Something glaring has been lost in the media’s headlines and in the carefully detailed analysis by many of my fellow trade economists in the wake of the White House announcement in December 2019 that China and the U.S. have come to an agreement on “Phase One” of a hoped for grand trade détente between the world’s two largest economies.
It is the recognition that under the Trump Administration, American policy toward international commerce has pivoted markedly toward a greater role for the U.S. government, rather than businesses, to engage directly in commercial cross-border transactions.
The centerpiece and seemingly the most tangible component of the Phase One agreement—at least as much as anyone can tell, since as 2019 comes to a close neither side has yet to issue a formal text—is a commitment by the Chinese government, through its state owned enterprises, to procure perhaps as much as $50bn worth of agricultural products from the U.S. over several years.
The irony that the President Trump’s trade team is relying heavily on state-to-state procurement transactions to ease trade frictions has not been lost on Xi Jinping according to friends of mine very well placed in Beijing.
Indeed, that the U.S. has become more like China rather than the other way around—at least in terms of respecting the WTO rules-of-the road regarding disciplines on non-market economies—is exactly what Mr. Xi has been hoping for as his Christmas gift all year long.
As long as Trump stays in power, Xi can count on this as the gift that will keep on giving. Given imperiled economy Mr. Xi oversees—if not feverishly trying to resuscitate—Trump’s gift is welcome indeed.
There is a plausible reason why Mr. Xi understands very well what drives the U.S. president. Trump emulates Mr. Xi’s ability to give the state the paramount role in the functioning of the economy.
The same can be said for Trump’s simpatico rapport with Russia’s Vladimir Putin, Turkey’s Recep Tayyip Erdoğan, and even North Korea’s Kim Jong-un, among other strongmen today across the globe.
Beyond the arranged agricultural deals with China, other actions reflect Trump’s longing for state control of the U.S. economy. Here are three that the president or his team have been contemplating or have begun to execute during his term in office so far.
The first is the starkest example. It was Trump’s attempt to order U.S. firms to leave China. Recall his Tweet earlier in 2019: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”
Second, Trump and his Treasury Secretary, Steven Mnuchin, have been working with allies in Congress to force a de-listing of Chinese firms from U.S. stock exchanges.
Ironically, portfolio investments in these businesses by American individuals and institutions might help those groups attain greater oversight of—or at least a better window on—the activities and performance of those Chinese firms, something one would think would be of value to the U.S. government.
And, third, Mr. Trump’s Secretary of Education, Betsy Devos, has launched a new program to penalize U.S. universities that inadequately disclose funding received from certain foreign governments.
These are resources that significantly help finance the operations of U.S. universities’ overseas campuses (which are highly profitable activities); fund cutting edge research activities taking place within U.S. universities by U.S. scholars; and plug a hole in cash-strapped U.S. universities, especially publicly funded schools.
These three initiatives are a few of the components of Mr. Trump’s overarching drive for a forced “decoupling” of the U.S. from China. If such a decoupling were successful, it would be the ultimate example of Trump’s exercise of a state-directed economy.
Fortunately, as I have written earlier in this space, any meaningful form of artificial decoupling is not only unwise public policy but it simply will not take root easily in a global economy whose supply chains, including the assembly of various components sourced from numerous geographies into final products, are truly multinational.
In short, no matter how forceful a government’s policy might be to try and sharply re-orient the current worldwide constellation of the location of production and consumption, as well as both the flows of technological advances and their geographic diffusion, it will unlikely counter in the short-run powerful forces engendered by inertia.
Why do I say that?
First, enacting and implementing new U.S. policies to bring about changes in taxes, tariffs and wage rates—among other factors—in order to alter global supply chains will not be easy tasks to accomplish. Even if the same party controlled both the executive and legislative branches, do not underestimate the power of U.S. businesses, labor and other interest groups to weigh in heavily.
Second, corporations with large fixed investments abroad will—for good reasons—not reconfigure their supply chain configurations on a dime. They will want to hedge their bets that any policy changes are durable.
Third, countries compete against each other to attract investment. A move by the U.S. to, say, make China a less desirable location for American firms to operate, will beget compensatory changes not only by Beijing but other countries in the region, for example, the ASEAN states. The world marketplace operates like a dynamic game.
Finally, the notion that the world will operate according to bifurcated technology standards for very long—say a duopoly of Western and Chinese technological regimes—is hard to digest.
The power of global economies of scale and scope will likely disrupt any semblance of a stable competitive equilibrium in this regard. One does not have think back very long to remember the race between Betamax, VHS, and DVDs.
