Trade Wars & Impending Death of American Soy

♠ Posted by Emmanuel in , at 6/20/2018 04:21:00 PM
There's a saying that you get the leaders you deserve, and it seems American soybean farmers have voted to put themselves out of business.  Overwhelmingly carrying states where soybean farmers are located, Trump is hellbent on rewarding his voters with economic misfortune. Given Trump's radically anti-China campaign rhetoric, let's say this turn of events is of no surprise to no one. What's more, the export of soybeans was one of the few bright spots in an otherwise dismal agricultural industry:
Soybean-producing counties went for Trump by a margin of more than 12 percent, according to a Washington Post analysis...

Like most large-scale soybean farms in the United States, [this] business relies heavily on foreign markets. China buys 60 percent of all U.S. soybean exports to feed a growing fleet of hogs, fish and chicken.

The high demand has made soybeans a bright spot of profitability for farmers at a time when many other crop prices are down. But Trump’s aggressive tariffs against Chinese goods, meant to protect U.S. intellectual property and manufacturing interests, have incited retaliatory actions that farmers say threaten their profits.
In recent days, the price of soybeans has dropped precipitously, probably causing no small amount of concern for the folks who voted for Trump to punish themselves:
Soybean futures for July delivery dropped more than 7 percent to a low of $8.415 a bushel, their lowest since March 2009, according to Thomson Reuters. They were trading near $8.64 a bushel as of 11 a.m. ET. There are a lot of "unknowns and no confidence," said Rich Nelson, director of research at Allendale, an agricultural market research and trading firm...

With Tuesday's late morning sell-off, soybean prices are now more than 17 percent lower for the quarter and down more than 10 percent for the year..."The dramatic drop today is soybeans because soybeans is first and foremost what the Chinese like to buy from us," said Phil Flynn, senior market analyst at The Price Futures Group.
As a mainly export-driven industry selling to the Chinese, the future of soybean farming has been cast in doubt despite the trade making sense on paper. But, who says logic matters during a trade war as belligerents seek to one-up each other in harming themselves?
But that situation only holds in the short term. Yes, as the world’s top buyer, China needs U.S. soybeans today, in a few months, and likely even next year. However, it is not unreasonable for China eventually to wane itself off American beans in the longer term, which could have detrimental and irreversible effects on U.S. markets...

On paper, a soybean trade war involving the United States and China makes no sense for either party. China imports roughly 100 million tonnes of soybeans each year, primarily from Brazil and the United States, which together produce 70 percent of the global supply.

Simple math demonstrates that under the current structure, China cannot avoid U.S. soybeans right now if it is to meet its import schedule. And besides, why would China want to pay more for a product it clearly needs? Why would the United States threaten its No. 2 export (behind aircraft) to the East Asian country? But logic apparently matters not in this case, as these are the choices that have ultimately been made under the decision to proceed with the tariff tit-for-tat, and potentially a full-on trade war.
When they chalk up the demise of the American soybean industry years from now, it will come down to one word: "Trump". Having voted for him in the first place, soybean farmers will have no one to blame but themselves.

UPDATE: Using the familiar computable general equilibrium model GTAP, researchers at Purdue University estimate Chinese soybean imports from the United States can drop up to 71% if 30% tariffs are applied. Currently, Chinese authorities have indicated a 25% tariff. Not far off...

US Against the World: Three-Front Trade War

♠ Posted by Emmanuel in ,,, at 6/01/2018 07:25:00 PM

Military historians generally believe that World War II was lost by the Germans waging a two-front war. In the West, it fought against the UK, France, and the rest while it simultaneously fought Russia in the East. Not being a close follower of military history, Donald "Trade Wars are Good and Easy to Win" Trump has now  simultaneously declared war not on two but three fronts: against China (by vowing to make good on slapping tariffs on $50B worth of Chinese imports), the European Union, and North America (by not renewing exemptions from steel and aluminum in June).

Can Trump Make America Great Again through US Against the World? Jeffrey Sachs believes Trump has gone insane and that the obvious answer is "no" in calling for Trump to be relieved of office:
The US has probably never before had a delusional President, one who speaks gibberish, insults those around him including his closest associates, and baffles the world. By instinct, we strive to make sense of Trump's nonsense, implicitly assuming some hidden strategy. There is none.
Trump's trade actions are blatantly illegal. They are flimsily justified as an act of national security, but this is sheer nonsense. They are also fatuous in terms of US economic and geopolitical interests. Harming our closest allies, raising the prices on key intermediate products, and provoking retaliation cannot possibly deliver higher wages, better jobs, or an improved trade balance. Trump's latest notion to slap tariffs on German automobiles would be even more damaging geopolitically.
Jeffrey Frankel, like most other sensible observers, also sees folly in Trump's nonsensical moves:
But the economics would be illusory. There would be virtually no effect on the overall U.S. trade deficit: We would otherwise sell the natural gas to some other country, and in reality those smartphones already get about 95 percent of their value added from South Korea, the United States and other countries anyway. Focusing on the bilateral balance is a waste of time. Regardless what happens with China, the overall U.S. trade deficit will rise this year as a result of the Republican tax cuts, enacted at a time when the economy is already producing at the limit of its capacity.

