70s Redux: Stagflation, Trade Wars & More

♠ Posted by Emmanuel in , at 4/20/2018 09:27:00 PM
US spars with Russia and China, oil spikes, stagflation returns...whaddya mean we're not in the 70s?
The Trump administration's combative attitude towards China and Russia make it seem as though the 70s never really went away. The Chinese stand accused of using nefarious means to enhance state capabilities--by undermining pillars of Western capitalism like technology to their own benefit. Meanwhile, the Russians are accused of engaging in all sorts of underhanded actions to destabilize countries aligned with the United States. You sure it's not 1979? While Russia is a shadow of its former Soviet self, China is set to overtake the United States as the world's largest economy on current trends by mid-century.

For more of that 1970s feel,  add in oil crisis-style price increases due to OPEC reducing production as well as geopolitical troubles in the Middle East. Israel figures large in 1973 as in 2018, as does Iran via the fall of the Shah in 1979 and the imminent US-Iran quarrel over Trump reneging on a multilateral deal over Iran's nuclear programs.

All these bring the reappearance of another bugaboo from the past which is appearing a lot in today's financial headlines: the [imminent] return of stagflation. In normal times, inflation results from having a robust economy creating demand for various goods, thus pulling up prices for these them. With stagflation, however, you have the unwanted combination of a stagnant economy and rising prices. It's essentially the difference between "demand-pull" and "cost-push" inflation.

What's pushing up prices nowadays? With regard to Russia, aluminum prices have been rising--as have those for other industrial metals--as the US has applied sanctions on Russian producer Rusal (Russia + aluminum) due to its close ties with Russia's globally meddling government. The end result has been the spike in prices:
They’ve gone crazy, jumping more than 30 percent since April 5 -- the day before the sanctions were announced -- and reaching the highest since 2011. Goldman Sachs Group Inc. said the metal could spike to $3,000 a metric ton, which would be almost 50 percent above the price before the curbs. And it’s not just the final metal: Alumina prices surged to a record, with at least one cargo selling for $800 a ton, almost $200 higher than the previous top price set more than a decade ago.
Trump's stated intentions to hit $150B worth of Chinese imports with 25% tariffs has folks worried about inflation Stateside emanating from a potential action of such magnitude:
US consumers would bear the brunt of the immediate damage in the form of inflation, as the prices of China-sourced consumer products and components would be expected to rise sharply. “The shelves of your average US retail outlet are filled with clothing, footwear, toys, appliances and other goods produced mainly in China,” says Mr Capri.

“US consumers would feel considerable pain from any kind of retaliatory tariff war between the two countries.” In this scenario we estimate US consumer price inflation overall to be 0.9% higher in 2017, and 1.5% higher in 2018, compared with our baseline US forecast. Private consumption growth out to 2021 would be well below that forecast in the baseline scenario.
Topping it all off are OPEC efforts to buoy oil prices combined with potential security-related supply disruptions if American-led sanctions of Iranian oil are resumed. Lisa Abramowicz of Bloomberg shares this chart showing the relation between breakeven rates on 10-year Treasuries--a measure of inflation expectations--and the price of WTI crude oil.

Bring out the disco ball and bell bottom pants from the basement; we're groovy 70s like in the financial world, too.

Should the World Bank Still Lend to China?

♠ Posted by Emmanuel in , at 4/16/2018 01:17:00 PM
There's an interesting behind-the-scenes discussion going on at the World Bank about the Chinese still receiving loans from the development lender. Not only is a country well on its way to becoming the world's largest economy still borrowing, but it's actually the largest borrower at its International Bank for Reconstruction and Development (IBRD) arm, which charges at market rates plus a relatively small spread. From the Financial Times:
China was the IBRD’s top borrower last year, according to the World Bank, with $2.4bn in funds committed. That was 11 per cent of the IBRD’s lending and more than it committed to education and health programmes worldwide.
Things get a more interesting when politics enter the fray. While the US wants to involve China in the workings of the World Bank, it does not want China to begin rivaling American influence at the development lender at a time when the World Bank requires more funding to become self-sustaining in its lending activities. Hence, Americans have to juggle four hard-to-reconcile objectives:
  • Maintain Chinese interest in participating at the World Bank as a contributor
  • Limit Chinese borrowing at the World Bank as an IBRD borrower
  • Keep American influence at the World Bank despite Trump's "America First" (isolationist) inclinations
  • Encourage lending to truly lower-income countries, not middle-income ones like China
The compromise being worked on to meet these disparate objectives is somewhat elaborate:
The increase in paid-in capital will be split into two with $7.5bn going to the International Bank for Reconstruction and Development, the bank’s main arm, and $5.5bn to the International Finance Corporation, its private sector lender, the official confirmed. The US is set to provide $1.3bn to the IBRD capital increase, the official added, but has not yet decided whether it will inject new capital into the IFC.
As part of the deal China will see its voting power in the IBRD rise from 4.45 per cent to around 5.7 per cent, people familiar with the matter said. The deal is expected to be endorsed in principle by World Bank shareholders at the spring meetings, according to people familiar with the discussions. Final approval is expected before this year’s autumn meetings. 
Then there is the US love-hate relationship with China:
The US has been concerned about the World Bank lending to a rival power that has been sitting on trillions of dollars in foreign currency reserves since Barack Obama was president. But Mr Kim has long argued that lending to a rising China helps to solidify a future for the World Bank and gives it a voice in Chinese economic reforms.