Mr. Trump surely envies Mr. Xi’s sweeping governmental powers and his hold over the Chinese economy, which—for better or worse—has become the “world’s factory” of today.
In an ever-changing global marketplace, however, nothing guarantees such a configuration will not migrate to elsewhere on the globe in a few decades time. Indeed, this could be hastened by Xi’s reluctance to reform a moribund economic system.
In this regard, Trump would do well to recognize that strongmen economies do come to end, and often their demise is not a pretty sight, particularly for those at the very top.
New 'east-west divide' splitting north start-up economy – BBC News
An “east-west divide” has opened up in the number of start-ups created across the north of England, research reveals.
Data suggests a larger number of start-up firms are thriving on the west side of the Pennines, with significantly fewer to the east.
This runs contrary to the government’s Northern Powerhouse ambition to “level up” the North, the study said.
The Department for Business, Energy and Industrial Strategy said it remains “committed to the Northern Powerhouse”.
The Enterprise Research Centre (ERC) said its findings strengthened the case for better east-west rail links, and challenged the government to do more to help foster “best practice” for businesses.
The study analysed the latest available data for start-up rates, from 2018.
It found Greater Manchester’s rate was among the highest in the UK, with 58 per 10,000 population.
But while neighbouring regions including Merseyside and Cheshire also showed healthy rates, many eastern areas “lagged far behind”, with the north-east having the lowest rate of just 19 per 10,000.
Peter McDowell, of Business Durham, which supports economic growth in the region, said there was a “natural cultural tendency” for many people in the north-east to join large employers, with the region traditionally regarded as a manufacturing and an “export economy” rather than a haven for start-ups.
He said the region also struggles to retain university graduates, with many choosing to return to regions with larger urban economies.
Mr McDowell added: “This is no surprise. The north-east has lagged behind many other parts of the country. It would be the same if you compared it with North Wales, or the south.
“This is why we are working on many projects and initiatives to promote more investment and growth in the area and encourage more new businesses.”
Greater Manchester also had the highest proportion of start-ups that manage to reach the £1m turnover milestone within three years (2.2%).
East of the Pennines, start-up growth was generally slower, with the exception of the Sheffield City Region (2.1%).
The ERC has presented its findings in a meeting involving local authorities across the Northern Powerhouse area.
The government defined the Northern Powerhouse as stretching northwards from a line running between the Mersey estuary in the west, to the Humber estuary in the east.
The ERC’s deputy director Mark Hart said: “While the current political rhetoric talks of ‘levelling up’, what we’re seeing in business dynamism terms is a clear ‘east-west divide’ emerging.
“If the Northern Powerhouse is going to be a meaningful economic unit, we have to address these inequalities.”
The Department for Business, Energy and Industrial Strategy said: “This government remains absolutely committed to the Northern Powerhouse and levelling up growth across the whole country to drive productivity, empower communities and rebalance opportunity.”
Trump Administration Faces Economic Test as Coronavirus Shakes Markets – The New York Times
WASHINGTON — The global spread of the deadly coronavirus is posing a significant economic test for President Trump, whose three-year stretch of robust growth could be shaken by supply chain delays, a tourism slowdown and ruptures in other critical sectors of the American economy.
The outbreak of the virus in China has already disrupted global trade, sending American companies and retailers that rely on Chinese imports scrambling to repair a temporary break in their supply chains. Its spread to South Korea, Italy and beyond has hindered global travel. Economic forecasters say that the effects will hurt growth in the United States this year even if they do not intensify — and that if the virus becomes a global pandemic, it could knock the world economy into recession.
Stock markets have plunged this week on fears about the virus, with companies such as Apple and Microsoft among the most prominent businesses that have warned that supply chain disruptions could slow sales. Analysts said this week’s declines were on track to be the steepest since the 2008 financial crisis.
The market’s fall presents a challenge for Mr. Trump, whose presidential success has been deeply tied to the economy and a rising stock market that is now experiencing pronounced jitters. For now, Mr. Trump has publicly played down the potential economic fallout, saying woes at the aerospace giant Boeing, a strike last year at General Motors and the Federal Reserve’s reluctance to slash interest rates have done more to hurt the economy.
“We have been hurt by General Motors,” Mr. Trump said on Wednesday. “We’ve been hurt by Boeing. And we’ve been hurt by — we’ve been hurt, in my opinion, very badly, by our own Federal Reserve.”
