FIG Topics of Interest



Building on President Donald Trump's "Indo-Pacific" strategy, U.S. Secretary of State Mike Pompeo will announce a series of investment initiatives in Asia on Monday focusing on digital economy, energy, and infrastructure.
The announcement, to be made at a U.S. Chamber of Commerce forum in Washington, comes at a time when trade frictions with China have given U.S. trade diplomacy a sharper edge.
"The Indo-Pacific is an absolute priority of U.S. policymakers in the executive branch and in Congress," Brian Hook, Pompeo's senior policy advisor, told journalists in a conference call.
Countries in the region have been worried by Trump's "America first" policy, withdrawal from the Trans Pacific Partnership trade deal, and pursuit of a trade conflict with China that threatens to disrupt regional supply chains.
Hook said the United States approach to development of the region was not aiming to counter China's Belt and Road Initiative, which comprises of mostly state-led infrastructure projects linking Asia, parts of Africa and Europe.
"It is a made in China, made for China initiative," he said. "Our way of doing things is to keep the government's role very modest and it's focused on helping businesses do what they do best."
Critics of Beijing's Belt and Road Initiative, which aims to recreate the ancient Silk Road, say it is more about spreading Chinese influence and hooking countries on massive debts. Beijing says it is simply a development project that any country is welcome to join.

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As trade tensions escalate between Washington and Beijing, the U.S. Senate quietly passed legislation on Thursday that would lower trade barriers on hundreds of items made in China.
With no debate, the Senate unanimously passed a bill that would cut or eliminate tariffs on toasters, chemicals and roughly 1,660 other items made outside the United States.
Nearly half of those items are produced in China, according to a Reuters analysis of government records.
The White House has not publicly taken a position on the so-called miscellaneous tariff bill, which has now passed both the Senate and the House of Representatives unanimously. The two chambers need to resolve minor differences before they can send the legislation to Trump to sign into law.
Supporters of the bill have said it would boost the economy by getting rid of tariffs set up to protect industries that no longer exist in the United States. The National Association of Manufacturers has said U.S. businesses pay $1 million a day on such import duties.
"It makes no sense because it is a direct and punishing tax on making things in America and for creating jobs in America," the trade group's president, Jay Timmons, said in a prepared statement celebrating the bill's passage.
Among the beneficiaries are companies that have moved production offshore. Hamilton Beach Brands Holding Co, for example, would pay reduced tariffs on Chinese-made toaster ovens, steam irons and other household appliances it used to make domestically.
Some domestic manufacturers have complained the bill would undercut their business by making it easier for rivals to bring in cheap foreign goods. They said the bill punished smaller firms that lack the ability to defend their interests in Washington.
The version of the bill that passed the House in January included 145 items that are made domestically, according to a Reuters analysis.
"There's no reason to block opportunity U.S. manufacturers might have for rebuilding our manufacturing base," Michael Korchmar, the head of a family-owned travel goods company in Florida, said in a phone interview earlier this month.

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“I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies!” Trump said in a Tuesday night tweet. “That would finally be called Free Market and Fair Trade! Hope they do it, we are ready - but they won’t!”
European Commission President Jean-Claude Juncker and EU Trade Commissioner Cecilia Malmstrom are due to meet with Trump in Washington on Wednesday. They plan to signal the bloc’s willingness to negotiate a bilateral trade agreement on manufactured goods, or a so-called plurilateral sectoral agreement between all major car exporters, which would cut or eliminate tariffs on automobiles globally.

The commission, which manages trade relations on behalf of all 28 nations in the EU, is preparing a list of retaliatory measures on American goods worth $20 billion should the U.S. impose car tariffs, Malmstrom said. “It would be more general, like farming goods, machines, high-technology products and others,” she said in an interview with Swedish newspaper Dagens Nyheter.

