With the President’s immigration comments doing little good, NAFTA on the brink, U.S.-China trade relations about to get still worse, and bilateral negotiations with our key trading partners becoming more acrimonious by the day, it’s timely to revisit our 2017 forecast on Trump Administration trade-in-financial-services policy.  Taken together with the new U.S. tax law, disintegration of key facets of the post-crisis global framework, Brexit, and new Fed actions on foreign-bank regulation, the America-First approach Mr. Trump proclaimed is quickly transforming into a “me-first” regime not just for the U.S., but also for most other major financial-market hubs.  If the Administration proceeds to makes its proclamations an actual policy, a new era of financial nationalism will bode real risk for financial stability and macroeconomic growth, not to mention simple civility.

Leaving aside tax policy on cross-border, intra-corporate payments, there are three major reasons that trade in financial services is becoming increasingly protectionist.  We are so close to the edge over which an integrated global financial system rests that each of what I’ll call the three Rs warrants careful consideration.  The three Rs affect banking, insurance, and asset management in similar magnitude but through different channels and are:  1) ring-fencing; 2) de-risking; and 3) regulatory arbitrage.  General chaos in U.S. foreign and financial policy is another factor but I’d rather think even about tax policy than U.S. foreign policy given all that keeps bedeviling it.

First to ring-fencing.  This has several underlying drivers each powered up by me-first thinking.  First, there’s a me-first attitude to protecting the home front.  Foreign banks took comfort in the Treasury report’s statement that foreign banks should be regulated for the risk they pose in the U.S., not more existential threats.  But all it does is bless what the Fed first did with intermediate holding companies and now proposes to do with all foreign banks with combined U.S. operations over the $50 billion mark.  This might go up to $250 billion if the Senate legislation passes, but I bet it won’t – the bill gives the Fed a lot of discretion and Dan Tarullo’s dictum – that foreign branches should be subject to U.S. capital rules – still holds sway.

Ring-fencing for banks, insurance companies, and asset managers also has significant competitive impetus, especially in the EU’s newly-subsidiarizing mood.  More substantively, it results from ongoing angst about the ability of any nation to resolve a large, complex cross-border financial institution.  As I’ve said before, these doubts are sadly well-taken, and ring-fencing thus will advance even if the capital and competitiveness rationales subside.

De-risking is lower-profile, but also a far-reaching source of global-finance fragmentation. It essentially forces financial institutions only to do business with counterparties they know well enough to be fully satisfied that no dodgy business lurks about warranting reporting under AML or sanctions laws.  All to the good in the battle against narco and human trafficking, not to mention that against kleptocracy.  However, a lot of innocent bystanders aren’t getting financed from abroad anymore, forcing recourse either to home-nation banks or, increasingly, Chinese ones. 

The last R is regulatory arbitrage.  This is of course the ability not only of financial institutions, but also and importantly also their national authorities to craft rules to maximize competitive advantage.  In the past, Bank of England’s Mark Carney grandly declared that the way to solve for the already-apparent collapse of national compliance with his global edicts was to give the Financial Stability Board dictatorial power over recalcitrant countries.  That didn’t exactly happen and of course things have only gotten worse ever since.

Donald Trump’s policies are doing little for national unity at home, let alone broader global cooperation.  With all of the self-interested incentives already driving policy around the world, this shift in U.S. perspective can only give protectionists an open field.  I am not a fan of traditional economic orthodoxy about the wonders of unlimited cross-border capital flows and globalization does have some pernicious economic-equality downside.  That said, we’ve seen Smoot-Hawley before, and it wasn’t good.

In 2013, I suggested using the World Trade Organization to establish new standards for trade in financial services that recognize – not now done – that prudential standards can have protectionist purpose.  Time for another look?