
the IMF, World Bank and WTO.  The US embraced, nay, help found and develop
these multilateral institutions as a  way to further US national
interest.  

The US remains a dominant power.  The Trump Administration
differs from past administrations on how it is best to project its
power.  The US appears to be able to withstand a challenge by any single
country.  The threat to the US is if the competitors, challengers or rivals team-up.  During the
last several years, US policy has helped facilitate cooperation among some
adversaries, especially Russia and China.  The instincts of some of the Administration officials is to drive a wedge
between them by seeking a better relationship with Russia.  Europe, on the
other hand, is more worried about Russia and envisions more commercial ties
with China.  Reports indicate that prior to
leaving Germany for the US, Merkel spoke with  Chinese President Xi. 
They “reaffirmed their common support for free-trade and open
markets.”   

The Trump Administration is more about unilateralism than isolationism,
but its unilateralism may find it more isolated. 

 

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