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Governments, corporate executives and consumers will all be watching a meeting this week between President Donald Trump and the head of the European Union’s executive arm, Jean-Claude Juncker, who hopes to forestall a major escalation in the global trade war. The U.S. is deciding whether to impose tariffs as high as 25 percent on car imports as part of Trump’s bid to reduce the $566 billion U.S. trade deficit. The proposal has drawn opposition not just from Japan, Mexico, Canada and Germany, among others, but from U.S. automakers as well.

1. How would auto tariffs be felt?

In ways small -- higher prices facing car buyers -- and big: If the U.S. follows through on all its tariff threats, world economic output would be 0.5 percent less in two years, according to the International Monetary Fund.

2. How drastic would the impact be on car prices?

A 25 percent tariff on auto imports would raise the price of new cars sold in the U.S. -- even ones built in the U.S., because they typically include parts made elsewhere. The National Automobile Dealers Association estimates that the tariffs would add as much as $2,270 to the cost of U.S.-built cars and $6,875 to the cost of imported cars and trucks. The European Commission estimates that the same level of tariffs would add 10,000 euros ($8,620) to the sticker price of European-built imports into the U.S.

3. Who would be hardest hit?

It could well be the U.S., according to the Washington-based IMF, which estimates that American economic output would be 0.8 percent lower one year into the global trade conflict. The big three automakers, General Motors Co., Ford Motor Co. and Fiat Chrysler, build about 1.2 million vehicles in Canada, 90 percent of which are exported to the U.S., according to an internal EU memo. General Motors said tariffs “could lead to a smaller GM” and force it to cut jobs by increasing costs and spurring retaliation from other countries. The American Automotive Policy Council, on behalf of GM, Ford and Fiat Chrysler, estimated that a 25 percent levy would create an $83 billion tax burden for the U.S. auto industry and consumers. Jeff Schuster at researcher LMC Automotive estimates that tariffs could cost the U.S. auto industry at least one million annual vehicle sales.

4. Then why would the Trump administration do this?

Trump campaigned on promises to even out what he sees as inequities created by the current multilateral trade system. He’s gone so far as to call the EU a “foe” of the U.S. on trade issues. Commerce Secretary Wilbur Ross said earlier this year, “The reason we harp so much on autos and the reason we harp so much on China, if you look at our trade deficit, it fundamentally has two components: one is geographic and that’s China and the other is a product and that’s automobiles.”

5. What exactly is Trump threatening to do?

His administration is investigating whether to use a Cold War-era law -- Section 232 of the Trade Expansion Act of 1962 -- to impose tariffs as high as 25 percent on all cars and car parts entering the nation. This law gives the president latitude to adjust imports if there is a national security threat. Trump used the same justification to hit steel and aluminum imports with tariffs earlier this year.

6. How big is this market?

The U.S. imported about $350 billion of cars and car parts in 2017 -- $62 billion of which originated in the 28-nation EU, according to U.S. government data. In the same year, the country exported about $155 billion in cars and car parts, $18 billion of which went to the EU.

7. How would Europe respond to U.S. tariffs?

The EU may target American goods -- not necessarily cars -- worth about 20 percent of the value of goods hit by U.S. tariffs, according to two officials with knowledge of the deliberations. The level of the EU’s retaliatory tariffs would probably match the U.S. levels, which could be as high as 25 percent. If the U.S. were to hit all EU auto imports with tariffs, then it’s likely that the EU would retaliate against about 12 billion euros of American goods. In comparison, European levies in response to the U.S. steel and aluminum tariffs applied to 2.8 billion euros ($3.3 billion) of American goods.

8. Who else would be part of this fight?

Japan, which exports 1.7 million autos to the U.S. each year, is threatening to respond with its own tariffs. Mexico exports 2.4 million autos, including its most popular export, the Chevy Silverado. Canada exports 1.8 million autos; motor vehicles and parts represented about 16 percent of Canada’s export value for the first four months of 2018.