Similarly unmoored from both economic and legal logic are the tariffs that Trump has imposed on imports of steel and aluminum, and threatens to impose on automobiles and other goods. With respect to legal criteria, the national security justification that he has invoked is flimsy in the extreme and will likely inspire other countries to retaliate. With respect to economic criteria, the beneficiaries in the steel industry, for example, are vastly outnumbered by those who will be hurt because they use steel as inputs, they consume the final product, or they produce export goods that will be hit by the repercussions, such as farmers.
Anyway, on to the belligerents. Take, for instance, slapping unexpected steel and aluminum tariffs on Canada and Mexico after Canada's PM Justin Trudeau flat refused to have NAFTA renegotiated every five years (as he should):
The White House launched a round of strong-arm tactics Tuesday when Vice President Mike Pence called Justin Trudeau and issued an ultimatum: A reworked NAFTA deal would need to be renewed every five years. In response, Trudeau canceled a trip to the U.S. Then on Wednesday, the Trump administration announced surprise steel and aluminum tariffs on Canada and Mexico. And on Thursday and Friday, President Donald Trump bashed Canada’s trade practices.

The White House is hoping the campaign of aggression will cause Canada and Mexico to cave as talks to renegotiate the 25-year-old NAFTA agreement are plagued by standoffs and delays. But instead, the moves could backfire as Canada and Mexico retaliate with their own tariffs, leading to a stalemate that would result in Trump pulling out of NAFTA altogether.
The other NAFTA countries are now engaged in a retaliatory tariff slapping frenzy:
Starting July 1, Canada will impose duties on about $12.8 billion worth of U.S. imports. The tariffs will target steel and aluminum imports from the U.S., but also agricultural and manufactured goods like cucumbers, laundry detergent and mattresses.

Mexico also said it would impose tariffs on $8 billion in American pork, blueberries, lamps and other goods. Mexican Economy Secretary Ildefonso Guajardo told reporters on the sidelines of a summit in Paris that his government is taking the action under the rules of NAFTA, which will allow the country to impose its retaliatory tariffs immediately, as soon as early next week.
Not content with irking the normally placid Canadians, the Yanks are making Europeans also deal with the same steel and aluminum tariffs. More specious measures are said to be forthcoming on "national security" grounds on Germans cars:
Mr Trump had warned before Thursday’s decision that any EU countermeasures would be responded to in kind — a message reaffirmed by US officials in recent contacts with European diplomats. The US administration in May announced an investigation into whether car imports pose a national security risk— a probe that is being eyed warily in Germany and elsewhere, as auto tariffs pose a much larger potential threat to the EU than the steel and aluminium duties. Germany, for example, accounted for just 4 per cent, or about $1.2bn, of the US’s $29bn in steel imports last year. But the US imported $20.2bn worth of cars from Germany and a further $8.6bn from the UK.
We'll see how the third round of China-US trade talks will go the next few days, but the writing appears to be on the wall already. As many have observed, the US trade actions are unlikely to be upheld at the World Trade Organization. Following China and India, the European Union has just initiated a case at the WTO against these steel and aluminum tariffs.

Given Trump's unrivaled ability to offend everyone--others Asians like China and Japan included over steel and aluminum alone--I would expect the rest to consolidate their cases against America. An interesting aspect here is that Trump is potentially driving the Europeans into the arms of China now since the EU has traditionally had complaints about the PRC more similar to those of the United States concerning the overproduction and dumping of Chinese steel and other goods. America will be left with no real major economic allies, be they Asian, European, or North American.

Let's further assume that the Europeans and the others win their WTO case(s) against the United States. These things take time. It may be that the case stretches into the 2020 US presidential elections when a less protectionist candidate wins--it's hard to imagine anyone more protectionist than Trump. The more "exciting" outcome would be the US losing its case while Trump is still president, in which case the US will probably just ignore the WTO ruling. It has done so in the past, and Trump has already pledged to ignore those it sees as "anti-US". With that result, we must return to the idea that Trump's intent, knowing full well that his trade policies are WTO-illegal, is to blow up the institution. Here, the question would be how long it is before a more conventional American leader is put in place to shore up an institution the United States thought up in the first place.

So, can the US "win" a three-front trade war? Two was already a stretch going by conventional wars; three is probably a step even beyond "too far already". In the end, the losers here are probably everyone involved as history suggests there are no real victors in these trade wars.

The Case for Singapore Rejoining Malaysia

♠ Posted by Emmanuel in at 5/31/2018 03:28:00 PM
Perhaps the only time Lee Kuan Yew cried in public was when Singapore left the Malayan Federation. Can things still work out?
Our longtime contact Andy Mukherjee of Bloomberg View recently penned a thought-provoking op-ed on why it makes sense for Singapore to rejoin Malaysia. Recall that Singapore was kicked out in 1965 of what was then known as the Malay Federation. Refusing to accept "affirmative action" laws aimed at ensuring ethnic Malays would gain preferences especially over the economically dominant ethnic Chinese, Lee Kuan Yew felt no choice but to leave. However, to the end of his life, he never gave up on the possibility of reintegrating with Malaysia.

Interestingly enough, recent events make this possibility less remote. Mainly, it makes economic sense. That said, we have to wait for  upset election victor, 92-year-old Mahathir Mohamad, giving up the reins of power to his onetime protege, 70-year-old Anwar Ibrahim. Due to Mahathir's age, it may actually happen fairly soon. The hope is that Anwar would once and for all do away with the "New Economic Policy" of Malay-favoring affirmative action that offends Singaporeans with their mix of ethnic Chinese, Indians, and Malays:
But guess what. The latest Malaysian election, with its big upset, offers a reason to reconsider Lee’s 1996 and 2007 optimism [on reunification]. Maybe the analyst in him was right all along.

