With a sharp tone of American protectionism, Donald Trump's presidency is sparking concerns among some heavily internationally exposed banks that a disruption in global trade could be on the horizon. Uncertainty in trade relationships with China, Mexico and the United Kingdom are consequently giving companies cause to re-examine how they pursue offshore business operations.
On Jan. 23, Trump got the wheels moving on his administration's pullback from trade deals by officially withdrawing U.S. participation in the 12-country Trans-Pacific Partnership trade agreement. "What we want is fair trade," Trump told business leaders in a meeting that day. "And we're going to treat countries fairly, but they have to treat us fairly."
Mauro Guillen, professor of international management at the Wharton School of the University of Pennsylvania, said banks run the risk of being shut out of emerging markets and investment banking opportunities if trade barriers impede economic activity. Those risks are especially high with China and its enormous economy, which Trump targeted during his presidential campaign.
"Whereas Mexico has only some limited capacity to retaliate against the U.S., China has so much more credibility," Guillen said.
The possibility of a trade war worried East West Bancorp Inc. CEO Dominic Ng, who used a fourth-quarter 2016 conference call to speak for an uninterrupted 12 minutes on U.S.-Chinese relations. Ng said China could race the U.S. in a tariff-building competition, which could hurt any business activities exposed to steel, aluminum or other commodities industries.
"If there is a trade war and then also there is maybe some political maneuvering, I think that's going to cause the entire global market to kind of have a meltdown," Ng said. He assured investors that Pasadena, Calif.-based East West, which has heavy exposure to China as a "financial bridge" bank, would be able to weather any possible headwinds.
But threats of a trade war might be overblown, Jeffrey Kleintop, chief global investment strategist at Charles Schwab said. Kleintop said that if Trump were to revisit a bilateral trade agreement with China, there could be viable discussions on actually lowering tariffs to Chinese imports like technology and American exports like grains, consequently improving global financing opportunities for banks.
"[It] could be a 'trade more' instead of a 'trade war,'" Kleintop said. "Which would actually be more favorable to the finance companies."
The United Kingdom's decision to break from the European Union and its single market opened the door to forging a new a bilateral trade agreement with the United States. But the terms of Brexit are still unknown, leaving some banks with nothing but speculation on EU infrastructures like "passporting," which has long enabled London to serve as a financial gateway for international banks seeking business in the EU. An analysis of FFIEC data shows that as of the third quarter of 2016, 37% of surveyed U.S. bank claims in the EU single market are in the United Kingdom.
"Very clearly, not just ourselves but others, continue to point towards most likely slower growth in the U.K. as a result of this for a period of time," Citigroup CEO Michael Corbat said on the company's fourth-quarter call. Citigroup reported exposure of $116.4 billion in the third quarter of 2016 and had dropped its exposure by 7.2% compared to the previous quarter. Morgan Stanley dropped their U.K. exposure by 10.2% during the third quarter of 2016, just after the Brexit vote occurred.
Trump has expressed a desire to pull out of the North American Free Trade Agreement, and on Jan. 26, White House Press Secretary Sean Spicer said the president was also exploring the idea of a 20% border tax on Mexican imports to pay for the wall, prompting Mexican president Enrique Peña Nieto to cancel his planned trip to Washington.
Any souring in relations with Mexico could have an effect on Citigroup Inc., which leads U.S. banks in Mexican business mostly through its Grupo Financiero Banamex SA de CV subsidiary. Citigroup's Corbat has said the company is cautiously watching what the administration does, specifically on tariffs. U.S. banks with high foreign exposure have reduced their exposure to Mexico over the course of 2016, an S&P Global Market Intelligence analysis shows.
Even smaller banks in the U.S. have expressed concern about the global picture, despite having little to no direct exposure to international markets. Melanie Dressel, CEO of Tacoma, Wash.-based Columbia Banking System Inc., said on a fourth-quarter call that the company is watching the new administration's trade deal negotiations since two of every five jobs in Washington are linked to global trade.
Greg Becker, CEO of Santa Clara, Calif.-based SVB Financial Group, said on a conference call, "The new administration's trade and tax policies will affect our clients that do business globally," listing the political uncertainty as a challenge.
Big or small, global exposure could continue to look unstable as the Trump administration embarks on its journey to restructure American trade relationships.
"There's many things at stake here; that's very clear," Guillen said.
Click here to view the Sept. 30, 2016 FFIEC 009a report and here to view the E.16 report.
Click here to download historical reports from the FFIEC website.