Trade policy shifts have a direct correlation with U.S. pension funds’ allocations to international private equity managers, with plans engaging in a form of “institutional tariff-jumping”.
- U.S. protectionism has led to a reduction in commitments to foreign managers by 1.1 percent for every percentage-point increase in import restrictions.
- U.S. pension funds have increased investments in foreign managers by 1.4 percent when foreign markets erect barriers against U.S. exports.
Understanding Institutional Tariff-Jumping
Tariff-jumping refers to a strategy used by multinational corporations to circumvent import tariffs by investing in regional production facilities.
“Tariff-jumping is a form of institutional-level tariff-jumping, long observed among multinationals, but rarely documented in investor behavior,” stated Stefan Morkoetter from the University of St. Gallen.
Global Influential Capital Providers
U.S. public pension funds wield significant influence in global private equity, holding around $770 billion in assets and committing roughly $60 billion annually.
- Top 20 public funds in the country account for 64% of all U.S. pension commitments to PE, with institutions like the $503 billion California Public Employees’ Retirement System and the $353 billion California State Teachers’ Retirement System committing more than $50 billion to the asset class.
- U.S. plans allocate roughly 20% of their commitments to foreign managers, but face increasing challenges from current trade disputes, changing tariff policies, and geopolitical instability.
A Shift Away from Cooperation
The shift away from cooperation is slowing global trade and fueling tensions.
| Country | Industry | Trade Dispute |
|---|---|---|
| U.S. | Semiconductors | Trade tensions with South Korea |
| China | Commodities | Trade tensions with the U.S. |
Globally influential capital providers like U.S. public pension funds are not merely passive observers of trade policy but are among the largest and most globally influential capital providers.
A Balancing Act with Real Financial and Political Consequences
Trade policy is a key factor in determining cross-border asset allocation decisions and institutional capital flows, especially when investment decisions are long-term, illiquid, and politically visible.
- U.S. public pension funds face heightened political pressure to divest from China, with several U.S. states enacting divestment laws.
- For example, last year, the Teacher Retirement System of Texas cited geopolitical concerns — specifically, the U.S. government designating China as a foreign adversary — as a key reason for removing China and Hong Kong from its public equity benchmarks.
- U.S. plans must navigate new federal Outbound Investment Security Program restrictions and adapt to a volatile trade policy environment.
The balancing act between financial and political considerations is challenging, as funds are being asked to reconcile fiduciary responsibility with fast-changing policy imperatives.
Strategic Agility Needed
The new trade era demands strategic agility from U.S. pension funds to navigate protectionism and maintain their returns.
This shift away from cooperation has significant consequences for global trade and the economy.
Conclusion
U.S.
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