Once Anwar Ibrahim is out of prison and in the Malaysian prime minister’s seat, and once he starts taking apart the system of state-sponsored racism that has existed there since 1971, the difference between peninsular Malaysia and Singapore will be of living standards. In fact, with a shared heritage of British-inspired common law and parliamentary democracy, the difference will be even less than it is between Shenzhen and Hong Kong.
There's also the added attraction of gaining a relatively populous market in Malaysia for famously low-birth Singapore. Simply, Malaysia has more of the people Singapore needs. The example of the Pearl River Delta is also an attractive example to consider in a "one country, two systems" sense that works well enough economically:
Much better institutional arrangements are possible now, taking a leaf perhaps out of the Greater Bay Area that Beijing wants for Hong Kong, Macau and Guangdong province. If the agglomeration proves to be an economic success for Hong Kong, it would again put pressure on Singapore to find the one thing it doesn't have: a hinterland.

A hinterland, and babies. Almost 25 percent of Malaysia’s 32 million population is below 14 years of age. For aging Singapore, where the figure is 15 percent, the neighbor’s demographic dividend — if harvested well by Anwar — is a valuable resource. Defense savings, should the two countries agree to share resources, are an added attraction.
The catch remains a strong one that Mahathir, who was already in a position of leadership when the "New Economic Policy" was implemented, is habituated to the old ways. Indeed, the recently defeated Najib Razak was rather more Singapore-friendly than Mahathir.
Mahathir is too wedded to the status quo to move the needle on race relations. But if Anwar does manage to plant the seed of equal opportunity and rules-based competition while clearing out the weeds of rent-seeking and cronyism, a mutually beneficial economic union with some sharing of the defense burden is possible. None of this will occur tomorrow. The shock election result has increased the odds of a loose confederacy from zero to, say, 10 percent over the coming 30 years. Still, that’s a start.
Maybe Lee Kuan Yew will still find solace over this matter in the afterlife; I for one don't rule it out day.

How OPEC Boosts US Oil Exports to Asia

♠ Posted by Emmanuel in at 5/28/2018 08:56:00 PM
Us Asians don't need Trump to force us to buy American oil. Fancy that.
As it was in the beginning with cartels, so it shall be until their end. The trouble with these things is that they only work if compliance with production limits are observed by a clear majority of the producers. I must admit that while the recent OPEC/Russia effort has been quite impressive--if you told me oil prices would reach their current levels when they started, I'd have said you're mad--there are limits.

The clear "antagonist" to these would-be petroleum oligopolists are the Yanks. Namely, the shale oil producers who have taken advantage of new production techniques to extract more oil and gas than previously thought possible from the United States. They too have been helped by the lifting of an oil export ban at the end of 2015; exports resumed in January of the next year.

The type of crude oil exported by non-American sourced is called Brent, whereas that coming from the United States is West Texas Intermediate (WTI). OPEC/Russia have succeeded in limiting supplies of Brent which they produce more of, while American WTI has been less affected. So, the price "spread" (difference) between cartelized Brent and WTI has been widening lately. The question is, why would oil customers worldwide buy OPEC/Russia's pricier Brent instead of WTI? The answer has to do mainly with bottlenecks getting US shale out of the ground and delivered to world markets. After all, you don't expect a country forty years dormant in exporting oil, the USA, to develop the necessary infrastructure overnight:
The simple reason for this is that the shale oil boom has left crude sloshing around the U.S., resulting in a local oversupply. While Brent prices have risen some 14 percent over the past three months, WTI is up just 7.5 percent and Midland crude – the version of WTI priced in the booming Permian basin rather than the benchmark delivery point in Cushing, Oklahoma -- is down 4.8 percent.

The last time we saw these sorts of spreads, there were sound legal reasons for it. The U.S. had forbidden almost all exports of crude oil for four decades until the end of 2015, so for many years its soaring shale oil production was trapped by the ban and the capacity limits of U.S. refineries that were able to convert it into exportable products.

The growing spreads now suggest that supply is pushing up against a different sort of bottleneck: A shortage of pipeline capacity between Midland and Cushing, and then a further shortage of pipeline and port capacity to get U.S. crude onto a hungry global market.
What may happen is that if OPEC/Russia keep artificially limiting oil production to boost prices, it may become even more economically viable for American shale producers to develop the infrastructure to get their oil to customers in Asia and elsewhere. Already, shale and similar sources have increased their production to almost counterbalance OPEC supply reductions:
There’s a further factor to consider, though, and it relates to what’s happening on the plains of Texas and Oklahoma. The latest period of supply restraint from Opec and Russia has in essence seen them give up market share to onshore North America. The 1.8 million barrels a day that they’ve taken off the market is almost entirely compensated for by the 1.53 million barrels a day of additional unconventional crude production from the U.S., not to mention 640,000 of additional daily barrels that have come out of Canada.

At the moment, infrastructure bottlenecks are keeping the U.S. shale boom almost as quarantined from global markets as legal restrictions did in the pre-2016 era. But, as my colleague Liam Denning has written, those widening spreads between delivery locations are driving midstream operators to seek profit from new export channels, from pipelines to the nascent capacity to load larger tankers from Louisiana’s Loop terminal.
We are already seeing the Yanks eat the lunch of greedy OPEC/Russia in Asia:
In Asia, China - led by Sinopec, the region’s largest refiner - is the biggest lifter of U.S. crude. The company, after cutting Saudi imports, has bought a record 16 million barrels (533,000 bpd) of U.S. crude, to load in June, two sources with knowledge of the matter said. India and South Korea are the next biggest buyers in Asia, each lifting 6 million to 7 million barrels in June, sources tracking U.S. crude sales to Asia said. Indian Oil Corp bought 3 million barrels earlier this month via a tender, while Reliance Industries purchased up to 8 million barrels, the sources said, although it wasn’t clear if Reliance’s cargoes would all load in June.