Health officials expect a spike in coronavirus cases in the United States, though it remains unclear how soon and how severe an outbreak might occur. Officials have warned the nation to be prepared for the virus to spread.
If the infection gains a big foothold in the United States, it could disrupt the economy, which has been expanding steadily with an unemployment rate that has hovered near a 50-year low for more than a year. In an extreme scenario where the virus severely hits the United States, it could keep workers at home and grind production to a halt, hurting revenue streams and tanking even highly leveraged corporations as they fall behind on debt payments. In the least severe case, the current slowdown in China could cause a short-lived growth blip.
Economists at Goldman Sachs already expect to shave 0.8 percentage points off the United States gross domestic product in the first three months of 2020 because of slumping tourism from China and trade slowdowns. But they expect a quick rebound in the second quarter that will help to make up for the downturn.
Other economists, including those at Moody’s Analytics, foresee more drastic fallout if widespread infections appear in other countries. A global recession “is likely” if the virus “becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea,” Mark Zandi, Moody’s chief economist, wrote on Wednesday.
Chang-Tai Hsieh, an economist at the University of Chicago’s Booth School of Business who tracks Chinese economic data, said in an interview Thursday that the effects on American growth will be “huge” even in a best-case scenario with the virus. Chinese business activity, he said, is running at about 20 percent of normal levels.
“The economic consequences are, everything is down” in China, he said. “Everything is down tremendously.”
As forecasts worsen, investor expectations of a Fed cut are quickly increasing. As of Thursday, investors were betting on a March rate cut, a move that seemed highly unlikely as recently as a week ago. Many now expect two cuts by June, market pricing suggests.
Democrats on the House Financial Services Committee sent a letter on Thursday to Jerome H. Powell, the chairman of the Federal Reserve, asking for more information about whether an outbreak of the virus in the United States could cause a recession and what tools the central bank had to combat a supply shock to the economy.
Central bank policymakers said on Thursday that they were closely monitoring viral developments, though they did not yet signal a coming cut.
“It really depends on: What are the medium-term implications for the U.S. economy?” Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in an interview. “If people are temporarily staying home, not traveling, not interacting and purchasing things, that could be a short-term hit. Or it could develop into something broader — and that’s the kind of calculus you have to do when you’re thinking about monetary policy.”
But rate cuts may have a limited effect: They work by stimulating demand, which could help if consumers and investors get spooked and stop spending. But cuts will do little to restart factories and correct supply problems.
“We’d absolutely expect to see a response from the Federal Reserve, not least to shore up confidence,” said Paul Ashworth, an economist at Capital Economics, a research consultancy. But he pointed out that monetary policy worked on the economy with a six- to nine-month lag, and “it doesn’t deal with the supply-side impact of, say, one-third of your work force catching this.”
The more critical response may come from Congress and the Trump administration, which have done little thus far to script a fiscal response.
Perhaps the most important thing the government can do to insulate the economy is to stem the outbreak, keeping Americans on the job and spending. If that fails, though, fiscal responses are an option; Hong Kong and China, both hit hard, have rolled out packages to help bolster growth. Tax and spending policies might also encourage demand more than fixing supply, but they can also work more quickly than monetary policy.
House Speaker Nancy Pelosi of California and Senator Chuck Schumer of New York, the Democratic leader, on Thursday morning called for Congress and Mr. Trump to fashion a spending bill meant to “address the spread of the deadly coronavirus in a smart, strategic and serious way.” A response should include interest-free loans for “small businesses impacted by the outbreak.”
Such a program would represent targeted relief but not an effort to dramatically increase consumer demand in the economy.
But such a plan seems far-off, if not improbable. Democratic and Republican leaders in Congress have not opened talks with the White House or between the House and Senate over any possible package of tax cuts and spending increases that would be meant to stimulate the economy in the event of a virus-related downturn. Top Senate aides said on Thursday that it was too soon for such conversations, with Mr. Trump’s allies noting the persistence of low unemployment and continued economic growth.
Michael Zona, a spokesman for the Senate Finance Committee and its chairman, Charles E. Grassley of Iowa, said on Thursday that “at this point, the coronavirus has not had a broad impact on the U.S. economy, and its effects have been limited.” But Mr. Zona said Mr. Grassley and the committee were “ready to consider appropriate tax relief responses if that becomes necessary and the extent of the problem can be determined.”
