The US Supreme Court lawsuit challenging President Donald Trump’s tariff war and the recent budget fight on Capitol Hill might have dragged down – if not sunk – one of Washington’s proposed tools to spearhead its strategic competition with China.
Ten months after Trump’s executive order authorising the creation of the nation’s first-ever sovereign wealth fund (SWF), there are still few clues about how it can be funded, structured and managed, leaving a giant question mark on whether it could run into a dead end.
However, as the situation unfolds, Trump – intentionally or not – may already be creating a de facto SWF.
In a proposal published on February 3, Trump outlined key missions of the fund, including promoting fiscal sustainability, reducing tax burdens, establishing economic security and promoting US economic and strategic leadership.
Although China is not mentioned in Trump’s official rationale for the fund, analysts say Beijing has had some success in leveraging a sovereign wealth fund in its industrial policy – along with others, including Norway and Singapore – which is likely driving the administration’s interest in this strategy.
How will Trump fund a US SWF?
The breadth of the proposed US fund’s remit and the stability of revenues that would sustain it have also been questioned.
Adnan Mazarei, a non-resident senior fellow at the Peterson Institute of International Economics, said oil and gas exports, budget surpluses or foreign exchange reserves typically fund traditional sovereign wealth funds.
These funds, such as Norway’s Government Pension Fund Global and Singapore’s Temasek Holdings, are set to preserve their wealth for future generations through diversified overseas investments.
“However, the purposes of a US SWF are not very clear ... [and] the sources of the funds are also not very clear,” he said, while doubting the effectiveness of the Trump proposal.
“They could include budget resources, but the US now has a considerable budget deficit, and any budgetary funds for an SWF would entail more borrowing by the Treasury,” he continued, adding that it is more likely to be financed by the sale of some government-owned assets.
New doubts rose amid the arguments at the Supreme Court last month over Trump’s use of emergency power to impose global tariffs.
If the court rules against the Trump administration, it would hinder protectionist measures against China and the US may have to refund some or all of the tariffs collected, further constraining its financing capabilities.
“Such a refund would put new pressures on the US budget, making the use of budget resources to finance a SWF even more unlikely,” Mazarei warned.
While the tariff lawsuits are ongoing, Trump has already floated a proposal to give middle- and low-income American citizens a US$2,000 cheque per person, all funded by tariff revenue.
“For a huge trade deficit country like the United States, how to source the initial funding for the sovereign wealth fund is puzzling,” commented Zhang Ming, deputy director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, a Beijing-based governmental think tank.
“Trump’s idea is to use income from trade tariffs, oil and gas extraction royalties, or issuing special bonds, but none of these methods will be easy to implement,” he wrote in an article published in the latest issue of the bimonthly International Economic Review magazine.
Is Trump’s US sovereign wealth fund a way to compete with China?
Zhang, an adviser to the Chinese government, attributed the Trump proposal to his need for a handy tool to compete with China.
China’s sovereign wealth fund has helped diversify its large foreign exchange reserves and also generated notable returns.
The annualised return of China Investment Corp’s overseas portfolio was 6.57 per cent over the past ten years ending in 2023, far exceeding the average domestic return, with assets under management increasing to US$1.3 trillion by 2023 from US$200 billion in 2007.
“Sovereign wealth funds have advantages in long-term investment strategies and rapid decision-making capabilities,” he added.
“It would allow them to make large-scale investments in key strategic areas of the US, including large-scale infrastructure projects, advanced manufacturing, advanced defence capabilities and cutting-edge medical research.”
Such overseas investments, on the other hand, could also trigger national security screenings and put their return and asset safety in check as bilateral economic relations sour.
In the United States, the government tends to advance its strategic goals through budget funding and leveraging private investor participation.
Some pivots were observed during Trump’s first presidential term, as the US International Development Finance Corporation was chartered following the passage of the Build Act of 2018 to advance the country’s strategic interests overseas.
Trump may already be creating a de facto sovereign wealth fund
Whether the country needs a traditional sovereign wealth fund remains debatable.
And even if Trump is unable to surmount the obstacles in the way of a formal SWF for the US, several of his moves on other fronts may serve the goals that such a fund would seek to accomplish.
Many analysts have pointed to unconventional measures adopted by Trump’s administration – including government stake purchase in strategically important companies, golden share rules and international partnerships – as efforts that mimic SWFs.
The US government has invested US$400 million to become the largest stakeholder of rare earth firm MP Materials, a 10 per cent stake in Intel and five per cent in Lithium Americas, all of which were funded through the Defence Production Act.
Salar Ghahramani, president & CEO of New York-based Global Policy Advisors LLC, said such nontraditional and creative approaches indicated the use of executive power to evade potential challenges at Congress over fund appropriation, particularly against the backdrop of the division between Republicans and Democrats on a wide variety of issues.
“I actually think that there actually is a very uniquely American sovereign [fund] that is being created,” he said.
“Deal-making seems to come very naturally to the administration, and through whatever measure, again, I think there have been some really creative solutions to the constraints.”
US government may be able to leverage US$1 trillion for SWF
To sharpen US advantages for China competition, a bipartisan task force at the Council on Foreign Relations, co-chaired by former secretary of commerce Gina Raimondo and former deputy treasury secretary Justin Muzinich, has been calling for the reauthorisation of the US International Development Finance Corp and the Exim Bank with enhancements, according to a report released last month.
Winston Ma, an adjunct professor at New York University School of Law, said the US is actually learning from China’s playbook to make strategic investments.
If all the promised investments are counted, including those from Japan and South Korea as well as partnerships with domestic private investors, the US government could leverage around US$1 trillion to pursue its strategic pursuits.
“This marked a different approach from traditional SWFs as it is sourcing money based on its national security needs and also using executive power to quicken the pace of its establishment,” Ma said.
“Those already-announced investments, scattered in many industries, can be centralised under the executive power of the Trump administration. In some sense, you can view it as a sovereign wealth fund.” -- SOUTH CHINA MORNING POST
