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

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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 campaign.  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 may also be discussed.  Many in the Trump Administration want 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 the same 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.