Originally published on March 24, 2017
Markets are all about signals – they send messages to investors about the future. In the four months since the United States Presidential election, global markets have generally risen. Investors see opportunities in the President’s plan to build infrastructure and cut taxes. However, market actors crave predictability, transparent regulatory processes, and evenhandedness — norms underpinning the rule of law. Some of the President’s recent actions signal a decline in the rule of law and as a result of this signaling, foreign and domestic investment in the US is likely to decline.
In countries with strong rule of law, government officials and agents, as well as individuals and private entities, are held to account. Laws and regulations are clear, publicized, stable, and just, applied evenly, and protect fundamental rights. Policymakers enact, administer, and enforce the laws and regulations in an accessible, fair, and efficient manner, while the court system provides a timely and even-handed approach to justice. Market actors know that although policies may change, these norms of good governance will persist. Thus, in the U.S., corporate investors presume that they will not be discriminated against because they hire Muslims, favor climate change accommodation, or choose to move their operations overseas.
President Trump has used his words and actions in ways that undermine confidence that companies and individuals will be treated in a transparent, equitable, and accountable manner. In early December, Trump stressed that rather than applying the same tariffs to all companies, he would use punitive tariffs to punish some companies that source overseas. First, under the Constitution, trade policymaking is a shared responsibility between the Executive and legislative branches. Congress has not indicated that it wants to single out specific companies for their production and employment decisions. Hence, this approach is undemocratic, undermines longstanding U.S. mores of evenhandedness, and violates trade commitments under the WTO, the international trade organization created by the U.S. to discipline such practices. While it is laudable that the President elect wants to preserve jobs, executives may hear that the Trump Administration will act in an arbitrary or discriminatory manner. Secondly, Trump-affiliated companies are not modeling positive behavior. Trump subsidiaries and licensees make eyeglasses, perfume, cuff links and suits in Bangladesh, China, Honduras and other lower-wage countries, not in the USA. Executives may read into his actions that he is above the law and not fully committed to his own policies.
In a similar manner, Trump’s refusal to put his family’s assets in a blind trust or to be fully transparent about his taxes and investments signals the wrong message about the rule of law. Without a blind trust, he risks conflicts of interest and raises questions about whether Executive Branch decisions are made in the public interest or the interest of his firm or cronies. Executives may read into this behavior that it is ok to have such conflicts of interest. Moreover, the U.S. may find it hard to promote good governance overseas when our new president’s approach to governance is opaque, unpredictable, and unaccountable. Trump signals that his interests take precedence over the public’s right to know or the interests of other investors, who will not have the same access he and his family have to make good market decisions. Here again, his actions convey that the U.S. will not adhere to the same levels of transparency, accountability, and evenhandedness investors have long expected.
Trump’s executive order on immigration provides another example of his failure to act in an evenhanded manner. The President did not widely consult with immigration experts and agencies; his Administration did not consider that many American firms employ individuals with green cards from many of the countries he targeted. The general counsel of Microsoft, Brad Smith, noted that the company was led by an immigrant and had some 76 employees blocked from entry to the U.S. for 90 days under the executive order. Meanwhile, top officials from Apple, Facebook, and other companies also spoke out against the order noting that it may undermine the Constitution’s long-standing principle of nondiscrimination among individuals of different religions.
Investment is not only about policy choices; it is also about signaling. President Trump has indicated that he (and hence the US) are less committed to longstanding mores of good governance such as transparency, accountability, and evenhandedness. Investors, especially foreign investors, may send a signal in return by reducing their investments in U.S. markets.
Susan Ariel Aaronson is Research Professor and Cross Disciplinary Fellow at the George Washington University, where she teaches corruption and good governance.
