Trump Pursues Trade Deals in Asia, Europe Amid Frostiness With China The White House is taking steps to show it wants to preserve and expand trade—albeit on its own terms
President Trump signed a revised free-trade pact on Monday with South Korea, as he steps up efforts this week to show he can strike new market-opening deals and isn’t antagonistic to trade. Mr. Trump also hopes by Wednesday to persuade Japan to enter formal bilateral trade talks, part of a commercial diplomacy effort this week by the president and his advisers on the sidelines of United Nations meetings in New York. (…)
This week’s efforts also coincide with what appears to be a rough patch in Mr. Trump’s efforts to rewrite the North American Free Trade Agreement. The administration has been pushing Canada to join by Sept. 30 a new Nafta framework set last month between the U.S. and Mexico. But talks with Ottawa broke down last week with no resolution on a number of sticking points. No new high-level negotiations were scheduled as of Monday afternoon. (…)
“The changes made are meaningful but modest,” said Wendy Cutler, who negotiated the original U.S.-Korea deal, known as Korus, under Presidents Bush and Obama. “The president set very high expectations that this was a terrible agreement and he was going to totally change it and reduce the bilateral trade deficit, but this seems to be pretty traditional agreement,” she added. Ms. Cutler also noted that “Korea came in with its own demands, and the U.S. was responsive—the U.S. gave as well as got.”
The biggest changes involve the auto industry. Seoul agreed to double the cap on the number of vehicles each U.S. automaker can sell annually in South Korea—from 25,000 to 50,000—for cars that meet U.S. safety rules, not Korean ones. And it agreed to let the U.S. keep in place until 2041 a 25% tariff on light trucks. Under the original deal, that was slated to be phased out over the next three years.
Both of those changes will have little immediate impact. None of the Big Three U.S. automakers had filled even half their quotas last year, and combined they exported just over 20,000 units to South Korea. Korean automakers currently don’t sell pick-up trucks in the U.S. Hyundai Motor Co. has announced plans to start selling a pick-up in the American market, but hasn’t said if it would be manufactured in South Korea, at its Alabama factory, or elsewhere in North America.
Despite Monday’s signing ceremony between Mr. Trump and Mr. Moon, it remains unclear when the pact will actually take effect. While the deal doesn’t need congressional ratification in the U.S., it does require legislative approval in South Korea. Korean lawmakers have warned that they won’t sign off without assurances that their automakers would be spared new restrictions in the event Mr. Trump follows through on a threat to impose global auto tariffs in the name of national security. That guarantee isn’t part of the pact signed on Monday. (…)
Japanese officials are hoping to emerge with an arrangement along the lines of the one that Mr. Trump reached at the White House in July with European Commission President Jean-Claude Juncker—a joint statement that was broad in its goals of lowering trade barriers between the two sides, but vague on specific goals and timetables. That was sufficient for Mr. Trump to promise to avoid imposing car tariffs on European automakers as long as negotiations were ongoing.
The European talks fall far short of a wide-ranging free-trade agreement, and are currently focused on modest measures like cooperating on regulatory standards. An official free-trade agreement sets rules governing virtually all commerce between two countries. By contrast, the U.S.-Europe talks just touch on select specific sectors and practices.
Mr. Abe wants to avoid opening the door to a full-fledged U.S.-Japan free-trade-pact because he fears it would undermine his efforts to foster the advance of an Asian regional trade bloc. He succeeded in getting the remaining 11 TPP countries to stick together even after Mr. Trump’s withdrawal, and member legislatures are currently in the midst of ratifying the plan. (…)
BTW:
The immediate impact of the 10% tariff rate imposed by the US will be limited, since the depreciation of the Chinese yuan against the USD since February 2018 has largely offset the effect of the tariff on Chinese exporters. The Chinese yuan has depreciated from 6.27 against the USD on 8th February 2018 to 6.87 on 17th September 2018, which has shielded Chinese exporters almost entirely from the impact of the 10% tariff. (…)
However, if no US-China trade deal can be reached by the end of 2018, and the US tariff rate escalates to 25% on this second tranche of USD 200 billion of Chinese products, the impact on China’s export sector will be far more significant. (…)
A 25% tariff rate on USD 200 billion of Chinese products would also cause significant collateral damage to other Asian economies that are part of the East Asian manufacturing supply chain. Around one-third of the value added in Chinese exports consists of imported foreign raw materials and intermediate goods, much of which is sourced from East Asian economies.