The Trump administration’s push to get the World Bank to stop lending to countries such as China is likely to take time to take effect. Some people familiar with the discussions said Beijing’s cost of capital at the bank would not rise immediately, as the new band for countries in its situation was established. Instead, they said, the interest charged to countries such as India in lower bands could be reduced. 
It's a fine line to thread in dealing with China that the Americans face, divided as they are among themselves to begin with. The Obama-era appointee Kim wants to engage with China, while the Trump administration alternately wants to leave the World Bank alone or limit China's role if it does choose to engage with the development lender. Why a country with historically unprecedented foreign exchange reserves [China] needs to borrow from the World Bank is also puzzling: Maybe it's more for gathering technical assistance-style knowledge than funding per se.

Mad Donald and 'Rejoining' Trans-Pacific Partnership

♠ Posted by Emmanuel in at 4/13/2018 12:54:00 PM
Why would CPTPP members bother aggravating themselves with Trumpified FTA negotiations all over again?
In an earlier post discussing the "renegotiated" Korea-US free trade agreement, I told you that you're better off following Trump's various dalliances with card-carrying members of the adult entertainment industry in search of something substantial. We now receive news that, during a talk with lawmakers from rural states worried about an American trade war with China, Trump sought to calm them by not only claiming that one is not inevitable but also that he's looking into rejoining the Trans-Pacific Partnership (TPP). In my humble opinion, Trump's relations with porn stars still has more actual policy implications. Allow me to explain.

What has transpired since the US left the TPP-12 is this: The remaining TPP-11 countries understood that the deal could not meet ratification conditions without the United States (who came up with the idea in the first place). From the Vietnam Investment Review:
According to the TPP, the agreement would take effect if the total GDP of the member countries captured 85 per cent of total GDP of the 12 signing countries in 2013. With the withdrawal of the US, which made up 60 per cent of the total GDP of the whole TPP, the eleven remaining countries had to change this. Therefore, if at least six nations approve the CPTPP, it may easily take effect 60 days after signing. Additionally, the new agreement also adds regulations related to the process of withdrawal, participation, and flexible reviewing of the CPTPP in the future.
So, if they were to continue with a deal without the Americans, losing the world's largest consumer market meant that the bar for participation had to be lowered as well given the reduced attractions. This task was accomplished by removing exactly the sort of intellectual property rights agreements the United States has been banging on about with regard to alleged Chinese theft of it. Ditto for patent protections caused by "unreasonable" delays originally meant to placate American MNCs:
[A]round 20 articles of the CPTPP have been temporarily postponed, including the strong commitments on intellectual property that the US raised before. Specifically, 11 of the 20 articles are on intellectual property [my emphasis]. The CPTPP will delay requirements for member countries to change their laws and practices. The CPTPP also suspends the time term of a copyright in case of unreasonable delays in licensing. Members of the agreement will not have to extend protection terms from 50 to 70 years [my emphasis].

The remaining postponed articles are on investment. For the dispute solution mechanism between governments and investors (ISDS), the CPTPP has narrowed the mechanisms availability for foreign investors to sue the host member state. Besides, the CPTPP states that one member of the ISDS Arbitration Panel will be appointed by the government and the plaintiff each, and one by both.
What Trump would in effect ask for is to put back in the IP-related articles in exchange for the US re-joining the agreement...and then some. While the attraction of better access to the world's largest consumer market is great for certain parties--think of up-and-coming exporter Vietnam--this possibility is outweighed by seriously huge inconveniences for the rest. Trump alludes to not wanting to re-enter unless the deal is somehow made better (read: America-friendly) than the original TPP. So, tack on more US-pleasing bits others find hard to swallow and likely more years of negotiation to remake CPTPP into TPP+ or whatever Trump would call it.

