FIG Topics of Interest



This year is shaping up to offer another uncomfortable milestone: the moment Europe’s biggest economy is forced to come to terms with its shortcomings. Germany today feels like it’s living out the final days of an era; there’s an air of impending change for which no one seems prepared. The country remains wealthy and politically stable, but it’s hard to escape a sense that Germans are complacent about the threats to the foundations of their prosperity.
The twilight of Angela Merkel’s long chancellorship is at the center of this atmosphere. She’s led the country through global crises—the 2008 collapse, the Greek meltdown, the influx of refugees, and various threats to the euro. Merkel was the champion of austerity, and yet her stewardship of the German economic engine kept the continent stable. Her handpicked successor, Annegret Kramp-Karrenbauer, is a mostly unknown quantity. Her main achievement so far is fending off an anti-Merkel candidate to head the Christian Democratic Union party.

Beyond politics, there’s a technological revolution that will likely mean the end of the internal combustion engine. The German auto industry—from BMW to Mercedes and Porsche—directly employs 800,000 people and has an export value of more than €240 billion ($269 billion), according to the German Association of the Automotive Industry. Volkswagen AG remains the world’s biggest automaker by sales volume, its admissions of emissions cheating notwithstanding. But the country that developed the first modern car in 1886—a Benz, more than two decades before Henry Ford’s Model T—has been slow to shift to electric vehicles. That casts doubt on how much longer Germany can maintain its dominance of the global luxury-car market in the face of competition from China and elsewhere.

Then there’s the sclerotic banking sector. The Finance Ministry’s attempts to press once-mighty Deutsche Bank AG to merge with Commerzbank AG may save neither. Without a viable banking behemoth, where will German enterprise look for financing?

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Maybe the world economy isn't in such terrible shape after all. New projections from the International Monetary Fund, published Tuesday, show that expansion still has some legs. Growth will be a not-too-shabby 3.3 percent this year.
That's down from a previous forecast of 3.5 percent. So, yes, it's a cut. But not a dramatic one. These numbers are a way from one IMF definition of recession, 2.5 percent, and miles from the contraction recorded in 2009. Superlatives about the lowest growth since the Great Recession are misleading. 

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(Europe to China: Do as we say, not as we do).

The European Union and China managed to agree on a joint statement for Tuesday’s summit in Brussels, papering over divisions on trade in a bid to present a common front to U.S. President Donald Trump, EU officials said.

Diplomats reached an eleventh-hour accord on a draft communique after China made concessions on wording about industrial subsidies that removed a European veto threat, said one of the officials, who asked not to be identified by name. EU Council President Donald Tusk, European Commission President Jean-Claude Juncker and Chinese Premier Li Keqiang are due to attend the gathering in the Belgian capital.

While the EU pressed China to cut industrial subsidies and open more to foreign investment, Europe is resisting protectionism by Trump, wary of his trade war against Beijing. The EU is also keen for Chinese help in the fight against climate change after the U.S. withdrew from a landmark international accord to cut greenhouse-gas emissions.
The Trump administration on Monday threatened a sharp escalation in trans-Atlantic commercial tensions by proposing to impose tariffs on $11 billion of U.S. imports of goods from the EU in response to alleged European subsidies to plane maker Airbus SE, a rival of Boeing Co.

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With trucks getting stuck at the border, Mexican companies are being forced to pay more to bring in additional vehicles for loading shipments. While the U.S. has yet to see meaningful shortages in goods from Mexico, prices for at least one import -- avocados -- have soared amid worries over a border closure. Buyers of berries, limes and asparagus are making plans to limit potential fallout from such a shutdown.

“The delays have doubled, tripled, quadrupled -- it’s not an exact science,” said Jaime Castaneda, vice president for trade policy at the U.S. Dairy Export Council. Lane closures and weekend shutdowns are adding to delays, he said.
Despite Trump’s threats -- or because of them -- Mexico has been cooperating and “I don’t think we’re going to have an official shutdown,” Larry Kudlow, the top White House economic adviser, said Sunday on CBS’s “Face the Nation.”

Trump conceded Saturday in a tweet that traffic and commercial delays will result from “the large scale surge of illegal migrants trying to make their way into the United States.” He added that “until Mexico cleans up this ridiculous & massive migration, we will be focusing on Border Security, not Ports of Entry.”


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“Both sides do want an agreement, but they want to make sure it’s the right deal for their respective domestic audience,” said Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management in Hong Kong.

Drafts of an agreement to end a nearly year-long trade war would give Beijing until 2025 to meet commitments on commodity purchases and allow American companies to wholly own enterprises in the Asian nation, according to three people familiar with the talks.


The White House is particularly focused on Chinese purchases of American goods through the second quarter of 2020, to narrow the trade balance ahead of Trump’s re-election bid. For that reason, the U.S. is pushing for China to front-load a big chunk of the commodities purchases in the first two years the agreement is in place, people familiar with the situation said.

A U.S. decision to tentatively sell fighter jets to Taiwan may affect the outcome of this week’s talks as well as any Trump-Xi summit, one of the people said. Given the geopolitical sensitivities of such a sale, that issue would likely be raised only when the two leaders meet and is unlikely to be part of the trade negotiations led by Lighthizer.