9. What does Juncker want to do?

He’s said to be bringing two main proposals: an offer to discuss the reduction of levies on cars and car parts among all major auto-exporting countries in a so-called plurilateral deal; and the possibility of broaching a limited free-trade agreement. Plurilateral accords involve a group of like-minded countries that are typically limited to specific sectors of goods or services. The World Trade Organization permits these types of negotiations as long as the benefits are provided to all WTO members on a most-favored nation basis. It is faster and less burdensome to negotiate these accords rather than multilateral deals because they don’t require the approval of all 164 WTO members. But even the EU’s own trade minister, Cecilia Malmstrom, has expressed skepticism about whether a plurilateral accord could work.

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“The central bank will work to stabilize the currency,” Wang, UBS’s head of China economic research in Hong Kong, said in a Bloomberg Television interview. “So what can China do? At this moment I think they can ease some of the tightening” in credit and fiscal policy, to support infrastructure investment, she said.
After overseeing a slide in the yuan of almost 5 percent since mid-June, the question for Chinese officials now is whether to turn to other policy measures to support growth in the face of headwinds to exports. Wang Tao at UBS Group AG is among those predicting China will use other tools than the exchange rate to “cushion the blow” from the trade war.

“A few years ago we didn’t have a story to justify the yuan weakening,” said Iris Pang, greater China economist at ING Bank in Hong Kong. “It was the PBOC that triggered the sudden yuan devaluation, without any notice or without any hints,” she said of the People’s Bank of China in 2015.
As China’s officials determine whether to respond to Trump’s yuan manipulation charge, economists say there are clear arguments for a cheaper Chinese currency, justifying the current weakness.

“The currency should be depreciating from a broad macro perspective -- you have the Fed hiking and PBOC easing, so at some point it will be reflected in the FX market,” Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong, told Bloomberg Television. “This is still in line with the broader PBOC policy of introducing more volatility and letting the market play itself out.”

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"I’m not doing this for politics. I’m doing this to do the right thing for our country," Trump said in a CNBC interview aired Friday. "We are being taken advantage of and I don’t like it."  

President Donald Trump said he’s "ready to go" with $500 billion in new tariffs on Chinese goods imported to the U.S., saying the country has been taken advantage of for too long.

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In an interview at CNBC's Delivering Alpha conference in New York, Kudlow said: “I don’t think President Xi at the moment has any intention of following through on the discussion we made and I think the president is so dissatisfied with China on these so-called talks that he is keeping the pressure on — and I support that.”
In response, China’s foreign ministry spokesperson Hua Chunying said: “That the relevant United States official unexpectedly distorted the facts and made bogus accusations is shocking and beyond imagination.”
“The United States' flip-flopping and promise-breaking is recognized globally," she added during a regular briefing in Beijing on Thursday.

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There’s no chance China will cut its trade surplus with the U.S. in response to President Donald Trump’s tariff threats. For starters, Washington has made no specific demand to which Beijing can respond. But its efforts may have an unexpected side effect: a debt crisis in China.

The 25 percent additional tariffs on exports of machinery and electronics looked, at first blush, like a stealth tax on offshoring. The focus on categories like semiconductors and nuclear components, in which U.S.-owned manufacturers in China are strong, recalled Trump’s 2016 promise to tax “any business that leaves our country.”

It seems, though, that offshoring wasn’t the target after all. Now, with the imposition of new tariffs on low-value exports that mostly involve Asian value chains, the simple fact of selling cheap products that the U.S. buys has become the problem.
Either way, the administration appears set on shrinking its current-account deficit (which, at a moderate 2.4 percent of GDP, is far lower than the 6 percent clocked in 2006-7) just as the Federal Reserve raises interest rates. Distress has already been registered in China. On July 13, the yuan (also known as the renminbi) hit 6.725 to the dollar, the weakest in a year and 5 percent lower than at the end of May.

Such a move is nothing earth-shaking for less controlled currencies. But a stable renminbi is a key plank in the leadership’s promise to its people, and the exchange rate is tightly managed by the central bank.