South Korea’s purchases are driven by its top refiners SK Energy and GS Caltex. Taiwanese state refiner CPC Corp has also snapped up 7 million barrels to be lifted in June and July. U.S. exports to Thailand will increase to at least 2 million barrels. State oil company PTT PCL is 1 million barrels of WTI Midland, while Thai Oil and Esso Thailand bought at least 500,000 barrels of Bakken crude each, said traders with knowledge of the country’s crude deals.
It's rare to find American good guys in the age of Trump, but I suppose the shale producers' contributions to punishing OPEC/Russia for introducing price distortions hurting oil consumers like you and me counts.  

Pope Francis, Do Speculators Go to Hell?

♠ Posted by Emmanuel in ,,, at 5/18/2018 03:18:00 PM
You tell 'em, Pope Francis! Here are more of his thoughts on haute finance.
Okay, so the question posed above is not definitively answered in a new papal bull on modern finance. Let's just say that certain kinds of speculative activity most likely raise your chances of eternal damnation. As a pope coming from Argentina--ground zero for IMF borrowings past and immediate future--the way financial markets impact the well-being of persons has long been on his mind. Earlier this year, an apostolic exhortation encouraged people to think about the true meaning of "security" which does not equate to "wealth":
67. The Gospel invites us to peer into the depths of our heart, to see where we find our security in life. Usually the rich feel secure in their wealth, and think that, if that wealth is threatened, the whole meaning of their earthly life can collapse. Jesus himself tells us this in the parable of the rich fool: he speaks of a man who was sure of himself, yet foolish, for it did not dawn on him that he might die that very day (cf. Lk 12:16-21).

68. Wealth ensures nothing. Indeed, once we think we are rich, we can become so self-satisfied that we leave no room for God’s word, for the love of our brothers and sisters, or for the enjoyment of the most important things in life. In this way, we miss out on the greatest treasure of all. That is why Jesus calls blessed those who are poor in spirit, those who have a poor heart, for there the Lord can enter with his perennial newness. 
Just yesterday, Pope Francis continued with this theme of countering what the world values by identifying immiserizing forms of finance that *might* make you wealthy but leave others worse off (and endanger your soul's well-being in the process). Given a reasonable premise that financial crises leave many worse off in market-based societies, derivatives attract scrutiny insofar as they may hasten such crises as witnessed during 2007-08. From the just-released Economic and Pecuniary Questions:
[26.] However, in some types of derivatives (in the particular the so-called securitizations) it is noted that, starting with the original structures, and linked to identifiable financial investments, more and more complex structures were built (securitizations of securitizations) in which it is increasingly difficult, and after many of these transactions almost impossible, to stabilize in a reasonable and fair manner their fundamental value. This means that every passage in the trade of these shares, beyond the will of the parties, effects in fact a distortion of the actual value of the risk from that which the instrument must defend. All these have encouraged the rising of speculative bubbles, which have been the important contributive cause of the recent financial crisis.

It is obvious that the uncertainty surrounding these products, such as the steady decline of the transparency of that which is assured, still not appearing in the original operation, makes them continuously less acceptable from the perspective of ethics respectful of the truth and the common good, because it transforms them into a ticking time bomb ready sooner or later to explode, poisoning the health of the markets. It is noted that there is an ethical void which becomes more serious as these products are negotiated on the so-called markets with less regulation (over the counter) and are exposed more to the markets regulated by chance, if not by fraud, and thus take away vital life-lines and investments to the real economy.
In a similar vein, other targets of the pope's ire include credit default swaps when used for the purpose of "gambling" on the eventual insolvency of firms instead of "insurance" for corporate debt holdings as originally intended:
A similar ethical assessment can be also applied for those uses of credit default swap (CDS: they are particular insurance contracts for the risk of bankruptcy) that permit gambling at the risk of the bankruptcy of a third party, even to those who haven’t taken any such risk of credit earlier, and really to repeat such operations on the same event, which is absolutely not consented to by the normal pact or insurance[...]

In fact, the process of acquiring these instruments, by those who do not have any risk of credit already in existence [i.e., those who don't hold debt securities], creates a unique case in which persons start to nurture interests for the ruin of other economic entities, and can even resolve themselves to do so.

It is evident that such a possibility, if, on the one hand, shapes an event particularly deplorable from the moral perspective, because the one who acts does so in view of a kind of economic cannibalism, and, on the other hand, ends up undermining that necessary basic trust without which the economic system would end up blocking itself. In this case, also, we can notice how a negative event, from the ethical point of view, also harms the healthy functioning of the economic system.

Therefore, it must be noted, that when from such gambling can derive enormous damage for entire nations and millions of families, we are faced with extremely immoral actions, it seems necessary to extend deterrents, already present in some nations, for such types of operations, sanctioning the infractions with maximum severity.
You may of course question my impartiality on this matter, but I do think the pope lays out a straightforward response to a highly topical issue. Risks of financial distress tend to rise in developing countries like Argentina as interest rates increase Stateside, and the current rate-hike cycle is no exception. Detached from the "real" economy, financial activity without underlying economic purpose aside from speculation is ethically questionable insofar as the lives of other persons can be subject to grave harm--especially in the developing world:
17. What is morally unacceptable is not simply to profit, but rather to avail oneself of an inequality for one’s own advantage, in order to create enormous profits that are damaging to others; or to exploit one’s dominant position in order to profit by unjustly disadvantaging others, or to make oneself rich through harming and disrupting the collective common good.

