(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

(What’s Left of) Our Economy: Evidence that Business Views on the Trump Tariffs Aren’t What You Think

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Alliance for American Manufacturing, Axios, Canada, China, Europe, investors, Mexico, polls, Rick Newman, tariffs, Trade, Trump, UBS, Yahoo Finance, {What's Left of) Our Economy

You don’t have to have much faith in public opinion results to recognize the following findings as absolute stunners when it comes to U.S. trade policy and President Trump’s efforts at fundamental overhaul: Although numerous surveys recently purport to show that Mr. Trump’s tariff-heavy approach is unpopular overall (see here and here for recent examples), two other polls have just found that the nation’s business community generally approves.

The first comes from UBS, the Swiss-owned investment bank that of course does a great deal of business in the United States. As Axios reported in early August, UBS found that strong majorities of the 300 business owners from twenty industries they questioned (each one was in charge of a company with at least $250,000 in annual revenue) favored tariffs on all of the countries targeted by the Trump administration.

The numbers broke down as follows: China, 71 percent; Mexico; 66 percent; Europe, 64 percent; and Canada, 60 percent.

UBS also asked 501 high net worth investors their tariff views, and most favored tariffs on China – but this share of the sample was smaller (59 percent). And even though trade curbs on Mexico, Canada, and Europe all generated minority support, the levels were impressive nonetheless (45 percent, 33 percent, and 43 percent, respectively).

On Wednesday, Rick Newman of Yahoo Finance reported that that company’s polling on the Trump tariffs produced similar results. The Yahoo Finance findings came from a group of 1,098 “business operators.” Asked to “describe the effect of President Trump’s trade policy” on their company, 49 percent of respondents expressed the “positive” view and 36 percent expected negative consequences.

And here’s the lowdown on the makeup of the Yahoo Finance sample:

“Nearly three-quarters…described themselves as business owners, with 17% saying they’re executives and 4% identifying themselves as board members.

“About 38% of respondents described their companies as small businesses earning less than $1 million in annual revenue. Thirteen percent of their companies earn more than $100 million. Respondents covered every major industry sector, with manufacturing accounting for 19% of responses, followed by retail or wholesale trade (17%), finance (12%), and technology (11%).”

Also worthy of attention is a poll released yesterday by the Alliance for American Manufacturing (AAM), a steel industry-centered group that favors the Trump tariffs. Its survey of 1,200 likely voters found Mr . Trump’s China tariffs winning public support by a 63 percent to 29 percent margin. No data was provided for U.S. policies toward other major economies, but backing for a stricter global approach was strongly indicated by the following description of respondents’ views:

“Three-quarters (75%) agree that ‘free trade is a goal, but in the real world we cannot get there unless we are also willing to use tough measures at the same time,’ including 50% who feel that way strongly. In comparison, only a third (32%) strongly agrees that ‘Free trade agreements have always benefited the U.S. and we should sign more of them.’”

This AAM poll so far does seem to be an outlier, although its questions also look more detailed and pointed than those in surveys reporting more favorable public views of trade and more public opposition to the Trump tariffs. But none of the major polls predicted a Trump electoral college victory in the 2016 presidential elections. It’s entirely possible that their readings on current trade issues are just as off base.

(What’s Left of) Our Economy: Why Today’s Fed Rates Announcement Really Matters

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asset prices, bubbles, federal funds rate, Federal Reserve, Financial Crisis, financial markets, Great Recession, interest rates, investors, Janet Yellen, moral hazard, Obama, OECD, recovery, {What's Left of) Our Economy

As the world economy anxiously awaits the Federal Reserve’s announcement this afternoon about how much longer it will keep the interest rates it controls near zero, the release yesterday of a new official report on global growth prospects is especially well timed. The latest global economic assessment from the Organization for Economic Cooperation and Development (OECD) valuably reminds the world’s leaders and publics alike that the main economic challenge of our time is not quickening the slow pace of recovery from the financial crisis and Great Recession. Instead, it’s generating the kind of robust growth that won’t almost inevitably trigger another crisis.

The OECD, an organization of the world’s high income countries (and some middle-income countries, like Mexico), raised its projections for overall global growth, and for growth in most major countries and regions, from those in its previous forecast in November. (Most of the main old and new numbers were conveniently presented in this Financial Times piece.) But the OECD also warned that too much of this improvement stems from the same forces that during the last decade inflated asset bubbles around the world that eventually burst disastrously.

In addition to lower oil prices, OECD chief economist Catherine L. Mann contended, monetary easing has “brought the world economy to a turning point, with the potential for the acceleration of growth that has been needed in many countries.” But she also specified that “excessive reliance on monetary policy alone [like the massive easing implemented by the Federal Reserve since the crisis broke out] is building-up financial risks, while not yet reviving business investment.”

As the United States and the rest of the world should have learned since the dark days of 2007-2009, no challenge is easier for governments to meet than creating the illusion of growth temporarily. They can simply promote borrowing and spending that have nothing to do with genuine wealth creation and the rising incomes it produces.

Actually, I’ve been surprised at how long easy money from the Fed and other leading central banks has kept the world economy afloat in the last few years. But this extraordinary official subsidization of economic activity is showing big signs of the same dangerous consequences produced by wildly excessive credit creation before 2007-8. It’s spurred a flood of capital into ever more dubious schemes from investors desperate for decent returns but also fully confident that governments will protect them from any risk. After all, if resources can be created at will by monetary authorities, and losses will be covered, why not throw caution to the wind? Why spend lots of time trying to figure out how to use them carefully or productively?  Why not take full advantage of what economists call “moral hazard”?

Ironically, and encouragingly, these worries about oceans of capital being invested without significant market disciplines seem to be shared by what has so far been the world’s biggest credit pusher – the Federal Reserve, or at least many of its leaders. At least as of this morning, that’s why it’s been widely reported that Chair Janet Yellen and her colleagues will start preparing markets and the rest of the world for the likelihood that they’ll raise the federal funds rate sooner rather than later – if only by a little. That also appears to be mainly why, for all the boosterism surrounding the U.S. economy throughout the current recovery – including President Obama’s claim that the nation has “turned the page” – American investors are reacting to even a modest rate hike so bearishly. They recognize that artificial legs have been the only legs that asset prices and the underlying real U.S. economy have been showing.