Every day is different in the Trump White House, and trade policy is far from immune to internecine warfare, decision by tweet, and all the other uncertainties that plague the Executive Branch as we head into a government shutdown. It’s thus more than possible that suggestions at a meeting earlier this week by a senior Administration official about a new front in the U.S. trade war was nothing more than a trial balloon. Even so, this is a barrage balloon. Applying the trade-in-goods concept of “dumping” to financial services creates a powerful tool for closing off the U.S. to financial institutions with significant home-country advantages over fully-private competitors. Japan was specifically mentioned, but China is a far more likely target of Trump firepower should trade-in-financial-services battles break out.
The balloons went up in a talk earlier this week by Vice President Pence’s senior economic adviser, Mark Calabria. Although not a formal talk with released comments, it was on the record and thus carries considerable weight. In it, Mr. Calabria seconded recent USTR findings on Japan, but went farther to complain more generally about instances in which governments support financial “infrastructure.” Japan Post was the immediate target, as indeed it was going back to Obama Administration complaints in TPP negotiations, but Mr. Calabria’s concerns have considerably broader implications if the Trump Administration deploys them in its trade-policy assault, where cudgels appear to be the weapon of choice
To be sure, large Japanese banks and insurance companies would stand with the Trump Administration against Japan Post. They have tried for years to get Japan Post back to selling stamps, but it is still a formidable financial institution with a giant footprint that presents a significant obstacle to the free and fair flow of retail banking and insurance offerings in Japan. Interestingly, the most effective challenge to Japan Post of late comes not from banks, but from a major platform company – yet another indicator of how formidably these firms are shaking up finance.
But, Japan isn’t the only offender in the government-finance arena. One could also cite German savings banks – long a target of EU sanctions on grounds they pose unfair competitive obstacles. The U.S. is also not without fault. As Mr. Calabria himself mentioned, one need look no farther than Fannie Mae to see a formidable fortress of government-backed finance competing head-on with private capital.
China is, though, the main target. As is often the case there, the interplay between public and “private” capital is hard to discern with the naked eye. Layers of complex inter-relationships underpin China’s two giant banks. One could thus say that they are shareholder-owned. One would, though, be wrong – they are arms of the state, too big to fail, and very different institutions than rival U.S. banks subject to the discipline of both the market and independent regulators fully able to do to giant banks whatever they like within the law as they read it regardless of what politicians tell them.
What could the White House do about government-infrastructure financial institutions, starting first with Chinese banks? Although the “dumping” construct has some conceptual applicability to the ability of large foreign banks to do business in the U.S., applying it in practice is a more than complex undertaking. For example, complaining about this to the WTO will get the U.S. nowhere even if the U.S. decides to stay in an organization the President has alienated by his on-and-off threats to withdraw. Barring transactions is a time-honored trade sanction, but any efforts by Chinese banks to make significant acquisitions in the U.S. are dead in the water not in response to competitive concerns, but rather due to all the CFIUS battles we have highlighted in recent weeks. The Fed will also continue to move with its usual caution – and independence – before sanctioning Chinese banks directly.
Indirectly, though, there’s a lot the Fed can do not only to China but also to other foreign banks whose U.S. activities are making it increasingly uneasy. As I noted last week, the new Fed proposal has de facto capital standards in it for large branches and agencies. Proposals to apply these by force of rule are also still under active debate at the Fed. Recall all the studies FedFin has also analyzed about the ways home-country capital advantages create IOER arbitrage and how this undermines monetary policy and it’s clear that the Fed has a problem far afield from the White House’s trade worries no matter how much it shares them.
When and if the White House does something about foreign banks linked to home-country infrastructure remains to be seen. The Fed is in so much transition now that its own policy-making apparatus is on pause. There is, though, no question that a lot of closed-door discussions are contemplating significant changes in U.S. policy to at least some foreign banks doing a lot of business in the U.S. Given the overall nature of the current America-First agenda, change could come fast and hard.