There are many other signs: The Shanghai Composite Index of stocks has declined 7 percent in a month, dropping below the government’s red line of 3,000 for the first time since September 2016. Corporate bonds are about to set a record for the most defaults in a year. Junk bond yields are spiking. The chorus of anxiety about debt is reaching a crescendo, with daily press reports on governments that can’t pay their employees or meet pension obligations. Property prices are tumbling in some cities and frozen in others whose governments have placed a finger in the dyke by halting transactions.

That the massive burden of debt will drag the economy into recession is as obvious as the empty towers that rise on every landscape. Precise estimates are difficult, since the government’s dedication to the optics of invincibility induces financial institutions to push debt into alternate, opaque channels. But on any metric, the amount of new lending each year grows faster than the economy, and the interest newly owed exceeds the incremental rise in GDP. In other words, the whole economy is a Ponzi scheme.

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Game Theory and Tariffs
Here are some insights from game theory on what to watch and expect.

  1. An inherently cooperative game is increasingly played uncooperatively: The Trump administration is taking a disruptive approach to trade, and several other areas, by shaking things up as a means to fix what it views as asymmetrical components that undermine the fairness of the system and harm the U.S. It has resorted to unilateral tactics that combine actual tariff actions with threats of escalation, instead of continuing to rely on the rules-based system that has underpinned the post-World War II international economic order.
    In game theory terms, the Trump administration has introduced a notable “uncooperative” element to the inherently “cooperative game” of international trade. Most economists worry about the implications for individual countries and the system as a whole.
    Trade wars tend to create a strong stagflationary impulse, disrupting growth and increasing costs and prices. The conflicts complicate domestic policy management and increase the risk of financial instability. They also risk causing serious fractures to the international economic and financial architecture, with consequences that can extend well beyond economics and finance.
    Given all this, the major question today is whether the current round of mounting trade tensions is a means to a better end — still-free but fairer trade — or an end in itself. Until now, the markets have attached a considerably higher probability to the former, more positive possibility, though every escalation in the tit-for-tat tariffs erodes some of the confidence in that outcome.
  2. Further escalation is the most likely outcome for now: For trade tensions to be a means to a better end, individual country behaviors must change in a manner that is visible, verifiable and durable. This is particularly true of China’s approach to intellectual property, market access limits and joint venture requirements, which are a longstanding source of friction with the U.S., as well as other countries. Until there are indications of durable change, the most likely American strategy will be to increase the pressure on China, even though that carries significant risks for all. The U.S. stance is intended to leave no doubt about the administration’s resolve and its commitment to affecting change, almost regardless of the domestic costs. But the U.S. could end up pushing China too far, too fast. That would threaten not just a full-blown trade war, but also increased geopolitical strains and financial disruptions (including because China is a large holder of U.S. government securities and a major participant in the dollar market).
  3. The game is inherently unbalanced: Whether by accident or design, the U.S. is now playing in an uncooperative game that it is well placed to win in relative terms. For many reasons, trade tensions are less damaging for the U.S. than for China, whose growth model is still notably dependent on foreign markets. This relative advantage is already evident in the performance of the equity and currency markets of the two countries. While this advantage certainly isn’t protection against some absolute damage, it gives the U.S. a stronger hand to play.
    The situation resembles the 1980s, when President Ronald Reagan embarked on a military spending race with the Soviet Union, a contest America was destined to win, albeit with costs and at considerable risk. This is an approach the Trump administration will be tempted to press further when it shifts its attention back to the modernization of existing trading arrangements with other countries, including some of its closest allies.
  4. China will likely ultimately agree to some U.S. requests: Because the game is unbalanced, China’s least costly strategy over time will be to seek a return to a cooperative approach to trade, even though the country is making gains on regional arrangements. This may only be possible by acceding to some U.S. requests. It may not be a first best outcome for China, but it’s a lot better than a full-blown trade war.
  5. Public accusations and counter-accusations make trust difficult: Restoring greater trust between China and the U.S. is key to re-establishing a durable cooperative game. This requires behind-closed-door meetings that set aside accusations currently being levied by both sides, and focus on immediate confidence-gaining steps as well a framework for resolving the inevitable misunderstandings and misperceptions that are likely to arise. The sooner these meetings resume in earnest, the lower the risks the current uncooperative game will turn into a very costly global trade war.  
  6. You can get there faster through coalition-building: Given that America’s genuine grievances against China are shared by other countries, it would be in the U.S. interest to build coalitions early on. Although the alliances could complicate the bilateral negotiations the U.S. wishes to pursue with those countries, they would help accelerate the effectiveness of its approach toward the bigger issue of China and reduce the risk of costly global economic fragmentation. This would also impart more of a multilateral tone to a notably unilateral approach, helping to safeguard an international architecture that, while it needs modernizing reforms at several levels, still serves the U.S. and the world well.
  7. Implementation is trickier than design: These steps are very difficult to calibrate. Trust is low, both in terms of domestic politics and between countries. A good understanding of other nations’ reactions is essential, as well as an openness to course correction as an uncooperative game becomes increasingly unpredictable. Moreover, on the domestic front, well-communicated, timely and coordinated White House decision making is key to maintaining the needed buy-in from broad segments of the population and Congress.

