Originally published in Mergers & Acquisitions

By Daron Gifford

Protectionist rhetoric in the U.S. and elsewhere is affecting the high-wire world of mergers and acquisitions in 2017, but not in the way many feared. Rather than dampening deals, the uncertainty appears to be prompting more cross-border transactions.

The first quarter of 2017 delivered $777.7 billion worth of announced transactions worldwide, a 12 percent increase from the same period the previous year, according to Thomson Reuters. About $337 billion, or 43 percent, came from U.S. companies buying European assets, a 10-year record.

And there is interest in acquisitions of U.S. companies from abroad as well. In the first half of the year, there were 87 announced acquisitions of U.S. companies by Chinese firms, as of June, the highest on record, ten more than in the same period in 2016.

The increased activity in M&A can be linked, in large part, to the desire of many companies to make a move overseas now, as a hedge against possible future trade restrictions, especially in the U.S.

This strategy seems reasonable, considering the recent U.S. withdrawal from the Trans-Pacific Partnership and threats to leave the North American Free Trade Agreement (NAFTA) —plus worries in Europe over the British exit from the European Union, known as Brexit.

Indeed, in July, trade talks between the U.S. and China broke down, and the Committee on Foreign Investment in the United States (CFIUS) has already balked at nine acquisitions of U.S. companies by foreign buyers so far in 2017.

CFIUS is also expected to, for the first time, start considering the effect of any transaction on U.S. workers and the nation of the acquiring company’s trade history. National security and critical infrastructure protection had previously been the only determinants. A litmus test may be the handling of various Chinese buyers’ interests in the bankrupt Westinghouse Electric Company’s U.S. assets.

In particular, China-based manufacturers that are part of the global automotive supply chain are continuing to seek a stronger foothold in the U.S. China-based businesses long have been sinking money into various automotive operations—from glass and tire makers to technology developers and car makers, reflecting Beijing’s long-term goal of dominating the world’s car business.

Besides selling parts to U.S. automakers, Chinese acquirers are targeting aerospace, agricultural equipment and industrial machine manufacturers. As of June 30, Chinese companies announced they had made eight overseas deals, totaling in $5.5 billion, in the auto sector this year, one less than the number for all of 2016.

They included Ningbo Joyson Electronic Corp.’s takeover of Japanese air-bag maker Takata Corp. and the acquisition of a 5 percent stake in Tesla Inc. by games and messaging company Tencent Holdings Ltd.

Meanwhile, Terrafugia, a small company in Woburn, Mass., that is attempting to make cars fly like small planes or helicopters, is closing a deal to sell to Chinese car maker, Zhejiang Geely Holding Group, which makes Volvo cars.

To be sure, even in China, not every metric is pointing up. While the number of deals is higher in 2017, the value of outbound Chinese M&A, surprisingly, perhaps, fell 70 percent, to $25.8 billion in the first quarter, a drop attributed by some to global economic uncertainties and a stricter domestic regulatory environment.

The auto space is hot elsewhere, as well, as Israeli company Mobileye, a developer of self-driving technology, was sold to U.S. tech giant Intel Corp. (Nasdaq: INTC) for $15.3 billion in March.

Non-U.S. cross-border transactions have been continuing apace, as well, with small deals dominating the space. In March, for example, Indian auto parts maker Motherson Sumi Systems Ltd completed its purchase of Finland’s PKC Group for $620 million. And Japan’s Panasonic Corp. recently became the majority owner in Ficosa International SA, a Spanish auto supplier and injection molder that makes car mirrors and safety systems and recently opened a plant in Cookeville, Tenn.

In Europe, there are more mixed messages: EU targets are hot; EU acquirers are not, probably because of Brexit and fears of the effects, especially in southern Europe.

Since the start of 2017, non-European companies have announced deals with or bid on 43 European targets, according to Pitch Book. European acquisitions of U.S. firms, however, fell almost a quarter to $86.9 billion in Q1, as the targets appear to be less attractive to the EU and related entities. Overall, though, European M&A activity hit $215.3 billion in the first three months of the year–a 16 percent increase over 2016 and the strongest start to a year since 2008.

Meanwhile, another trade caveat is interest rates. The Federal Reserve has hiked rates twice recently and is signaling a third increase, despite a somewhat benign inflation outlook. Higher rates have the potential to both reduce the availability, and increase the cost of outside capital available for deals. If this Fed picture changes and rates rise further or faster than expected, the pace of mergers and acquisitions could slow, especially among leveraged deals involving private equity funds.

As for the effect of the U.S. dollar on trade, it has not been especially impactful, with the exception of extreme variations due to crises in other countries; it will always vary from country to country, day to day, quarter to quarter. Longer-term trends would be a better metric. In 2017, for instance, the greenback started very strong, but it has been softening steadily against most currencies since the start of the year. Elsewhere, the British Pound reacted strongly to Brexit last year but has recovered somewhat, as has the Euro, even more strongly. So, it’s a mixed bag when you talk about foreign exchange.

Dealmakers pondering cross-border deals in the current uncertain environment would do well to heed this advice:

Evaluate all aspects of the value proposition for the deal, including the operational, technology and market synergies with your current business and understand how well it meets your growth goals and business strategy.

Look at more than just near-term financial returns. Trade barriers will come and go, exchange rates will fluctuate, so don’t build your business case on short-term drivers.

Be aware of the strategic fit to your global business –– not only geographic presence but look at extensions of your product portfolio and growth in new customers.

Prepare plans rapidly to retain local management leadership; you are buying an ongoing business that needs to keep operating.

Express “real” willingness to partner with other parties. This could reduce the financial outlay and mitigate risk.

While no one knows for sure what will happen on trade, acquisition interest is continuing, particularly with the auto industry and suppliers, as well as other industries like mining, technology, consumer markets, and oil & gas. So much for that protectionist rhetoric that many feared would dampen global M&A.

Daron Gifford is the partner in charge of strategy and automotive consulting at the accounting firm and consultancy Plante Moran in Detroit.