FIG Topics of Interest



The Trump administration notified Congress on Monday that it wants to scrap trade concessions for India, the largest beneficiary of the so-called generalized system of preferences that impacts $5.7 billion worth of goods.
Both Trump and Modi likely hope to isolate thorny trade issues from their geopolitical ties as both countries position themselves in Asia against an increasingly assertive China. But even assuming the strategic alliance -- which includes the so-called Quadrilateral Security Dialogue between the U.S., India, Japan and Australia -- remains intact, the world’s two largest democracies are probably still headed for a bout of turbulence.
Even if Modi doesn’t want to raise the temperature, “the discourse in this country has been that America needs India to balance China,” said Harsh Pant, an international relations professor at King’s College London. “And the question will be: Why is America doing this to India?"
“It is extraordinary how Trump manages to demarcate trade from geopolitics, when in the real world they are intimately linked,” Blaxland said.

That extends to the U.S. pulling out of the Trans-Pacific Partnership trade deal that would have more closely tied Asian economies to Washington, despite pleas from regional allies such as Japan to reconsider, Blaxland added. “The TPP was dismissed, just as trade links with India and Turkey now appear set to be discarded,” he said.
Trump’s removal of trade concessions are not entirely unwarranted, coming after Indian customs duty hikes, expanded import substitution rules and domestic price caps, according to Richard Rossow, Wadhwani chair in U.S.-India policy studies at the Washington-based Center for Strategic and International Studies.
The current spat follows previous U.S. attempts to pressure New Delhi to draw down significant oil imports from Iran, as well as Venezuela. India -- whose history of non-alignment gives it close economic partners that make Washington policymakers uncomfortable -- has nevertheless increased oil, natural gas and coal imports from the U.S.

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The U.S. and China are close to a trade deal that could lift most or all U.S. tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products, two people familiar with the discussions said.
Chinese officials made clear in a series of negotiations with the U.S. in recent weeks that removing levies on $200 billion of Chinese goods quickly was necessary to finalize any deal, said the people, who weren’t authorized to talk publicly about the deliberations. That’s the amount the Trump administration imposed after China retaliated against the U.S.’s first salvo of $50 billion in tariffs that kicked off the eight-month trade war.
One of the remaining sticking points is whether the tariffs would be lifted immediately or over a period of time to allow the U.S. to monitor whether China is meeting its obligations, the people said. The U.S. wants to continue to wield the threat of tariffs as leverage to ensure China won’t renege on the deal, and only lift the duties fully when Beijing implemented all parts of the agreement.

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“I think it can be done during this mandate,” Malmstrom told reporters on Friday in Bucharest before a meeting of trade ministers from the 28-nation EU. “We’re not delaying anything.”
European Union Trade Commissioner Cecilia Malmstrom said a trans-Atlantic trade deal could be achieved before year-end, stressing a readiness to work speedily as the bloc tries to keep at bay the threat of U.S. automotive tariffs.

Malmstrom said she expects EU governments to give her the go-ahead in March to start negotiations with the U.S. to cut tariffs on industrial goods. A final agreement with President Donald Trump’s administration could be reached before the European Commission’s term ends on Oct. 31, she said.
“It is important that we all agree on lowering tariffs internationally rather than on raising them,” Economy Minister Peter Altmaier of Germany, which has the most to lose from possible U.S. curbs on imports of EU autos, told reporters in Bucharest.

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“Don’t underestimate the impact of the Italian recession,” Le Maire said in an interview with Bloomberg News. “We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France because it’s one of our most important trading partners.”
The recession in Italy has set off alarm bells in Paris as the two countries’ economies are deeply intertwined, with shared companies in multiple sectors and annual trade flows of around $90 billion.
The European Commission has also sounded the alarm about the possible threats coming from Italy. The Commission will say next week the Italian government’s plans fail to provide for long-term growth, singling out for criticism the lower retirement age and the “citizen’s income” for the poor, newspaper La Repubblica reported Thursday.
The government’s program makes Italy “a factor of ‘contagion risk’ for the entire euro area,” Repubblica said of the conclusions in a draft of the Commission’s annual report.