However, there will also be some trade diversion effects away from China which may benefit some Asian exporting nations such as Vietnam and Malaysia. Vietnam produces low-cost electrical and electronic goods as well as garments and textiles that US importers could source as substitutes for some Chinese products, while Malaysia is a significant exporter of electrical and electronic goods globally. (…)
Rising US tariffs on Chinese products could significantly improve the relative competitiveness of several ASEAN countries as manufacturing hubs compared with China, notably for Vietnam, which is likely to be a significant winner from the US-China trade war. (Markit)
So many tweets, so few real changes…Bully deadlines to Canada simply come and go. And now, the U.S. and China are not even talking…This is not a real estate game. It increasingly looks like a big messy hole from which Trump, and the USA, need help to “graciously” emerge from.
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China Denies U.S. Navy Ship’s Request for Hong Kong Visit The Chinese government refused the USS Wasp a port visit to Hong Kong next month, a decision issued as Beijing also cancelled a high-level naval meeting in the U.S.
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EU, China, Russia Defy Trump With Plan to Keep Trading With Iran
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OPEC Gives Tepid Response to Trump’s Demand for Lower Oil Prices
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Oil prices surge as Saudis, Russia won’t open the taps
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Trump ‘Fortunately’ Failed to Sway OPEC, Algerian Oil Boss Says
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Trump Folds on Nordstream 2 Because … Logic
Everything Looked Great for the Dollar Recently, So Why Didn’t It Go Up? The greenback has been weakening for the past month despite fundamentals; the preceding months hold clues as to why
(…) There are still a lot of hedge funds betting on a rising dollar, according to Commodity Futures Trading Commission data on futures positions, suggesting plenty of positions to be unwound if global sentiment keeps improving. On the other hand, U.S. short-term fundamentals are looking great for the dollar, with domestic economic data less disappointing than it had been, and more disappointing in Europe. That ever widening gap in yields in favor of the greenback should make dollars attractive, too. Fundamentals are likely to reassert themselves eventually, but sentiment has the momentum for now.
I often wish investors and pundits could be like our 3-year old grandson. When asked something on which he just has no clue, Linus simply and honestly says “I don’t know”.
This I know however: the recent dollar strength has actually been pretty tame and the USD remains in what could be a long-term downtrend in spite of everything suggesting it should totally outperform. (Chart from JP Morgan)
BTW, a strong dollar may not be what the world needs at this time as William White, former BIS chief economist, writes (via John Mauldin):
(…) grounds for believing that a sharply stronger dollar could be troublesome do exist. BIS statistics indicate that, between end 2007 and 2017, dollar denominated debt issued by non-US-residents (non-banks) rose to $11.4 trillion, with emerging market debt doubling to $3.6 trillion. Moreover, these figures do not include off-balance-sheet borrowing through FX swaps which is probably even greater. The primary worry is that a stronger dollar would make such loans harder to service, leading in turn to concerns over the solvency of borrowers and then of lenders worldwide. (…)
New developments in financial markets have also, historically, been a source of contagion. The combination of large scale bond sales by emerging market corporates and purchases by asset management companies constitute just such a development. To these concerns about “known unknowns”, we must add worries about “known knowns” indicating poorly functioning markets. We have recently observed continuing market anomalies (e.g. violation of covered interest parity), flash crashes, bouts of reduced market liquidity, more indexing and passive investing, and the continued reliance of banks in many countries on wholesale dollar funding. Given that there could also be “unknown unknowns”, a repeat of 2008 market conditions cannot be ruled out.
The scramble for dollars in 2008 and after, particularly by European banks, was materially eased by swap lines between the Federal Reserve and the central banks of major, advanced economies. The continued adequacy of such measures is questionable. No such lines have been negotiated with emerging market countries, likely the first to be attacked. Further, the Dodd-Frank Act now constrains the Fed’s flexibility as Lender-of-Last Resort, even for American banks. Finally, would Congress and the Trump administration willingly accept lending trillions of dollars to unreliable foreigners in an “America first” world? Since the funding difficulties of banks could lead to insolvency, and since preparations for such events also remain inadequate, a global dollar shortage could yet prove a very serious problem.
My own, very humble, contribution to the not-so-strong USD: world trade is slow and slowing. Since 80% of global trade is in USD, fundamental demand for the greenback cannot be all that strong.