There's also the matter of Trump as a reliable negotiator, and he has demonstrated neither reliability nor trustworthiness in his entire existence. Why would the others choose to upend the whole process again to accommodate someone proven to be so fickle? It's not going to happen. My belief remains the same as before: the others are allowing for the possibility for the US re-entering TPP, just not with Trump. For this reason the IP articles and so forth have not been jettisoned altogether but are held in abeyance.

That task may be up to pro-trade Vice-President Mike Pence after Trump is removed or resigns from office, or the next American president. For now, contemplating a Trump-led TPP return is actually of lesser substance than the consequences of Trump attempting to suppress damaging disclosure of his porn star-loving ways.

From US-China to World Trade War, Auto Edn

♠ Posted by Emmanuel in , at 4/07/2018 03:25:00 PM
If you want yourself beaten up in world trade, the Trump administration has the best example...in automobile trade.
Apparently not done after baiting China--supposedly, Trump now wants to apply 25% tariffs on $150B instead of "only" $50B worth of PRC-sourced goods--we receive news that the Great American Leader now wants to punish the Europeans, too. The circumstances of this forthcoming trade bust-up are even more unbelievable if you think about them. Let me explain.

Recently, the Trump administration has proposed rolling back environmental regulations the previous Obama administration set on automobiles to benefit American automakers:
The Trump administration on Monday rejected an Obama-era plan to make automobiles more fuel efficient, opening up a long process to weaken current standards and putting California and the federal government on a collision course over vehicle emissions.

Scott Pruitt, administrator of the Environmental Protection Agency, said in a statement that the standards on model year 2022 to 2025 vehicles were not appropriate and should be revised. The Obama administration set the average fleet-wide fuel efficiency standards “too high” and “made assumptions about the standards that didn’t comport with reality,” Pruitt said. He did not offer specifics on revising them.

The standards called for roughly doubling by 2025 the average fuel efficiency of new vehicles sold in the United States to about 50 miles (80 km) per gallon. Proponents said they could help spur innovation in clean technologies.
Yeah, screw the Earth! There's no such thing as global warming! Drill, baby, drill! You're with me right? Well, um, er, apparently, the Trump administration is not even with itself.  In its quest to bash those cheating foreigners--this time the Europeans--it appears they're seeking restrictions on cars imported from the European Union because of...I am not making this stuff up...environmental violations:
The Trump administration is considering ways to require imported automobiles to meet stricter environmental standards in order to protect U.S. carmakers, according to two sources familiar with the administration’s thinking.

White House spokeswoman Sarah Sanders said President Donald Trump “will promote free, fair and reciprocal trade practices to grow the U.S. economy and continue to (bring) jobs and manufacturers back to the U.S.”

Two U.S. automotive executives said Friday they believed the idea had been floated in White House talks last week by Commerce Secretary Wilbur Ross, but said the auto industry had not asked for the changes or backed them.
Aside from rolling back environmental regulations for domestic firms while seeking to raise them for foreign ones, it's doubly rich insofar as American automakers have long complained about other countries' "non-tariff barriers" [NTBs] like environmental regulations. The Europeans will be hit harder insofar as brands which sell their wares Stateside have a smaller US manufacturing footprint:
U.S. automakers have long urged removal of non-tariff barriers in Japan, South Korea and other markets that they believe unfairly hinder U.S. exports. There are also concerns that any new non-tariff U.S. barriers could violate WTO rules.

Citing unnamed senior administration and industry officials, the Journal said Trump had asked several agencies to pursue plans to use existing laws to subject foreign-made cars to stiff emission standards.

It appears such non-tariff barriers could have a greater potential effect proportionately on European automakers, which collectively import a greater percentage of cars from plants outside the United States, according to sales figures from Autodata.