Such a practice is particularly deplorable from the moral point of view when the intention of profit by a few through the risk of speculation even in important funds of investment, provokes artificial reduction of the prices of public debt securities, without regard to the negative impact or to the worsening of the economic situation of entire nations. This practice endangers not only the public efforts for rebalancing, but also the very economic stability of millions of families,  and at the same time compels government authorities to intervene with substantial amounts of public money, even to the extent of artificially interfering in the proper functioning of political systems.
 The pope is able to relate finance's potential dangers in a manner we can easily understand.

EU Firms Main Targets of US Sanctions on Iran

♠ Posted by Emmanuel in ,,, at 5/12/2018 03:51:00 PM
I guess there are good reasons these folks don't dislike Europeans as much.
One thing the Trump administration has delivered on, for better or worse, is pursuing "unisolationism." Ask the Europeans. Withdrawing from the Paris Agreement on climate change, criticizing Europeans for not contributing enough to NATO's defense, putting the Transatlantic Trade and Investment Partnership (TTIP) on the back-burner, and now reneging on a deal to obtain Iran's compliance on not enriching weapons-grade uranium (JCPOA)...the list goes on and on.

The last is very interesting: isn't it meant to reimpose US sanctions on Iran? For all intents and purposes, American firms still had significant reservations about doing business in Iran after that deal was struck. With the benefit of hindsight--Trump's election and all that--they were right not to seek much business there. However, the Europeans did not seem to have as many reservations. The end result is that, because American firms doing business with Iran were rather few, the real Western victims of this policy change are European firms. It works indirectly: the United States will apply sanctions against firms doing business with Iran like before, and European ones are hardly exempted:
The EU is scrambling to find ways to safeguard huge business deals with Iran, amid the threat of US penalties. Washington is re-imposing strict sanctions on Iran, which were lifted under the 2015 international deal to control the country's nuclear ambitions. On 8 May President Donald Trump denounced the deal, saying he would withdraw the US from it.

Since the deal took effect in 2016 major European firms have rushed to do billions of dollars' worth of business with Iran, and now thousands of jobs are at stake. Many of those firms fear their business ties with the US could be at risk if they continue to do deals with Iran past a November deadline.
Ie there anything the Europeans can do to insulate them from American sanctions on deal-doers with Iran? The bottom line is that all the other existing parties want to keep JCPOA intact, including the Europeans. However, the mechanisms which they can use to evade US overreach are iffy:
There is an existing EU "blocking statute", from 1996, aimed at countering US sanctions linked to communist Cuba. Now EU officials say they are revamping the statute to avoid the latest US restrictions on firms doing business with Iran.

But there are doubts about the statute's legal power. Reuters news agency says Shell and some other European firms with big operations in the US prefer to push for US waivers on a case-by-case basis. US authorities have imposed hefty fines on banks for processing Iranian transactions, including UK-based Standard Chartered, HSBC and Lloyds. France, Germany and the UK all say they remain committed to the nuclear deal with Iran and to expanding business ties, provided Iran sticks to its commitments.
Well, good luck with that. Speaking of which, here's a list of European deals now at risk:
  • Total (French) signed a deal worth up to $5bn to help Iran develop the world's largest gas field, South Pars
  • Norway's Saga Energy signed a $3bn deal to build solar power plants
  • Airbus clinched a deal to sell 100 jets to IranAir
  • European turboprop maker ATR (an Airbus-Leonardo partnership) agreed to sell 20 planes to Iran
  • Germany's Siemens signed contracts to upgrade Iran's railways and re-equip 50 locomotives
  • Italy's state rail firm FS signed a $1.4bn deal to build a high-speed railway between Qom and Arak
  • France's Renault signed a joint venture deal, including an engineering centre and a production plant, to boost Renault's production capacity in Iran to 350,000 vehicles a year
Going by the amounts proceeding the dollar signs above, it's not going to be a small loss of business for European firms if they comply with American sanctions. Many were particularly appalled when the US ambassador to Germany told German firms to start drawing plans to withdraw from business deals with Iran. However, the course of action European firms will take obviously depends on how much they business they stand to lose in America should they ignore America's reimposition of sanctions. Chinese firms not doing much business Stateside are not under pressure, and may even pick up business once the Europeans leavee, for example.

To Lower US Drug Prices, Raise Them Abroad?

♠ Posted by Emmanuel in , at 5/12/2018 02:48:00 PM
Trump's new health plan: Make Foreigners Sicker Than Americans.
With the exception of diehard Trump fans who would applaud anything he does [like bragging about grabbing women's private parts], his recently-released plan to reduce drug prices was met with mostly negative reviews by those who actually understand what it consists of [1, 2]. To non-Trump fans, this is as disappointing as it is predictable. Like American leaders before him, to be fair, Trump's plan doesn't involve making Big Pharma squirm. It neither drains the s wamp nor provides evidence that Trump alone can fix spiraling health care costs. Indeed, the relatively bulletproof nature of the drug giants is evident, as politicians have been unwilling to offend their interests (and bottom lines) once more.

How much do American politicians take the interests of Big Pharma to heart? When Trump helpfully suggests (rather unforcefully) that they make token price concessions, he still has their best interests at heart by suggesting that they sock it to foreigners instead by raising prices for them. This, of course raises several pointed questions, followed by a New York Times excerpt:
  • Aren't there ethical concerns for pricing drugs significantly higher outside the world's richest country--especially developing countries?
  • If foreign countries have successfully negotiated bulk discounts while buying for their national healthcare systems, then why should they be made to follow the abysmal US model wherein such bargaining is not practiced?
  • Why should the US set policy setting the prices charged by American pharmaceutical firms abroad? Isn't the US a believer in a "market-based" economy?
[The Trump administration] has an idea that may not be so popular abroad: Bring down costs at home by forcing higher prices in foreign countries that use their national health systems to make drugs more affordable...