Having struck a near seven-year high of 54.1 in January, the Global PMI Export Orders Index reading was a mere 50.3 in August, highlighting the rapid erosion of trade growth since the start of the year to near-stagnation.
Slower export growth has been commonly attributed by PMI respondents to rising concerns regarding tariffs and trade wars. Stagnant or falling exports are currently being recorded in the US, China, Japan and the UK, with only modest growth seen in the Eurozone.
The impact of tariffs on prices and worsening supply availability is also becoming apparent. Average prices charged for goods and services rose globally at the fastest rate since the global financial crisis in July, according to the PMIs, easing only modestly in August.
Tariffs and trade wars were also commonly cited as factors encouraging companies to build safety stocks of inputs to ensure supply, or lock-in lower prices, exacerbating supply shortages and driving prices even higher. The problem appears to be particularly acute in the US, where almost two thirds (64%) of US companies reporting higher input prices in August explicitly blamed tariffs as the cause of increase costs. Almost one-in-three went on to cite tariffs as the cause of having to hike prices to customers. (Markit)
The correlation between export orders and global GDP is obvious.
ECB’s Draghi Says Rising Wages, Inflation Back Easy-Money Phaseout
MORE ON ONGOING MARGINS SQUEEZE
Following up on yesterday’s post and supporting the idea that margins are getting squeezed:
MORE ON SMALL CAPS WARNING
Following up on yesterday’s post and supporting the idea that small caps are peaking out:
(…) When compared to their long-run trend, the relative returns of small caps reached nearly two standard deviations above their trend in August. Such an extreme level has been a reliable signal of a peak in the outperformance of small caps since 2001. The chart below also highlights a strong correlation between the relative performance of small-cap stocks and that of cyclical versus non-cyclical sectors, as both are sensitive to fluctuations in the macroeconomic cycle. Cyclicals have underperformed defensives since mid-June. (…) (Thomson Reuters)
This is where we are on Value vs Cyclicals courtesy of Morgan Stanley. It rarely gets much worse…
CEOs’ Economic Outlook Eases on Trade Policy Uncertainty
The Business Roundtable CEO Economic Outlook Index, which measures company plans for capital investment, hiring and sales, declined to 109.3 from 111.1 in the second quarter. While the third-quarter outlook index still clocked in at the fifth-highest level in the survey’s 16-year history—a signal of strong executive sentiment—business leaders expressed concern over trade policies. (…)
Close to two-thirds of surveyed CEOs said recently enacted tariffs and pending trade policies will have a “moderate or significant negative effect” on their capital spending decisions in the coming months.
In the third quarter, the share of firms planning to increase capital investment over the next six months decreased to 55% from 61% in the second quarter, while the share planning to expand hiring fell to 56% from 58%. (…)
“Decreases in capital investment not only impact the operations of Business Roundtable companies, less spending on equipment and facilities also squeezes small- and medium-sized suppliers and the millions of Americans they employ,” Mr. Bolten said in a statement. (…)
Report Says Tech’s Business Model Is Broken, Calls for Tighter Regulation Silicon Valley tech giants can’t be trusted to police themselves and should be subject to tougher regulation, according to a critical new report.
The business models powering digital advertising platforms like Facebook Inc. and Alphabet Inc.’s Google still undermine user privacy and incentivize disinformation campaigns despite recent efforts by tech companies to prevent abuse, says the report from Harvard’s Shorenstein Center on Media, Politics and Public Policy and New America, a left-leaning Washington-based think tank.
“We need to completely reorganize the way that industry works,” said Dipayan Ghosh, who previously worked on privacy and policy issues at Facebook and is now a fellow at the Shorenstein Center. (…)
Mr. Ghosh and his co-author, Ben Scott, a director of policy and advocacy at the Omidyar Network, argue that protecting user data will require a combination of stronger privacy laws and limits on how much data the tech companies can gobble up. They add that tech companies also need to provide additional disclosure about how their information is used to serve them ads, far beyond what is currently shared. (…)
Among the specific recommendations is for tougher restrictions on tech-related mergers and acquisitions, particularly on those that allow the biggest companies to add to their vast stores of data about consumers. “If data is a source of primary value in the modern economy, then it should be a significant focus of merger review,” the authors write.
They also call for more aggressive third-party auditing of algorithms underpinning these systems.
When the Supply of Uber and Lyft Drivers Rises, Their Earnings Fall