In comparison, Japanese and Korean brands made about 70 percent of the vehicles they sold last year in the United States at North American plants. European brands built only 30 percent in North America.
Assuming the United States remains in the World Trade Organization, something we're unsure of these days, this idiocy would be the most open-and-shut case of discrimination against foreign producers you could possibly find. That they are willing to do something so blatantly discriminatory is either the product of unimaginable foolhardiness or an all-out attitude of not caring anymore what other countries believe. It's every country out for itself. With climate change denier Scott "Lifestyles of the Rich and Famous" Pruitt as your environmental regulator, these sorts of inconsistencies were perhaps bound to happen since he's more concerned with living the good life than any semblance of coherent policy.

These are the times we find ourselves in.

From US-China to World Trade War, Farm Edn

♠ Posted by Emmanuel in , at 4/07/2018 03:01:00 PM
Trump may start a chain of events wherein soybeans become the casus belli for world trade war.
The usually-reliable trade commentator Chad Bown, currently of the Petersen Institute of International Economics, has identified the way an American-Chinese tit-for-tat trade spat can become a wider conflict involving the rest of the world. It is no big secret that the PRC is now taking aim at constituencies very loyal to Trump. Namely, agricultural regions of the United States. In my most uncharitable moments, I'd simply say "you get what you deserve" for voting for Trump and leave it at that. However, there are additional nuances here involving the fate of world trade.

Rich-country agricultural subsidies have long been a bugaboo for developing nations in export competition with them. A trade negotiation round has never, ever been completed at the WTO since developing countries have expressed dissatisfaction at these developed countries' reluctance to lessen agricultural subsidies. Why should poor countries bear the brunt of rich countries subsidizing their agricultural sectors, artificially increasing their import competitiveness? As we gather nowadays, developed-world farmers are very important constituencies. This is so much so that Trump is contemplating extending even more subsidies than they currently enjoy to offset possible retaliatory Chinese tariffs on soybeans and other US agricultural exports:
President Donald Trump, wanting to protect U.S. farmers from China's threatened tariffs, may end up pitting his country against many more nations in a trade spat that has hit global markets and worried the international business community, experts said Friday.

If the Trump administration chooses to subsidize American farmers further, that could trigger retaliatory tariffs and subsidies in major exporters of agricultural products such as the European Union and Brazil, the experts added.
Chad Bown lays out how this will play out in a Twitter message, of all things:
How THIS escalates beyond US-China:
• Trump slaps tariffs on China
• China retaliates on US agriculture
• Trump subsidizes US agriculture to pay them off
• Farmers in EU, CAN, AUS, BRA, ARG, etc - now suffering because of Trump subsidies - demand retaliatory tariffs/subsidies
Instead of being a North-South spat as it's played out at the WTO during the Doha Round, what we have here is a potential free-for-all as assorted agricultural exporters pile in regardless of their development status. Just as it is in "real" wars, a localized conflict often can spark wider conflagrations.

US-China Trade War: Ready, Aim

♠ Posted by Emmanuel in at 4/04/2018 03:40:00 PM
Dragging the world economy into his idiocy: Trump unleashed in the international political economy.
I'll offer short commentary here since it's been largely anticipated. Yesterday, the United States Trade Representative lifted some of the fog of trade war I talked about earlier by unveiling a list of China-originated products targeted for 25% tariffs in line with its Section 301 findings. The USTR originally suggested $50B worth of goods to be targeted; Trump himself increased the amount to $50B. There was some (false) hope before that the US and China could pre-negotiate a less extensive list, but the equity markets were proven to show quite a lot of wishful thinking.

Shortly thereafter, the Chinese government unveiled its own tit-for-tat list of $50B worth of US-sourced exports to the PRC. Again, I believe that there was some wishful thinking that just as the PRC restrained itself in response to steel tariffs to $3B worth of goods, it would not make such an extensive targeted list of products. Not so.

In effect, then, the US and Chinese have established what they would target: The US wants to slow Chinese plans (namely, "Made In China 2025") to enhance its development by focusing on high-technology industries (which are allegedly benefiting from widespread PRC-sponsored intellectual property theft). Yet, the US wants to have its cake and eat it too by slapping tariffs on non-consumer goods. If it did, it would raise the ire of price-sensitive consumers--especially Republican constituents. Meanwhile, China seeks to hit America where it hurts most politically--those very same Republican constituents like folks in the Rust Belt who voted for Trump or soybean farmers and other agricultural producers who by and large voted for the orange-colored  buffoon.