“We’re going to be ending global freeloading,” Mr. Trump declared at a meeting with drug company executives in his first month in office. Foreign price controls, he said, reduce the resources that American drug companies have to finance research and develop new cures. The White House Council of Economic Advisers fleshed out the idea three months ago in a report that deplored the “underpricing of drugs in foreign countries.”
The council said that profit margins on brand-name drugs in the United States were four times as high as those in the more regulated markets of major European countries and Japan. The United States, it said, needs to “address the root of the problem: foreign, developed nations, that can afford to pay for novel drugs, free-ride by setting drug prices at unfairly low levels, leaving American patients to pay for the innovation that foreign patients enjoy.”
Moreover, there are no guarantees that increased profits abroad would translate into savings at home:
“There is absolutely no reason to believe that trade policies designed to raise prescription drug prices overseas will result in equivalent or any decreases in prices in the United States,” six House Democrats, led by Representatives Jan Schakowsky of Illinois and Rosa DeLauro of Connecticut, said in a recent letter to Mr. Trump.

People who work in the industry said it was unlikely that consumers would go to the pharmacy counter and see a meaningful reduction in drug prices before the end of the year.
Just because your "health care system" [sic for the United States] is supremely dysfunctional in no small part because of political inaction to confront price gouging, it doesn't mean that matters would be "improved" if you strong-armed other countries into making their systems as pathetic as America's.

The Hippocratic oath states that, first, medical professionals should do no harm. By the Trump administration's reckoning, a lot of harm should be done elsewhere to compensate for the ineptitude of American government officials unable to get their act together and extract meaningful concessions from drug firms who've been exceedingly successful at lobbying against rational drug pricing Stateside. 

BTW, I still recommend Marcia Angell's book on my virtual bookshelf on how Big Pharma actually doesn't put in most of theresearch for drugs but rather takes advantage of publicly-funded institutions. They only make profits afterwards by commercializing others' work.

5/15 UPDATE: See the New York Times for more on the decrepit state of the US health care system.

A Geneva Showdown on the WTO's Future

♠ Posted by Emmanuel in , at 5/08/2018 06:54:00 PM
The WTO's future is being decided right now at its Geneva headquarters as the US and China duke it out.
The World Trade Organization has often been derided as an instrument for the world's most advanced nations to advance their interests at the expense of others. This is especially so for the United States, which has largely been responsible for setting up the world trade system as we know it. The election of Donald Trump has upended this narrative in a number of ways--so much so that some commentators question the institution's viability going forward absent American support. What will become of the WTO is especially important to ponder while a meeting is underway at its Geneva headquarters. Without much surprise, US-China fisticuffs were front and center.

Similar to what Trump's minions have done at other international organizations--the International Atomic Energy Agency, the UN Framework Convention on Climate Change and so on--his WTO representative is reneging on multilateralism in the hopes of undermining the concept's practical viability. The way America has tried to do this is to gum up the WTO's legal mechanism. By sabotaging it as a forum for solving trade grievances, the world returns to a pre-WTO or even a pre-GATT world where might makes right, and the US is presumably still strong enough to get its way:
U.S. Ambassador Dennis Shea, addressing the WTO’s General Council for the first time, began by attacking the judges of the WTO’s Appellate Body, whom he blamed for a “steadily worsening rupture of trust”. “Something has gone terribly wrong in this system when those charged with adjudicating the rules are so consistently disregarding those very rules,” Shea said, according to a copy of his remarks provided to Reuters.

The United States has vetoed new appointments to the Appellate Body, causing a crisis at what is effectively the supreme court of world trade. Shea said the judges had over-stepped their authority and had broken the rules by failing to observe a 90-day timetable for judging appeals. Many experts say the delays are caused by ever-more complicated disputes piling up in a congested system.
Having created thought up the legal mechanism in the first place, the reality is that the United States wins a majority of the cases it is involved with at the WTO. Instead of it being "unfair" to America, there must be a more plausible reason for American obstructionism in not appointing enough judges for it to perform its functions. China obviously takes exception to what the Americans are doing:
Chinese Ambassador Zhang Xiangchen, who had put the issue on the agenda, began by warmly welcoming “our new colleagues, especially Dennis”. But the cordial opening gave way to criticism of the “dangerous and devastating” U.S. actions. “By taking the selection process as a hostage, the U.S. is abusing the decision-making mechanism of consensus,” Zhang said.

The U.S. veto, along with steel and aluminum tariffs and a threat to put $50 billion of tariffs on Chinese goods for alleged intellectual property theft, had systematically challenged the WTO’s fundamental principles, he said.