These seven insights are key to assessing the benefits, costs and risks of the Trump administration’s unconventional approach to international trade. They go beyond the arguments underpinning the markets’ consensus baseline view that the tit-for-tat measures should not have a significant and lasting downward impact on the economy and stocks and, ultimately, may help bring about trade that is still free but fairer. They also trace a fuller distribution of possible outcomes that includes a rather fat left tail (a full-blown trade war) and a smaller right tail — that is, a more fundamental realignment of the global system that favors American interests, counters the multiyear erosion of its international standing and allows it to benefit more from its core position in the international economy.

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Most U.S. business economists expect corporate sales to grow over the next three months and hiring and pay to rise with them.

But a majority of the economists surveyed by the National Association for Business Economics say the corporate tax cuts that the Trump administration pushed through Congress have yet to affect their plans for hiring or investment. The administration had promoted its tax cuts, which were heavily tilted toward corporations and wealthy individuals, as likely to raise worker pay and promote corporate investment and expansion over time.

The NABE also said a majority of respondents from goods-producing companies said their companies were delaying investment, raising prices or taking other steps in response to the Trump administration's trade conflicts with other nations.

The results of the quarterly survey being released Monday reflect responses from 98 of the NABE's members between June 14 and June 27.

Sixty-eight percent of the business economists said they foresee sales growing over the next three months. And for a fourth straight quarter, a higher proportion of respondents reported rising sales at their companies. All the panelists expect the U.S. economy, as measured by the gross domestic product, to expand over the next 12 months.

Goods producers — a category that includes manufacturers, farmers and construction — are most optimistic, with 94 percent saying they expect sales to rise over the next three months.

Fifty-one percent of the economists said wages rose at their companies between April and June, and they expect pay to keep rising over the next three months. It was the first time since the NABE began analyzing such data in 1982 that it has reported such strong wage growth over two quarters. Forty-one percent of respondents said their companies expect to hire in the next three months.

"Labor market conditions are tight, with skilled labor shortages driving firms to raise pay, increase training, and consider additional automation," Sara Rutledge, chair of the NABE's Business Conditions Survey, said in a statement.

Overall, the respondents reported little impact so far from the Trump administration's tariffs against China, the European Union, Canada and Mexico. A majority — 65 percent — said the trade disputes haven't led their companies to change hiring, investing or pricing so far.

But among goods-producing companies — which are directly affected by the tariffs and the counter-tariffs by America's trading partners — a majority said they had made one or more such changes. Twenty-six percent of the goods-producing companies said they had delayed investments, and 16 percent said they had raised prices.

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