The U.S. wants the right to take unilateral, “proportional” action against China if it fails to abide by the rules. A person familiar with the text said China so far agreed only to consider avoiding retaliation if the U.S. acted against Beijing but stopped short of a formal pledge to refrain from counter-punching.

One of the final issues is what will happen to the tariffs the two sides have imposed on about $360 billion of each other’s goods in the past nine months. Trump has suggested that at least some of the tariffs will stay in place, saying they are necessary “for a substantial period of time” to ensure Beijing keeps up its end of the bargain.

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“We’re coming to a big finish here,” Zach Pandl, Goldman’s co-head of global foreign exchange and emerging market strategy, said on Bloomberg Television after the U.K. Parliament again rejected all alternatives to Prime Minister Theresa May’s unloved deal to leave the European Union. “We do think we’re making progress despite these failed votes.”
Instead of a prolonged stalemate or a chaotic no-deal scenario, Pandl said a soft Brexit approach, which may include a permanent customs union packaged with a second referendum, could come within the next day or two.

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“You couldn’t pick a worse time of year because Mexico supplies virtually 100 percent of the avocados in the U.S. right now. California is just starting and they have a very small crop, but they’re not relevant right now and won’t be for another month or so,” said Barnard.
Trump said on Friday that there was a “very good likelihood” he would close the border this week if Mexico did not stop immigrants from reaching the United States. A complete shutdown would disrupt millions of legal border crossings in addition to asylum seekers, as well as billions of dollars in trade, about $137 billion of which is in food imports.

“When a border is closed or barriers to trade are put in place, I absolutely expect there would be an impact on consumers,” said Monica Ganley, principal at Quarterra, a consultancy specializing in Latin American agricultural issues and trade.

“We’re absolutely going to see higher prices. This is a very real and very relevant concern for American consumers.”

Mexico is the largest importer of U.S. exports of refined fuels like diesel and gasoline, some of which moves by rail. It is unclear if rail terminals would be affected by closures.

As changing palates have increased demand for fresh produce, and a greater variety of it, the United States has increasingly come to depend on Mexico to meet that need. Imports have nearly tripled since 1999. In that period, Mexico has gone from supplying less than a third of imported produce to 44 percent today.

In addition to avocados, most of imported tomatoes, cucumbers, blackberries and raspberries come from Mexico. While there are other producers of these goods globally, opening those trade channels would take time, said Ganley.

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Stephen Wang is counting the costs of President Donald Trump’s trade war. He had to put down 12 times more cash as a guarantee to U.S. customs that he would pay the bill for tariffs on the Chinese-made pumps, valves and motors he imports. 
The cost of the guarantee - a U.S. customs bond - has shot up, an additional hit to importers already facing steep customs bills adding up to tens of billions of dollars for tariffs imposed by the Trump administration on incoming Chinese goods, as well as steel and aluminum imports.

Since coming into effect last year, the tariffs have pushed up manufacturing costs, upended decades-old global supply chains and inflated prices for consumers, resulting in lower sales and forcing companies to defer investments. This, in turn, has dimmed global growth outlook, roiling financial markets.

Other ripple effects are less obvious, among them the rising expense of U.S. customs bonds. But for small companies that can ill afford the added cost, the impact can be crippling.

Given the extra duties associated with Trump’s tariffs, importers have been forced to post bonds that are worth much more to guarantee they can cover the added cost of bringing Chinese imports, and foreign steel and aluminum, into the United States.

In some cases, customs bond requirements have increased 500-fold, according to Reuters interviews with a dozen importers, underwriters and customs brokers.

“Managing the cash flow has become tough,” said Wang. If the tariff war drags on, he warns, companies operating with thin profit margins and a weak capital base could go bust.

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China has made unprecedented proposals in talks with the United States on a range of issues including forced technology transfer as the two sides work to overcome remaining obstacles to a deal to end their protracted trade war, U.S. officials told Reuters on Wednesday.
“They’re talking about forced technology transfer in a way that they’ve never wanted to talk about before - both in terms of scope and specifics,” he said, referring to Chinese negotiators. He declined to give further detail.
“If you looked at the texts a month ago compared to today, we have moved forward in all areas. We aren’t yet where we want to be,” the official said, speaking on condition of anonymity.
Talks would continue as long as progress is being made on the core issues, the official said.

“It could go to May, June, no one knows. It could happen in April, we don’t know,” another administration official said.

The two sides still have differences over intellectual property and how to enforce a deal, he said.

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A Green New Deal proposal backed by numerous Democrats failed to advance in the Senate on Tuesday as Democrats protested what they called a political show vote orchestrated by majority Republicans.

The nonbinding resolution, which calls on the United States to make an ambitious effort to slash its use of fossil fuels to fight climate change, fell short in a procedural vote. The Senate did not proceed to debating the measure, as 57 senators voted against it and 43 Democrats and independents who caucus with them — nearly all of the Democratic caucus — voted “present.” Four senators who vote with Democrats — Joe Manchin of West Virginia, Kyrsten Sinema of Arizona, Doug Jones of Alabama and independent Angus King of Maine — voted against the resolution.

By voting “present,” Democrats hoped not to go on the record on a bill that had no realistic chance of passing, even if they support the concept of a Green New Deal. The six Democratic senators running for president next year — who co-sponsored the original resolution introduced by Sen. Ed Markey, D-Mass. — did not take a position on the measure Tuesday.

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