January 24, 2017

International Trade, Investment, and Finance in the Trump Administration

U.S. Treasury Secretary-designate Steven Mnuchin arrives on Capitol Hill in Washington, DC to testify at his confirmation hearing before the Senate Finance Committee, Jan. 19. (AP Photo/J. Scott Applewhite)

On January 20, Donald J. Trump was sworn in as president of the United States. AGSIW senior resident scholars examine statements made by some of the president’s key Cabinet nominees during their confirmation hearings – and by the president himself – for clues to the new administration’s likely policies on the issues of most pressing interest to the Gulf Arab states.

Leaders across the Gulf states, like leaders and citizens around the world, are listening for clues from the confirmation hearings of President Donald J. Trump’s first appointees on how the new administration will deal with a number of policy issues. The issues of most interest to the Gulf finance and business community, including the interests of state-owned entities, are likely: infrastructure, trade, monetary policy, and financial regulation. These might be the drier of the issues reported by U.S. media, but they are salient for Gulf-owned assets in U.S. financial markets, and for Gulf private and state-owned entities that might have a business presence in the United States, given uncertainty surrounding what the Trump administration might seek to change.

In U.S. monetary policy, any plans to increase interest rates will be passed on to the dollar-pegged Gulf Cooperation Council currencies. For some GCC states, raising interest rates could create some difficult pressures on their economies, as it has in the past, as their banking systems will be forced to pass on higher rates at a time when a nascent private sector will be desperate for affordable finance. For citizens seeking home finance via mortgages, an already limited set of financial products could become less accessible. Lack of affordable housing is one of the primary grievances of young families across the GCC states, especially young families in Saudi Arabia who feel priced out of a thin market.

In earlier comments, Trump expressed an interest in a weaker U.S. dollar, to boost exports. A weaker dollar also tends to boost oil exports, which are priced globally in dollars, benefitting Gulf states (some more than others). Conversely, oil prices fall on a rising dollar. On interest rate hikes from the U.S. Federal Reserve, there a number of factors to consider, including any Trump appointments to the Federal Reserve Board, a body that is designed to execute monetary policy that is independent from the executive branch.

In financial regulation, the U.S. bank sector sets standards for the global bank sector. When U.S. banks are tightly regulated, their counterparts in international transactions feel these constraints. Much of the U.S. bank regulation that seeps into GCC bank systems relates to anti-terrorist finance regulation and sanctions regimes against Iranian military holdings. For banks in the GCC states, this has meant strict compliance to verify accounts and many commercial banks limiting their customer deposit base simply for inability to verify the origin of funds. The regulations have also had perhaps an unintended effect of dampening an already limited nonprofit and philanthropic sector or “third sector” within the GCC states, as the scrutiny of charities and their ability to deal in the bank sector has only amplified Gulf governments’ efforts to tightly oversee them. Regulations passed in Dubai in 2015, for example, centralize any charitable fundraising through a government entity. In Kuwait, the government has linked charities to a terrorist threat, enabling wider scrutiny of their collective activities. While contributing to an environment of strong state control over charitable organizing, the regulations have been successful tools of the U.S. Treasury Department to guard against terror finance flows, but they also limit the growth of U.S. banks in the region and the expansion of deposit bases and credit lines, again two elements essential to growing the Gulf private sector. Should some of these regulations be relaxed, as Trump has proposed, particularly in the paring down of the Dodd-Frank regulations, including the Volker rule, which limit U.S. banks’ ability to invest their holdings in speculative products at a risk to customer’s accounts, there could be some relaxing of financial regulation in the GCC, or at least more U.S. financial institutions engaged in different kinds of investment opportunities in the region.

In trade policy, Trump has been very clear on his intention to get “better deals.” The United States has strategically bypassed the GCC in negotiating a regional trade agreement, preferring bilateral free trade agreements with individual Gulf governments, including a deal with Bahrain in 2006 and a deal with Oman in 2009. Likewise, the GCC as an organization has been slow to cement regional trade agreements with other states and regional groups. This could prove an auspicious moment for the GCC to unify in its efforts to secure a trade deal with the United States, or better yet, with the United Kingdom or European Union, or to solidify its efforts with the Association of Southeast Asian Nations along the lines of its 2011 agreement with Malaysia, and 2015 agreement with Singapore.

Perhaps the most likely area of change and opportunity will be in the Trump administration’s promises on infrastructure investment. State-owned investment funds across the GCC are closely watching this space. If opportunities are real, and foreign investors are welcome, there have already been hints of interest from both the Qatar and Kuwait sovereign wealth funds. Besides passive investments in infrastructure funds, there is significant interest and opportunity for Gulf state entities to manage and operate infrastructure investments in the United States in the oil and gas industry and in ports. Whether these investments will be welcomed, or considered “a good deal” by the Trump administration is yet to be known. Previous politicization of GCC investments in U.S. infrastructure indicates possible tension points, particularly if the Trump administration’s policies are led by a populist, nationalist base.

Trump’s pro-growth agenda will need partners, and the GCC states are also looking for investment partners in their diversification efforts and for placements for state-owned investment vehicles. The negotiation of these efforts is bound to combine some showmanship with some practical assessment of mutual interest. It will be the politicization of these partnerships that will create the most risk.

Market Watch is a blog conceived by AGSIW Senior Resident Scholar Karen E. Young seeking to provide insights from the crossroads of Gulf politics and finance.