As noted in our previous report, " 2016's Thriving M&A Market," this year has seen a continuation of the historically high trend of inbound M&A activity in the US. This is largely due to foreign investors' interest in a market that they view as stable and growing, especially compared to the fluctuating fiscal positions of developed countries in the EU.
However, with the unexpected results of the November 8 general election, projections concerning foreign direct investment (FDI) activity for the rest of the year and Q1 2017 are now askew. Our research indicated that investors were wary of candidates who identified with protectionist and populist sentiments, fearing that they would enact legislation to boost tariffs and drive up prices. Now that Donald Trump is the president-elect, we have decided to conduct a brief overview of his stated policies on trade and globalization. Our review will include a prediction of the FDI market in the US going forward, as well as what the recent election of populist, conservative candidates worldwide means for the global investing climate. We have also asked Joe Andrew, Dentons' Global Chairman and former chair of the Democratic National Committee, to contribute his unique perspective on the events that have unfolded.
Trump has made multiple remarks regarding reducing trade and globalization's influence in the US economy. The first of these is his stated plan to back away from the Trans-Pacific Partnership (TPP) trade deal. This deal would have connected 12 Pacific Rim countries via lowering tariffs and non-tariff barriers to trade, including penalties. Though the deal has yet to be agreed upon, Trump has stated that the TPP would weaken US manufacturers and would eliminate America's means of holding other countries accountable for subverting stipulations of trade agreements. As of this writing, a recent press conference featuring four ambassadors from TPP countries was canceled. Congressional leaders have refused to ratify the treaty during the remainder of President Obama's term. It is possible that the deal could be renegotiated, given that Trump has stated he would be open to doing so with NAFTA, but at the very least, the deal in its current iteration is not likely to pass.
In that vein, Trump has said in the past that he plans to scrap NAFTA completely upon assuming office. However, in his 60 Minutes interview on November 13, he amended this position by saying he would either end NAFTA or renegotiate it significantly. In order to disincentivize companies from moving their manufacturing operations to Mexico, Trump would raise tariffs considerably to discourage this practice. This subsequently ties into Trump's trade plans for non-NAFTA countries, as he plans to raise tariffs for countries which are common hubs for US manufacturing relocations, such as China.
China has borne the brunt of the president-elect's ire towards globalization. He has stated that he plans to use Cabinet-level positions—including the Secretary of Commerce, the Secretary of the Treasury and the US Trade Representative—to pursue action against China and other countries that are perceived to have violated trade deals, manipulated currencies, subsidized exports and stolen American trade secrets. This would represent a significant departure from previous administrations, which have adopted a more conciliatory tone towards these trade transgressions in order to keep multilateral relations stable.
Analysts predict the effects of Trump's plans would significantly alter the worldwide economy, which has largely relied on globalized trade for the past 20-plus years. Many speculate that Trump's protectionist policies could ignite trade wars in which nations such as Mexico and China subsequently enact retaliatory tariffs against the US, or at the very least buy fewer goods from the US. This would cause prices to climb worldwide, particularly in the US, and could also discourage FDI in the US. Additionally, Trump nixing TPP and scaling back NAFTA could jeopardize other trade deals, such as the Transatlantic Trade and Investment Partnership (TTIP) and Trade in Services Agreement (TiSA).
China has been the number two investor (behind Canada) in terms of inbound M&A for the year so far. In recent years it has favored investing in developed nations, viewing them as more attractive due to their stable and open economies. However, the rise of right-leaning populism in the US and Europe in the past year may prompt China devote more of its FDI to emerging, liberalizing economies—particularly those in Asia, such as Singapore, Vietnam and Malaysia. With China already facing a sluggish domestic economy, tariffs enacted by the West could cause a substantial fall in the nation's GDP due to its current reliance on exports; this could theoretically discourage Chinese investors from engaging in FDI at all. Considering that China is a hub for outbound FDI, we could see a slowing of the global M&A market altogether.
Will these predictions of the Trump administration's actions prove accurate? Former Speaker of the House Newt Gingrich, who is a close advisor to the incoming administration, has stated that, "Trump will pursue many bilateral [relationships], deregulate even more than Reagan and very aggressively seek economic growth. There will be dangers and opportunities in the new administration." Indeed, Trump's election was not without fanfare from various world leaders, especially far-right and populist politicians in Europe and Asia. Politicians and leaders such as Nigel Farage of the UK Independence Party, Marine Le Pen of France's National Front, Geert Wilders of Netherlands's Party for Freedom, Turkish President Recep Tayyip Erdogan, Filipino President Rodrigo Duterte and Russian President Vladimir Putin all expressed their excitement at America's election of a perceived like-minded president, and stated their intent to forge a strong working relationship with the incoming Trump administration.
On the whole, we expect to see a slowing of inbound M&A for the remainder of 2016 and into the early part of 2017. Due to these and other trends surrounding Trump's election, many investors are recommending a "wait and see" approach. However, even with a slowing of inbound M&A activity during Q4, 2016 will remain a historically strong year for FDI in the US.
Joseph Andrew is a contributor to this client alert.
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