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“I really want them to define patience a little more systematically’’ in terms of what data would cause them to move or hold, said Derek Tang, an analyst at Monetary Policy Analytics in Washington. “Some color there would be helpful.’’
The Federal Open Market Committee pledged in its January statement to “be patient’’ on the timing of future rate “adjustments.” That backed away from the “some further gradual increases’’ it highlighted in December and left open whether the next move is up or down.
The current 2.25 percent to 2.5 percent target for the benchmark federal funds rate is at the bottom of their range of estimates for the neutral rate that neither speeds up nor slows the economy.
The Fed’s balance sheet policy also probably played a large role in the discussions. Officials issued a separate statement last month committing to an operational strategy of abundant bank reserves, which means a bigger balance sheet than would otherwise the case.
They also said they would be flexible in shrinking their holdings of Treasuries and mortgage-backed securities, depending on the economy.
“We are going to get a sense of the landing point” for the balance sheet, said Julia Coronado, president and founder of MacroPolicy Perspectives LLC in New York, referring to a stopping point in the rundown of bank reserves. “The minutes are likely to send a signal that the end of the reduction in the Fed’s Treasury portfolio could come as early as April.”

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The markets are braced for the likelihood that the Commerce Department today (i.e., before Sunday's deadline) will release its recommendations on whether the U.S. should impose a tariff of up to 25% on imported autos on national security grounds.  The President will then have 90 days to make a final decision.

The global stock markets will likely sell off sharply if President Trump ultimately goes ahead with auto tariffs on the EU, Japan and other countries since autos are a significant macroeconomic sector and since U.S. auto tariffs (and retaliatory tariffs) would hurt earnings for most global auto companies.  The EU has said that it already has a list of retaliatory tariffs on U.S. products that it will impose if President Trump goes ahead with tariffs on European autos.

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“Under present circumstances a further slowdown in global growth could meaningfully boost U.S. recession odds, but it would have to be fairly large,” the authors write.
While slowdowns abroad haven’t caused a recession in the U.S. in the past century, Goldman economist David Mericle and his colleagues dug into whether global threats have become more important in an interconnected world. They concluded the danger posed by other countries is higher than before, though it would still take a major pullback to potentially tip America into a downturn -- roughly a 4 percentage-point slowdown in global growth excluding the U.S.
The economists say the base-case probability of a recession over the next year of 14 percent would rise to 20 percent if global growth slowed 1 percentage point more than expected. The risk of recession would surge to 46 percent in the event of a 3-point deceleration. A 4-point moderation ups the odds to 64 percent.

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"The economy's current account is in long-term decline and the future growth of the economy will be increasingly dependent on foreign capital," said the investment bank in a report on Tuesday.
China will likely become more reliant on foreign capital as the country looks set to enter into years of shortfall in its current account, Morgan Stanley predicted in a report.
The last time China had a current account deficit was in 1993. A country may need to operate on borrowed means when it runs into a deficit as the total value of goods, services and investments it imports exceeds the total value it exports.

Unlike 1993, however, the investment bank predicts that the shift toward a shortfall might be "sustained," setting the world's second biggest economy on a path to becoming more reliant on foreign capital from 2020 onward.

China's current account surplus has slipped from 10.3 percent of its GDP in the third quarter of 2017, to just 0.4 percent in the third quarter of 2018. This year, the current account deficit could be 0.3 percent of its GDP, and widen to 0.6 percent in 2020, the investment bank predicted.

That pales in comparison to its golden days more than a decade ago, when China had a huge current account surplus of $420 billion, or 9.9 percent of its GDP in 2007.

The report blamed the shrinking current account on China's aging population, and plateauing market share in goods exports, among other factors.

