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Global Treasury

Brexit, Trump an Unpredictable Mix for Treasurers

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June 22, 2016

A yes to Brexit might give a taste of the uncertainty MNCs will face under a Trump administration.

Tragedy and comedyThe British vote Thursday on whether or not to remain in the European Union (EU) may provide a window not only into the level of Trump’s prospects in the general election but the potentially devastating impact on multinational corporations (MNCs).

With recent polls now suggesting a tight vote, many companies reportedly are rushing to hedge the possibility of a weaker British pound sterling. No one knows the exact impact of such an unprecedented departure. However, the Brexit’s unanticipated level of support echoes Donald Trump’s surprise capture of the Republican presidential nomination.

Emily Blanchard, associate professor at the Tuck School of Business at Dartmouth College, said the Brexit initiative and Donald Trump’s rise each represent a retreat from the trend in recent years toward lower trade barriers and deeper economic and political integration. The other side of the coin, she noted, are the Trans-Pacific Partnership (TTP) and Transatlantic Trade and Investment Partnership (TTIP), unprecedented agreements that would push the global trade agenda two steps forward.

“The difference in these two world views is increasingly sharp,” Ms. Blanchard said, adding that while Hillary Clinton has backed away from TPP during the primary, she seems likely to move to the center in advance of the general election, embracing renegotiation over repudiation of the deal.

Presidential candidates typically move toward the political center after winning the primaries. Not Trump. His favorability has dropped in recent polls, but he shows no signs of backing off his promises to stem the flow of low-cost labor by building a wall along the Mexican border and to rectify “unfair” trade agreements by instituting tariffs and other protectionist measures. A vote in favor of Brexit could foreshadow Trump’s own popularity rising, given similar concerns are driving both movements.

Brexit, should it come to pass, would take place gradually over two years – owing to the Lisbon Treaty – giving Britain time to negotiate new treaties with EU members and for companies to adjust. Nevertheless, pound sterling has fallen 10% against the US dollar (USD) and about the same against the euro. It would also give plenty of time for derivative contracts, most typically short-term in nature, to roll off and remain under EU law. However, that doesn’t mean companies shouldn’t be looking at current longer-term contracts to understand their rights and obligations.

A Trump victory based on his current rhetoric would almost certainly have very different consequences. Ms. Blanchard noted that while Congress has ceded the authority to negotiate trade deals to the president, it is not clear whether the president has the authority, or the public mandate, to overturn existing commitments under current trade deals. So it’s unclear whether Trump would require Congressional approval to institute tariffs beyond the World Trade Organization’s (WTO) tight limits on such retaliatory trade measures. Nevertheless, such legal niceties could take time to sort out if Trump administration acts first.

Imposing 45% tariffs on Chinese products across the board, as Trump has threatened, would dramatically increase the cost of goods for consumers as well as companies importing supplies or even their own foreign-made goods, and that’s assuming the Chinese choose not to retaliate.

Ms. Blanchard noted that more than half of US imports are “within the boundary of the firm.” Today’s largest and most productive firms are also the most integrated into global supply chains, many of which have a substantial footprint in China.

“Sudden, substantial barriers against imports would mean that companies will no longer able to make products around the world in the way they do today,” Ms. Blanchard said, adding, “Though it is hard to know exactly how costly those tariffs would be, there is little doubt that they would hurt US production, exports and competitiveness in the global marketplace.”

And that’s before considering the likelihood that US trading partners would take retaliatory measures. Ms. Blanchard said that in a best-case scenario, those countries would use the WTO dispute settlement process (DSP) to address issues.

“But if we do something outlandish, then it’s entirely possible that the WTO DSP will go out the window … and we don’t even want to contemplate that,” she said. Even the whiff of tariffs or a retreat from existing agreements before the election could be problematic. Ms. Blanchard noted that consumers and especially businesses are highly adverse to uncertainty, which prompts them to hold off on major decisions, reducing investments and consumption.

“If the jitters are bad enough, they could push an economy into recession,” she said.

Should Trump regain favorability before the election—if Clinton’s popularity plummets or voter concerns about job losses once again become paramount—prudent corporates may start to pull back sooner rather than later, taking a wait-and-see attitude to global trade.

“I worry that we may be understating the extent of uncertainty, the unknowability, and the potential consequences of Trump’s talk, much less the prospect of these types of actions,” Ms. Blanchard said, adding, “If the Brexit vote is to leave, we’ll probably have a taste of just what that uncertainty can do.”

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