“Any one of these, if left untreated, will fatally undermine the functioning of the WTO. But the reality is that the WTO is currently confronted with ‘three hard blows’,” Zhang said. The United States was reportedly seeking export limits from countries in return for exemptions from its steel tariff, which was “explicitly prohibited” by the WTO rules, he added.
Others also notice the ongoing sabotage:
WTO spokesman Keith Rockwell said many WTO members joined the debate, many expressing concern that the U.S. actions could make the system dysfunctional, and prepared to discuss its views while rejecting any linkage between judicial appointments and reforming the WTO. “It was extraordinary in its intensity,” Rockwell said. “It was unusual to see these two very prominent members laying it all on the line in terms of what they think ... This was a discussion that we had to have.”
That the Trump administrations other trade actions contravene the spirit of the WTO is evident enough. These actions are consistent with wanting to return the world to a pre-WTO or even pre-GATT era. Trump's appointment of the Reagan-era fossil Robert Lighthizer as US trade representative is part of that:
President Ronald Reagan tapped Lighthizer to be deputy U.S. trade representative in 1983. One of his accomplishments in that position was to persuade Japan, South Korea, Mexico and the United Kingdom to limit their exports of cheap steel to the United States. That action was later found to be in violation of World Trade Organization regulations.
The Trump administration would like nothing better than to render the WTO insignificant and return us to the mid-Eighties of Lighthizer's prime replete with Section 301s and other WTO-illegal measures.. The question for the rest of us is, who will take the lead in upholding this institution (if any)? Just as the other signatories of the Trans-Pacific Partnership went ahead anyway without the US, is there still a "coalition of the willing" that sees value in keeping the WTO functional? US obstructionism can be overcome, but there is a collective action problem that needs solving first.

Will it be China, the EU, or some other folks? Supposing that others do see value in it, there may be a combination of countries willing to champion the WTO at this point in time. Otherwise, the best its proponents can do may be to wait for a more trade-friendly US leadership. The danger though is that the WTO may become too irrelevant by then if others do not come to the WTO's aid in its time of need.

Self-Humiliation & US-China Trade Talks

♠ Posted by Emmanuel in , at 5/06/2018 05:55:00 PM
Their underlings got nothing unaccomplished during trade talks, unsurprisingly.
During negotiations and bargaining, you are taught to never begin with your most generous offer, but rather your least generous one to "anchor" talks in your favor. In the recently-concluded US-China trade negotiations, the participants apparently took this lesson to heart. So much so that, well, it is almost impossible to see any common ground achievable that would accommodate their respective starting positions at the current time. Instead of working on plausible starting positions, they have effectively begun with fantasy-themed requests that their respective trade grievances with one another be addressed in full and as soon as possible.

The reported details understandably ended with basically no agreement on anything substantial insofar as each party is asking the other to make politically unrealistic and unrealizable concessions--more so the United States. Here's what the American negotiators asked for, among other things:
  • Reduce the US-China bilateral trade deficit by $200B by 2020 
  • Withdraw current cases filed against the US at the WTO, including those concerning PRC designation as a non-market economy
  • Further, take no retaliatory actions to forthcoming US trade policies (i.e., these aimed at China)
  • Reduce Chinese tariffs in "non-critical" sectors to corresponding ones applied by the US
  • Be subject to tariffs and other restrictions on Chinese products if the PRC does not comply with America's laundry list of demands 
It's pretty obvious that this long list of demands would become contradictory in places. So the United States believes that China should still be classified as a "non-market economy" by the WTO. At the same time, it believes the PRC has the discretion to reduce the bilateral trade deficit by over half through striking an agreement with the Chinese government. Moreover, it accuses the Chinese of using non-market interventions to distort world trade. Which is it, then? If China is supposed to act more like a market economy, then its officials should have limited discretion over the actions of its exporters. That is, global supply-and-demand would determine trade balances instead of the active meddling of the Chinese and American governments. Asking PRC officials to intervene to staunch Chinese exports would constitute a non-market distortion of the sort Americans are accusing the Chinese of practicing (and we presume want to stop). 

Alike what the US is trying to do with steel exporters in the EU and NAFTA, it also seeks to humiliate China by making it unable to file cases against the United States at the WTO over perceived trade violations. Again, what dignified trade partner would choose self-abrogation of one's rights--here as a WTO member--and leave oneself vulnerable to US trade actions without international recourse? Further, effectively asking China to apply the same tariff rates as the world's wealthiest country would also be asking it to abrogate its rights to special and differential treatment accorded to developing countries.

China would be giving up a lot for...uncertain benefits in the age of the mercurial Trump.

That said, the Chinese also presented their own list of unrealistic demands, including:
  • Opening of US government procurement to Chinese electronics firms
  • Stop hindering Chinese technology firms buying US ones on "national security" grounds
  • Allow Chinese e-payment services to operate Stateside
  • Remove the export ban on the allegedly Party-affiliated ZTE
To be sure, the Chinese are not exactly responsive to accusations that it's using unfair means of government support to bolster its technology industry since most demands concern maintaining the status improving market access of Chinese technology firms to the US market as well as removing obstacles to buying American IT concerns. Without having allayed American security fears first, however contrived these are, the Chinese are unlikely to receive better market access Stateside. Indeed, despite PRC firms already receiving increased scrutiny--they hardly got a free pass during previous administrations for buying US firms over "national security" concerns--they are set to receive even more scrutiny.

I get the sense that this was more an event of talking over each other to score with domestic audiences about the other's inflexibility and stubbornness instead of being a realistic exercise in coming up with creditable starting points for eventually striking a deal. As such, a trade war is seemingly inevitable unless drastic changes in both these nations' stances occur fairly soon.   

Self-Humiliation & Exemption From US Steel Tariffs

♠ Posted by Emmanuel in , at 5/01/2018 12:34:00 PM
VERs and evil feels oh so 1980s.
The self-made deadline of the United States to make permanent 25% tariffs on steel and 10% on aluminum imports has come and gone with no small amount of confusion. That is, we are now in June 2018 with no better indication of who will be permanently hit with what. It's particularly true for EU countries, Canada and Mexico. While this phenomenon--uncertainty created by the Trump administration--is par for the course nowadays, it does create a lot of unease for America's trading partners that does not sit well with them.

