Consumer protection and China in Trump’s cross hairs

Consumer protection and China in Trump’s cross hairs

The 2016 Republican National Convention has concluded, and while concerns about a Clinton presidency was evident, policy initiatives supported by Donald Trump were hard to find. However; some policy hints, were revealed through both candidate and surrogate speeches as well as in this year’s Republican policy platform. These policies, if implemented, will have significant consequences for U.S domestic and international financial markets.

Oversight of or end to the Consumer Financial Protection Bureau (CFPB)

The CFPB, first formed as part of Dodd-Frank Wall Street Reform and Consumer Protection Act, has been a long-standing target for Republicans. The Bureau writes and enforces regulations for the non-bank U.S financial industry, performs mortgage monitoring, and tracks consumer complaints. As it is housed in and funded through the U.S Federal Reserve, it has no official Congressional oversight and its budget lies outside traditional appropriations authority.

It is for this reason that this year’s platform describes the CFPB as a “rogue agency” with its director enjoying “dictatorial powers.” Furthermore, the GOP platform calls for the abolition of the CFPB, yet, should this not be politically or legislatively possible, the subordination of the CFPB to Congressional budget authority. Outside of the platform, Mr. Trump has made the dismantling of Dodd-Frank a goal of his candidacy.

While Trump would like to shutter the CFPB altogether, this route will prove challenging as an overhaul of Dodd-Frank would require an act of law. Should Republicans capture the White House and maintain control of both the Senate (increasingly in question) and House of Representatives, an attack on the CFPB will encounter stiff resistance. Opposition by Democrats in the Senate, will result in Republicans being unable to overcome a filibuster.

If Republicans cannot achieve the outright dismantling of the CFPB under a Trump presidency, a Republican Senate may be able to use reconciliation rules to force a simple majority vote on directly appropriating the CFPB. This scenario is more plausible given the lower required threshold, and would significantly weaken the CFPB, as Republicans would now have significant authority over their operations.

At a minimum, a Trump presidency will likely significantly weaken the CFPB oversight, as new leadership could be appointed to stymie bureau activities or deprive the organization of resources.

Reassessing the Sino-US Bilateral Investment Treaty (BIT)

A frequent target of Trump’s foreign policy ire is China. He has repeatedly expressed his disgust at China’s alleged currency manipulation, intellectual property theft, and regional military aggression; sentiments echoed at this year’s Republican National Convention. Trump has repeatedly called for a “smart trade” regime which protects American domestic jobs by frequently employing tariffs.

Given this uncertainty, Washington and Beijing have pushed to finalize the BIT before the end of the Obama administration in January. Unlike the TPP, the far lower public awareness of BIT has allowed talks to move forward without significant public scrutiny. In June, the U.S trade representative announced that China’s most recent offer was much improved and worthy of continued conversation.

That said, any deal would be jeopardized, given a confrontational Trump Presidency vis-a-vis Sino-US relations. Trump has made clear his intent to label China a currency manipulator. Despite the validity of the claim, an official charge could be issued by the Treasury Department without Congressional authorization, and would likely carry trade restrictions. Historically Beijing has not responded well to external economic threats, and any U.S trade restrictions would not simply touch off a currency war, but also encourage Beijing to not fulfill their BIT agreements.

The Return of Glass-Steagall

Perhaps the most unexpected policy initiative is that, for the first time, both the Republican and Democratic Party Platforms call for the reinstatement Glass-Steagall. The Act, written into law in 1933 and repealed in 1999 with the passage of the Gramm-Leach-Bliley Act, separated commercial and investment banking. It prevented Federal Reserve member banks from dealing or investing in, underwriting, or distributing securities.

As there is now at least tacit bipartisan motivation for reinstatement of the Act, it is possible that such a policy push could originate from either a Trump or Clinton administration. A significant effort to impose this regulatory regime; however, remains more likely under a Trump presidency, given his vocal condemnation of the banking industry.

Such a move would likely find support from Democratic banking reform champions such as Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders.

Likely outcomes

Should both of these policy initiatives be implemented during a Trump presidency, global markets, banking, and trade would experience varied reactions.

The weakening or elimination of the CFPB could jeopardize work the bureau has done to clarify the mortgage approval process; including requiring lenders to verify borrower income and discouraging marketing tools such as teaser rates. Such regulatory weakening may lead to mortgage default exposure similar to that experienced during the 2008 financial crisis. Conversely, while this weakening may enable lenders to resume in risky practices, it would also likely lower the standards for borrowing, thereby allowing younger buyers to enter the housing market.

In addition, by unilaterally setting these regulatory standards, the CFPB has proactively enforced its own regulations targeting banks with significant penalties for what it deems as anti-consumer practices. Such hefty enforcement would likely be curtailed with increased legislative scrutiny or CFPB elimination, freeing banks to develop consumer strategy.

A failure to pass or subsequently enforce BIT would expose U.S firms to possible discriminatory business practices and arbitrary treatment regarding their investments in China. This lack of business protection currently discourages investment in China and proves a leading political risk to Sino-U.S business relations. These mutual protections would also encourage further Chinese investment in the United States.

Given questions about Beijing’s continuing ability to prop up the Chinese economy, coupled with the ongoing devaluation of the yuan, it is likely that a completed BIT would be met with a flood of Chinese capital (limited by capital controls) entering the United States. This developing cornerstone bilateral economic ties could be a source of mutual growth. Should a Trump presidency use the BIT as a foreign policy bargaining chip or suspend enforcement altogether, this opportunity for growth could quickly become an opportunity cost.

While party convention platforms are non-binding, given the bipartisan nature of the call for a reinstatement of Glass-Steagall make that turn of events a possibility. It is very unlikely given the existing policy cleavages in Congress that the new act would be very similar to the original, but with a restructuring of larger banks. Should Trump follow through, he would likely experience significant resistance from Congressional Republicans. Elements of securities regulation found in the original Act; however, could be included in a larger bill to support the growth of smaller, local or regional banks, which would be more likely to garner enough support for Congressional passage.

Categories: Economics, North America

About Author

Jon Lang

Mr. Lang is a Principal at Key Global Advisory, a geo-political and economic risk consultancy. His prior professional experience ranges from strategy consulting at Deloitte to national US policy development for the White House. He holds a bachelor’s degree in Government from Georgetown University, a master’s degree in European Political Economics from the London School of Economics, and is currently completing a global executive MBA at Duke University’s Fuqua School of Business.