New research shows a direct correlation between trade policy shifts and U.S. pension funds’ allocations to international private equity managers, with plans engaging in a form of “institutional tariff-jumping.”
It’s no surprise the research comes as the U.S. has upended the global trading system by slapping tariffs on almost every country across the globe. A working paper from Switzerland’s University of St. Gallen and the International Institute for Management Development found that when U.S. protectionism rises, public pension funds in the country reduce their commitments to foreign managers by 1.1 percent for every percentage-point increase in import restrictions, while upping investments by 1.4 percent when foreign markets erect barriers against U.S. exports.
The paper’s authors stress that multinational corporations have long engaged in tariff-jumping, a strategy to circumvent import tariffs by investing in certain regional production facilities. But the authors are beginning to see the same behavior among investors, chiefly U.S. pensions.
“This is a form of institutional-level tariff-jumping, long observed among multinationals, but rarely documented in investor behavior,” co-author Stefan Morkoetter from St. Gallen wrote in an email to Institutional Investor.
Pension funds did not appear to make allocation decisions based on broader industrial policies, such as providing subsidies to companies that produce electric vehicles, according to the research.
The paper analyzed 1,824 foreign private equity fund commitments by 129 U.S. public pension funds between 2009 and 2022. The impact of President Trump’s constantly changing tariffs on pension fund allocations has yet to be determined.
Globally Influential Capital Providers
U.S. public pension funds wield massive influence in global private equity, holding around $770 billion in assets and committing roughly $60 billion annually.
The top 20 public funds in the country account for 64 percent 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 each committing more than $50 billion to the asset class.
But while U.S. plans allocate roughly 20 percent of their commitments to foreign managers, they face increasing challenges from current trade disputes, changing tariff policies, and geopolitical instability.
This shift away from cooperation — seen in industries like semiconductors and commodities — is slowing global trade and fueling tensions. The authors argue that “the U.S. plays a central role” in “this shifting macroeconomic landscape,” before adding: “Trade policy and political uncertainty have been shown to significantly affect investment behavior.”
“U.S. public pension funds are not merely passive observers of trade policy but are among the largest and most globally influential capital providers,” the authors wrote. “Their investment decisions can reinforce the economic incentives created by trade policy.”
For example, government policies can create unintended consequences, including investors allocating capital directly to protected markets to benefit from their local advantages. Governments may unwittingly be giving investors enormous influence over their strategies. “In this way, pension funds may indirectly enact the structure of trade policy through their capital allocation,” the research states.
“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,” the authors wrote.
Pension funds now 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 also must navigate new federal Outbound Investment Security Program restrictions and adapt to a volatile trade policy environment.
While several U.S. public pensions emphasize the financial rationale for maintaining global exposure — CalPERS states that “diversification is a key component to generating” its required returns — political scrutiny and national security concerns are playing an increased role in how pensions allocate overseas.
“With large portions of capital tied up in illiquid, long-term vehicles like private equity, funds are being asked to reconcile fiduciary responsibility with fast-changing policy imperatives — a balancing act with real financial and political consequences,” he added.
As U.S. pensions navigate protectionism, their private equity commitments reveal a paradox: barriers at home deter globalization, while barriers abroad invite it. For funds balancing politics and returns, the new trade era demands strategic agility — or costly constraints.