Over the next two months, the USTR will subject its list to "consultations" with affected constituents, their lobbyists, and other stakeholders. So the next move is largely in America's court as it finalizes what products to hit with 25% tariffs. The Chinese will simply match what the amount the US applies tariffs to with identical 25% tariffs. That is the very definition of tit-for-tat. We're at the "aim" stage of ready, aim, fire. The "fire" stage happens when tariffs are finally applied.

As a parting note, Trump believes the US will "win" a trade war easily because the trade balance is so heavily in favor of China. Figures show a $337B trade deficit the US is running with China; Trump says $500B (or $800B even after accounting for IP theft). Where he gets these numbers is anyone's guess. Like most other things, he just makes this stuff up, probably. The fallacy here is regarding trade as a zero-sum game: the size of the trade balance shows who is "winning" or "losing." Hence, a trade war is "easy" to win since if US-China trade comes to a full stop, the US would be "winning" back $375B annually.

If US-China trade comes to a full stop, I somehow believe that we will have far greater problems for the world economy than Trump gloating about how he "defeated" China or other such nonsense. Still, these are the times we find ourselves in that such a scenario is not entirely implausible.

Visit USA? You Must Be Joking Pt I

♠ Posted by Emmanuel in at 4/03/2018 04:53:00 PM
Avast ye coloreds! You're not wanted in Trumpland...go back to your s__thole country, etc.

There's good stuff over at Politico on how the number of visas to the United States--including the tourist visas I am emphasizing here--has fallen significantly since Trump became president.  No real explanation is required about why this is happening since his bigotry knows few bounds--against people of dissimilar color, creed, gender, gender identity, or other non-Trumpian elements. In short, if you're not a white male, you're not wanted in Trump's America.

I will have more on the reduction of tourism to the United States--its largest export sector, mind you. It's always struck me as novel that someone who supposedly made a fortune (or at least purports to have made one--we can't tell as Trump famously won't release his tax records) has done more than any American president in living memory to make others unwelcome.

Suffice to say for now that the number of those eligible to visit America are dwindling. Not that many necessarily want to nowadays but...
It’s unclear whether the drop is due to fewer people applying or more rejections of [visa] applications. The cause is likely some combination of both. The State Department furnishes data on how many visitor visas are granted per country, but releases only limited information on how many applications are received or refused.
The timing is informative though as Trump's hateful bigotry has escalated:
But the decline comes as Trump is once again underscoring his hard-line views on immigration. Over the weekend, the president used Twitter to blame Democrats and the Mexican government for a “dangerous” flow of migrants over the border. The Republican president blasted America’s “dumb immigration laws” and threatened to abandon legislative talks on how to deal with undocumented immigrants brought to the United States as children.

Evidence plainly indicates that Trump’s desire to restrict foreigners’ access to the U.S. has become a reality. Critics say that, by imposing new procedural and security hurdles, Trump and his aides are building a figurative wall to keep people out of America, even those who just want to come for a brief visit. The critics fear the drop in visas could damage industries, ranging from tourism to higher education. 
Is there an exchange-traded fund [ETF] for the American tourism sector? Given current trends, betting against it is a no-brainer in the age of Trump. Believe it or not, and Trump supporters may have difficulty believing this, white supremacist policies are not quite welcoming.

Non-Event: 'Revised' Korea-US FTA

♠ Posted by Emmanuel in , at 3/29/2018 02:07:00 PM
This isn't newsworthy at all. News about Trump's trysts with porn stars actually matters more.
You may be wondering why I haven't written anything at all about the so-called 'revised' Korea-US Free Trade Agreement (KORUSFTA). The main reason is that there have been very few changes, and these changes are next to inconsequential anyway. As you know, the main bone of contention of the Trump administration has been how Korean auto exports heading America's way have been far greater than those going in the opposite direction. So, it was inevitable that autos would be the main point of discussions.

What's actually been reported is quite laughable and does not address the main problem here: American cars remain largely unsuitable for the Korean market (or most of the Asian car markets, for that matter). As such, it is rather pointless to increase the cap for Korean importation of cars from the United States when the old cap was far from being reached anyway:
Under the terms of the draft agreement, the US was able to secure improved market access and eased import restrictions for automobiles. In 2016, the US deficit in the sector alone was US$24 billion – nearly 90 percent of the total goods deficit, according to a USTR statement from October 2017. The deal will allow US automakers to export 50,000 vehicles that do not comply with domestic safety regulations per manufacturer each year to Korea – double the figure previously agreed under KORUS. These vehicles do meet US safety standards and would be treated as such. 