What is it Americans are asking for? At the moment, they are offering a choice between [a] limiting the amount of steel exports to the United States and [b] being subject to the aforementioned tariffs if such restraints are not agreed upon. Here is what the Americans have said:
”In all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security,” the White House said. “These agreements underscore the Trump administration’s successful strategy to reach fair outcomes with allies to protect our national security and address global challenges to the steel and aluminum industries.”
Previously, the United States got the South Koreans to make a concession of reducing steel exports by 30% to gain an exemption. Now, it wants to do "pattern bargaining" with its other trade partners. So, what's the problem here? Well, WTO members--of which all the countries concerned are--should not be forced to make such concessions. What the United States is now asking for is not new. For all intents and purposes, they are "voluntary export restraints" [VERs], a euphemism for the United States "asking" trade partners to self-limit the number of exports they send to the US. Of course, it is coercive in nature because there is an "or else" element in being hit by trade sanctions if not followed. Article 11.1(b) of the WTO's Agreement on Safeguards states:
Furthermore, a Member shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side. These include actions taken by a single Member as well as actions under agreements, arrangements and understandings entered into by two or more Members.
So what you are in effect doing if you agree to what the US wants with regard to steel and aluminum exports is voluntarily giving up your rights under the WTO to kowtow to the US. While this may be fine with some like South Korea for reasons only they know, for others it is an act of self-humiliation. So, it comes as no surprise that those more reluctant to implement these things are the larger trading partners like, say, Japan:
The lack of retaliation threats from Japan, despite anger and frustration at the US president’s decision to target a close ally, reflects confidence that many of the country’s steel exports can win product-by-product exemptions from the tariffs. Japan’s calculated response highlights its determination to keep good relations with Mr Trump and the difficulty of using tariffs as a tool to force trade concessions when so many US industries rely on imports.
The same with the European Union:
European officials have said the U.S. tariffs violate international trading rules, and they have threatened to retaliate with levies on iconic American brands such as Harley Davidson motorcycles and Kentucky bourbon.
“The EU should be fully and permanently exempted from these measures, as they cannot be justified on the grounds of national security,” the European Commission, the 28-nation bloc’s trade authority in Brussels, said in an emailed statement on Tuesday. “The EU has also consistently indicated its willingness to discuss current market access issues of interest to both sides, but has also made clear that, as a longstanding partner and friend of the US, we will not negotiate under threat.”
Who's gotten a pass aside from South Korea? To no one's surprise, they are countries with smaller trading volumes who have presumably agreed to VERs as well:
The administration has reached agreements-in-principle with Argentina, Australia and Brazil, according to the statement, which the White House released late Monday night. The details "will be finalized shortly," the statement added.
We'll know if they did agree to VERs shortly. 

While China and Russia are perceived as security threats of the highest order and would naturally be unable to conform to US national security interests as this issue is being made out to be, it is notable that India and Japan have not managed to obtain exemptions. Ultimately, for countries other than China or Russia, it ultimately boils down to whether you'd want to self-humiliate yourself by abrogating your WTO rights to not be subject to VERs. This point brings us to another fine point on whether these VERs are admissible at the WTO, but I presume that having been bamboozled into agreeing to these VERs that you wouldn't turn to the WTO anyway. 

New Zealand Needs Skilled, e.g., Sex Workers

♠ Posted by Emmanuel in at 4/26/2018 11:46:00 AM
Me love you long time in Kiwi-land.
Believe me, I was looking for something else when I found this rather amusing news story from the New Zealand Herald. Prostitution being legal in New Zealand, it turns out that their immigration authorities recognize sex workers and escorts as "skilled workers" going by the Australian and New Zealand Standard Classification of Occupations (ANZSCO). It determines who gets how many points. That is, they use a point-based system for determining immigration:
Would-be migrants can claim valuable points as skilled sex workers or escorts, according to information on Immigration NZ's (INZ) website. But an immigration expert say it would be difficult for any applicant to succeed. The agency confirmed sex work/escort is on the skilled employment list, despite it not being on the skill-shortage list. A sex worker or escort is defined as someone as providing clients with sexual services or social companionship.
That said, it's unlikely that someone in this line of work can easily move to Hobbit-ville given the practical impediments to applying:
"The list itself comes from the Australian and New Zealand Standard Classification of Occupations (ANZSCO) list and not INZ," an agency spokeswoman said. According to information on INZ's website, sex worker or escort is listed as an ANZSCO level 5 skilled employment, and applicants could claim points if they were paid at or above $36.44 per hour, which is $75,795 based on a 40-hour week [my emphasis; the reporter was having fun with math given the nature of the mentioned trade]. The applicant would also have to be qualified in ways that include having a recognised qualification or have at least three years of relevant work experience.
How do these points-based systems work? Consider the Aussie one on which the Kiwi one is based:
Australia's points system was instituted in 1989 as a departure from the country's previous racial- and ethnic-based policy. To gain entry, applicants must accrue 60 points for such attributes as English proficiency, skilled employment, educational background and ties to Australia. Australia awards the greatest number of points (30) to people of prime working age. Applicants must also pass a medical exam and character test.
Hmm, that part about medical exams and character tests may prove problematic for folks in this profession. Again, while it is conceivable that a sex worker could obtain an NZ work permit based on being a skilled worker, it is unlikely. In fact, I can only think of one at the moment who qualifies having well and truly cleared the NZD75K mark, and she [although it can be a he, I presume] had the benefit of extra-curricular legal entanglements.

Will a US points-based system mean America won't run a trade deficit with other countries in this valuable service? Thinking of it, those Kiwis may be running unfair trade practices here. Maybe it's time to sic Peter "Death by China" Navarro on them. David Dennison, eat your heart out.

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 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.