State-Owned Companies, Financial Markets & The New Trade Deals

This summer US Congress passed a law giving president Barack Obama the authority to “fast-track” free-trade pacts such as the multinational Trans-Pacific Partnership (or TPP), which covers around 40% of trade in American goods and 60% of trade in Asian goods.

These kinds of trade deals could hail a potentially new role for sovereign investment institutions and have a significant impact on their commercial activities in the future.

Sovereign institutions and state-owned companies are becoming an important part of the national and international trade debate. Negotiators are purportedly using politically-controversial trade agreements to protect against political actions by state-linked institutions and anti-competitive measures such as indirect subsidies to state-owned companies and sovereign funds.

For example, Vietnam and Malaysia, key TPP members, have a high number of state-linked companies and allegedly anti-competitive trade behavior. Yet, the main target of the US government on these issues is China, which is not part of the TPP group. The United States is likely to raise these concerns in future agreements such as the Bilateral Investment Treaty, which it was negotiating with China before discussions between the two countries were put on hold.

The latest trade deals appear to reflect the seemingly close relationship between sovereign institutions and state-linked corporations and their investments. The sovereign wealth fund industry, which manages assets valued at approximately $6.7 trillion, according to the Official Monetary and Financial Institutions Forum’s 2015 Global Public Investor report, now invests in a broad spectrum of assets, including real estate, venture capital, private equity, infrastructure, hedge funds and commodities.

Capital-import nations have mostly abandoned their suspicious attitude toward foreign sovereign financial vehicles. Sovereign funds see trade agreements as an important tool for accessing new markets and exporting their knowledge and financial resources. They have increased their direct investment in foreign markets significantly in recent years. But any new trade rules against anti-competitive measures could hamper state-linked corporations’ ability to continue to provide liquidity for foreign markets.