Mr. Trump’s economic advisers had already been working on a package of tax cuts intended to serve as a centerpiece of his 2020 campaign. That package, which is still in flux and probably months away, could include new tax cuts for the middle class and for start-up businesses, along with extensions of some expiring provisions of the 2017 tax cuts. Tax experts who have spoken with the administration do not see the effort as an immediate stimulus package, but more as an attempt to build on the 2017 law and offer voters a contrast between Mr. Trump and his Democratic opponent.
On Thursday, the White House added Treasury Secretary Steven Mnuchin and Larry Kudlow, the director of the National Economic Council, to the president’s coronavirus task force. Both officials have been working on the tax plan. The Financial Banking and Information Infrastructure Committee, chartered under the president’s Working Group on Financial Markets and chaired by Treasury, is in regular communication and is also monitoring the economic fallout from the virus.
With Democrats controlling the House, there has been little expectation of major tax legislation before the November election. There was no sign on Thursday, from inside or outside the White House, that the coronavirus had changed that.
“The bipartisan consensus on Capitol Hill is that substantive tax policy is not happening before the lame duck” session after the election, said George Callas, the managing director at Steptoe & Johnson LLP, who was tax counsel to former House Speaker Paul D. Ryan of Wisconsin. “I haven’t seen that change in thinking happen yet.”
The fatigued Canadian consumer's days of propping up the economy may be coming to an end – Financial Post
The Canadian consumer has been one of the unsung heroes of the economy, but the latest retail sales data shows consumption fatigue at a time when the Canadian businesses need them to open up their wallets.
Retail sales growth slowed to just 1.6 per cent in 2019 — the slowest pace since 2009, according to data from Statistics Canada. Of particular concern was that December sales were flat — a time when shops see their biggest traffic in the year.
“The holiday period didn’t really accelerate things,” said Ed Strapagiel, a Scarborough, Ont., retail and marketing consultant. He says that declines in brick-and-mortar shopping, automotive and gasoline sales dragged down the sector in particular.
As commodity prices falter and manufacturing sees uncertainty, the Canadian consumer has stepped up to the plate, driving up, among other things, retail sales over the past few years.
Canadians racked up outstanding credit card balances of more than $100 billion in the third quarter of 2019 for the first time, according to TransUnion Co. And the average Canadian’s non-mortgage debt may rise by another 1 per cent to $31,531 by the end of 2020, according to a forecast by the credit-tracking agency.
But broader economic factors are sapping consumer sentiment.
“The lagged impact of earlier interest rate hikes cutting into household spending power likely is part of the explanation, and also helps to explain why household insolvency rates edged higher last year,” said RBC Capital Market economist Nathan Janzen in a research note last week.
One potential bright spot in the retail data are e-commerce sales, which grew by 31.1 per cent in the month of December from the same time last year, to 4.6 per cent of all retail sales, a record high online market share. Given the difficulty of tracking online sales, that number could be even higher.
“What’s not captured in the Canadian data is what Canadians are spending on foreign websites. Statistics Canada does its surveys on strictly Canadian businesses,” Strapagiel said, which leaves out some online spending at foreign retailers.
Strapagiel says that the retail slowdown is a cyclical issue as the economy worsens, and that inflation and population growth should continue to push up sales over the long-term.
“All things considered, retail should be doing about 3.5 per cent per annum,” he said, describing the long-term trend, “and we’re quite well below that now.”
Statistics Canada is expected to release fourth quarter GDP numbers on Friday, which could help the Bank of Canada decide on interest rates next Wednesday.
RBC Capital Markets thinks transitory factors cut about 0.5 percentage points from annualized growth in the final quarter of 2019, slightly more than in the previous quarter.
“With underlying growth also appearing to have slowed, our Q4/19 forecast has been lowered to 0.3 per cent,” RBC said, noting that the first quarter of 2019 may see a below-trend 1.4 per cent GDP gain.
“A permanent hit to auto production following the closure of the GM Oshawa plant will subtract a couple of tenths from growth in the quarter. The coronavirus outbreak will also represent an economic headwind in early-2020.”
The retail slowdown, combined with disruptions from the coronavirus, or COVID-19, and the shutdown of rail networks, has some analysts warning the risk of recession in the Canadian economy is high.
“Auto, rail, and teacher strikes, manufacturing and retail sector layoffs, the COVID-19 outbreak and now rail blockades are all hitting an already vulnerable Canadian economy,” said Tony Stillo, an analyst at Oxford Economics. “We think Canada’s 12-month recession odds remain worrisome at 40 per cent.”
• Email: KMartine@postmedia.com
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