"We expect China to shift to an annual current account deficit from 2019 onwards due to a slipping national saving rate amid an aging population," said the bank.

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Republican Sen. Marco Rubio is backing a new proposal to tackle one of Democrats' favorite talking points: stock buybacks.

The plan, unveiled Tuesday, would raise taxes on capital gains to discourage companies from pursuing share repurchases. The goal is to reduce the difference between what investors pay on capital gains than on dividends, which are taxed at individual income tax rates.

The measure aligns Rubio with Democrats who have argued that the benefits of the GOP's tax law have primarily helped corporations rather than households.
Rubio is the chairman of the Small Business Committee, which is releasing a report on the issue on Tuesday.
"Tax policy changes to end this preference might, on their own, increase investment by shifting shareholder appetite for capital return," the report says.

Instead, it suggests using the revenue from a higher capital gains tax to encourage capital investment. The current tax law — passed by Republicans in 2017 with Rubio's reluctant support — allows businesses to fully and immediately deduct their expenses, but the popular provision phases out after 2022. The new proposal would make that measure permanent and expand the types of investments eligible for the deduction.

The report calls the Tax Cuts and Jobs Act a "missed opportunity."

"The existence of non-productive alternatives to capital investment, as a result, makes the product of the firm's American workers less valuable while at the same time increasing profits, making possible a world of higher asset prices, lower investment in the economy, and lower worker pay," it says.

The committee's proposal is part of a much broader report on U.S. and Chinese competitiveness, and critical questions — such as how high the tax on capital gains should be — remain unanswered.

The message against stock buybacks has become a central theme for the early Democratic presidential contenders for 2020 — and a narrative that Republicans have fiercely resisted. But Rubio was a GOP outlier during the debate over the tax law, arguing for a higher corporate tax rate to offset the cost of a bigger child tax credit. Since then, he has repeatedly highlighted the relatively slow growth in wages compared with the massive jump in share repurchases.

"When [a] corporation uses profits for stock buyback, it's deciding that returning capital to shareholders is better for business than investing in their products or workers," he tweeted in December. "Tax code encourages this."

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“I’ll say 50/50 we’ll get a deal,” Senate Appropriations Chairman Richard Shelby said on “Fox News Sunday.” “I hope and pray we do.”
Without a funding deal, nine federal departments and related agencies would shut down again.
The sticking point is over the number and purpose of immigration detention beds. Democrats are seeking a cap to force U.S. Immigration and Customs Enforcement, or ICE, to detain criminals rather than undocumented immigrants with no criminal history. Republicans are resisting a limit on grounds that criminals shouldn’t count toward it and ICE should have discretion.
There are currently 40,520 ICE immigration detention beds funded by Congress. Heading into the talks, the White House sought to increase the number to 52,000, while Democrats wanted a reduction to 35,520. Democrats have proposed a 16,500 cap on beds to be used for interior enforcement, with the rest to be used for those captured at the border, according to people familiar with the talks.
Lawmakers could resort to a resolution with funding through Sept. 30 if they can’t get a deal, but acting White House Chief of Staff Mick Mulvaney said on “Fox News Sunday” that Trump “cannot sign everything they put in front of him. There’ll be some things that simply we couldn’t agree to.”
Democrats are also demanding language in the bill aimed at blocking Trump from shifting funds to pay for the wall, according to a person familiar with the negotiations. The language could stymie executive actions to build the barriers and has become another hitch in the negotiations, the person said.
“He’s going to do whatever he legally can to secure the border,” Mulvaney said on NBC’s “Meet the Press,” one of two appearances on Sunday talk shows.
As of Saturday, it seemed that negotiators were focused on a proposal with border barrier funding of between $1.3 billion and $2 billion, said a person familiar with the talks. Details about where the fencing would go and a Democratic request to eliminate previously funded fencing in the National Butterfly Center, a conservation area close to the border in Mission, Texas, were still being negotiated.

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