[Korean Trade Minister Hyun-chong] Kim said that he expected minimal impacts on the import volume from this concession, given that the existing threshold has not been met for six years and Ford and General Motors shipped less than 10,000 units apiece to Korea under the allowance last year [2017 my emphasis].
Given that light trucks like pickups are the most saleable and profitable segments of the US auto industry, the deal is reportedly amended to make it harder for Korean automakers to sell such vehicles Stateside:
The US further extended its 25 percent duty on Korean pick-up trucks until 2041, 20 years later than permitted under the deal’s previous timeframe, according to the Korean Ministry of Trade, Industry and Energy. "We reached an agreement by accepting some of the US demands in regard to market access," Kim said. "We took consideration of the fact that no companies are currently exporting domestically-produced pickup trucks to the US.”
This was a big so-what since Korean automakers make no pickups anyway. However, in exchange for these so-called concessions, the Koreans actually got something substantial. That is, they don't need to increase the share of American parts their US-bound exports contain:
Korean negotiators were able to avoid higher content requirements for US auto parts, officials say.
So contrary to what Trump said, this is essentially the same deal for American workers for better or worse. As I said, it's a non-event.

Oh, Canada: Ongoing Exodus of Techies from US

♠ Posted by Emmanuel in at 3/28/2018 03:51:00 PM
Toronto is one of the places where immigrant tech workers can work without Trump seeking to deport them at each turn.
The polite term used to describe Donald Trump's anti-immigrant, whites-first policies is "nativist." I have never found that euphemism useful since, well, the real natives of the United States are actually Native Americans. On the other hand, there is next to nothing distinguishing Trump's policy preferences to those of white supremacists. Like re-tweeting British hate group videos. Like discouraging people of color from being counted in the 2020 Census--and by definition being considered "non-persons" in Trump's America--these policies are legion.

Wouldn't America be great again (like the 1950s) if all these coloreds (and women, gays, Muslims, etc.) knew their (subordinate) place in a white man's world? 

It is no surprise then that those who have worked in the United States' most dynamic sector--not coal or steel for Trump fans, by the way--are not exactly finding Trump's discriminatory immigration policies to their liking. I've featured the ongoing Silicon Valley exodus to Vancouver already before. To no one's surprise, further discrimination in immigration policies are driving even more of these folks to the United States' northern neighbors--this time to the fine city of Toronto. A Canadian tech hub, MaRS, has just conducted a survey mirroring earlier anecdotal evidence:
The survey, carried out by MaRS, a tech hub in Toronto, had a relatively small sampling — 55 companies. But its target — tech companies — hit the much-coveted professionals courted by Canada, France and other countries since Trump began raising obstacles for foreigners working and studying in the U.S.
Among the results:
  • 53% of the companies said their international applications grew over the course of 2017, and 45% hired one or more of the people who applied.
  • 82% of the applicants were from the U.S., 55% from India, and 36% from China. As for those actually hired, 55% were from the U.S., 23% from China and 9% from India.
  • These were largely tech workers — 47% of them were engineers, 24% data scientists and 10% researchers.
The reality of it--not the reality show of it--is that the United States is an increasingly unattractive place to work for knowledge workers who tend to thrive more in an open, multicultural setting. Somehow, I don't think Trump aspiring to a coal- and steel-powered economy where a tertiary education is not required--least of all in STEM disciplines where they teach you left-wing nonsense that climate change is man-made and suchlike--is attractive to footloose knowledge workers who countries the world over seek to employ.

Aside from starving the United States of workers outright given its unfavorable demographics, what Trump is also doing is starving it of the most talented and sought-after ones to appease an ever-dwindling base of, well, disgruntled (former) coal and steel workers. If there ever was a definition of "backward-looking," it's Trump.

China and the Fog of Trade War

♠ Posted by Emmanuel in , at 3/23/2018 12:15:00 PM
Watch out: blowback may be severe.
The Trump administration is a triumph of gesture over substance, so it should be no surprise that his China-bashing trademark has the feel of a really lousy made-for-TV "special" wherein signing ceremonies matter more symbolically than the actual policies being implemented. Specifics can wait: see the example of tariffs on steel and aluminum that are still up in the air despite being announced at the start of the month.

That Trump is improvising on trade policy with less-than-comprehensive details from his economic ministers is obvious. My favorite current example is that there isn't even clarity on whether the forthcoming tariffs on Chinese-made goods supposedly taking advantage of intellectual property [IP] violations are worth $50 or $60 billion dollars. Trump likes to style himself as a dealmaker, and so something in that range would be his "opening gambit." This, however, introduces a lot of market uncertainty as to who might be able to wangle "special deals" to limit the harshness of trade penalties.

What we haven then is the fog of trade war in the era of Trump. A reason why I haven't written more about these assorted China-bashing penalties is that, well, many of the details are still up in the air. From what we know so far largely based on (limited) information provided by the USTR, the intellectual property offensive has three parts to it:

I. The unilateral component - applying tariffs on IP-related Chinese exports makes use of the United States "Section 301" concerning sanctioning unfair trade practices by other nations. The reason most are unfamiliar with it is that the law was more widely used during the 1980s before there was a WTO to adjudicate such matters--when current US Trade Representative Robert Lighthizer was busy trying to bash the Japanese (not the Chinese) during the Reagan (not the Trump) administration. The whiff of antiquity about its current use is that it hasn't really been deployed all that much since, well, Trump made the old trade warrior Robert Lighthizer his point man after a hiatus of nearly four decades.

Usually, an order of the cease-and-desist variety (here of allegedly unfair trade practices) clearly states which behaviors must be halted immediately. Unfortunately for the Chinese, the grand signing ceremony was all show; Lighthizer has yet to unveil what exactly it is that will be targeted:
The President has instructed the Trade Representative to publish a proposed list of products and any tariff increases within 15 days of today’s announcement.  After a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases.
So in response to $50-60 billion worth of Chinese goods to be penalized, the PRC has only identified $3B worth of American exports to China to retaliate against. It's early days still, and China cannot be expected to calibrate its response when these American unilateral actions are under a cloud. Alike the tariffs on steel and aluminum, these are eminently questionable from the standpoint of WTO legality. Speaking of which there is also...

II. The multilateral (WTO) component - for a guy criticizing the WTO for allowing unfair practices of American to persist for so long, it's interesting that Trump and his administration are nonetheless attempting to bring a case against China regarding IP. Just today, the United States filed a case there:
"China appears to be breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends," the U.S. Trade Representative's office said in a statement.

"China also appears to be breaking WTO rules by imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology," it said. Such policies interfered with foreign technology holders' ability to set market-based terms in licensing and other technology-related contracts, it said.
Parts I and II are inconsistent in the sense that I undermines the whole WTO system by suggesting might makes right: because the US is such a powerful country economically, it can pretty do what it pleases unilaterally. Yet, in the same breath, II wants to use the very same WTO it undermines by taking such courses of action to pursue IP remedies. What will it be? China will certainly be looking at making its own WTO case against forthcoming tariffs on its goods in I. Maybe the real question in the meantime is whether the WTO still matters by then while the US alternately seeks to undermine and uphold it.

III. The investment component - as many have noticed, preventing further Chinese investment in US firms to presumably stop the PRC from gaining more American technology is rather redundant. Since the Committee of Foreign Investment in the United States (CFIUS) has dissuaded Chinese firms for a long time from buying American technology companies on "national security" grounds, what's different here? This from the Obama era circa 2015:
For more than a decade, China has complained about what it maintains has been a pattern of erratic and politicized treatment of Chinese investors when they attempt to acquire US companies. The Chinese want the Committee on Foreign Investment in the United States (CFIUS) to be more open and transparent in its rulings and to not discriminate against Chinese firms. The United States is not likely to accede to these demands in any formal or legal manner.
How much more PRC "technology-" or "security-"related investment in the US is there to stop when almost all of it is stopped while subject to CFIUS scrutiny? See the egregious example of Jack Ma's Ant Financial being stopped from buying money transfer service MoneyGram or even (Singapore-based) Broadcom's proposed merger with (US-based) Qualcomm. Broadcom is not even PRC-based, but they made it sound like another unwanted Chinese intrusion in the technology space.

BOTTOM LINE: In a sensible world, the Chinese would accede to American wishes to not so explicitly make technology transfer provisions for foreign companies wishing to enter the Chinese market. In exchange, the free-spending Americans would acknowledge that such profligacy inevitably means foreigners would come to own more and more of its largest debtor's (US) properties. In the real world, though, we get few of these things and a trade war in which many details are...covered in fog as mutual grievances fester. Stay tuned as we navigate this opacity.

And no, I don't believe anyone "wins" a trade war.