Investment stagnation stemming from trade uncertainty is likely having an impact on stock market volatility and recent market declines (Getty Images)
“The U.S. economy expanded at a 3.5 percent pace in the third quarter as consumers opened their wallets, businesses restocked inventories and governments boosted spending, marking the strongest back-to-back quarters of growth since 2014,” Bloomberg writes. The growth “followed a 4.2 percent advance in the prior three months…” But sustained growth and productivity gains require business investment. As the weekend edition of the Wall Street Journal notes,
“The GDP report pointed to pockets of unexpected weakness, particularly in the business sector. Business investment grew at a modest 0.8% annual rate. That included a contraction in investment in business structures… Business-investment data can be volatile from one quarter to another, but the weak number in the latest report suggests other factors—including uncertainty about the outlook for trade tariffs—could be starting to weigh on business decisions to spend on new equipment and plants.” [emphasis added]
Investment, employment, and economic growth stagnated under President Obama because of the constant uncertainty businesses faced in the form of a stream of burdensome new regulatory provisions. President Trump may be similarly hamstringing investment by the uncertainty his unpredictable tariff policies are creating.
This provides the context for trade correspondent L.C.’s weekly trade report that follows.
Dialogue of the deaf — over hacked phones?
Chinese trade negotiators continue to report that they don’t know whom they should be talking with within the US Administration – who can actually speak for the President – or just what actions the US wants them to take. The disagreement among US officials, not just the President’s failure to decide on the details of his policy, adds to the confusion. But “The U.S. is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington’s complaints about forced technology transfers and other economic issues,” the Wall Street Journal (October 26, 2018) reports.
The anti-Trump New York Times meanwhile cites intelligence agency claims that one of President Trump’s iPhones has been hacked by China and Russia and that although the President has been warned, he continues to use the compromised phone. The Chinese are said to be interested in listening in to find out his thoughts on the China trade situation.
Bilateral US-Japan negotiations lagging behind Japan-China talks
The US is moving forward with plans for a bilateral free trade agreement (FTA) with Japan. But there’s a problem with the bilateral trade treaties that the President holds so dear:
“Columbia University economist Jagdish Bhagwati has lamented that bilateral treaties, which give partners the right to exclude and discriminate against countries not included in the agreement, have replaced multilateral global trade agreements whose benefits were automatically shared by all countries. This, says Mr. Bhagwati, creates a “spaghetti bowl” of regulations, armies of lawyers and new elites organized to cut their way through the morass.”
This is not exactly conducive to draining lobbying swamps, one of the US President’s avowed goals. It also subjects smaller economies to bullying by larger ones, whether it be China bullying its Asian and African trade partners or the US bullying its counterparts.
This is one reason Japan, despite the importance to both countries of the US-Japan security alliance, has been hedging its economic fortunes with China. The Trump administration refuses to join the multilateral Trans-Pacific Partnership (TPP-11) Japan has been sponsoring.
Japanese Prime Minister Shinzo Abe traveled to Beijing for three days, meeting with President Xi Jinping and Prime Minister Li Keqiang. He was accompanied by almost 1000 Japanese business executives who reportedly signed 500 deals worth $18 billion. But it was the country-to-country effort that appeared most important. The leaders promised to accelerate efforts for success in the Regional Comprehensive Economic Partnership (RCEP) negotiations.
Meanwhile, the TPP-11 may enter into force this year. It takes effect 60 days after six of the 11 participating countries deposit their ratification instruments with New Zealand, the TPP’s administrator. If six countries ratify by November 1st, the first tariff decrease will take place on January 1st, 2019. That would be a major boost to trade among the early signees. As of last week, four countries – Japan, Mexico, Singapore, and Australia – had ratified. This week, New Zealand completed its ratification. Still, a sixth ratification is needed and time is short, just a few more days. But Australian Trade Minister Simon Birmingham said during the recent World Trade Organization (WTO) reform conference in Ottawa, “We believe that we are on track to be able to ratify and lodge notification with New Zealand by the first of November.”
India’s Modi goes to Tokyo
Just back from Beijing, Prime Minister Abe is hosting India’s Prime Minister Narendra Modi for an official visit to Tokyo on November 28th-29th. This is the annual Japan-India summit, and it showcases the special nature of the bilateral relationship. India has institutionalized an annual summit with only two countries, the other being Russia.
India and Japan are particularly interested in strengthening ties as a counter to China’s growing power — though all three countries are seeking further economic integration through the RCEP. Modi has an explicit “Act East Policy” aimed at forging closer ties with Asia, while Abe has long looked to his farther west, calling for a “Free and Open Indo-Pacific Strategy.” Both are aimed at curbing China’s strategic as well as economic ambitions. The two have forged closer military ties, as exemplified by a first-ever joint military exercise in November, plus cooperation in third-country development to parry China’s Belt & Road Initiative.
India is seeking tariff reductions from China so that it can export more of its products there. India is also seeking US acquiescence to its investment in a new Iranian port at Chabahar so that India can increase its trade and investment with Afghanistan, presently blocked by a hostile Pakistan.
Spotlight on the metals tariffs
The irritant of the US Section 232 steel and aluminum tariffs imposed on Canada and Mexico is gaining attention because it is uncertain whether they will be lifted before the USMCA trade agreement takes effect.
The US private sector, many members of Congress, the Canadians and Mexicans are unhappy with the continuation of these duties on metals despite the promise that they would be removed once the NAFTA renegotiation was concluded. Failure to remove the tariffs could interfere with the signing of the US-Mexico-Canada Agreement (USMCA) — a.k.a. NAFTA 2.0 — or with its passage by Congress. Both Canada and Mexico have also made it clear they won’t lift their retaliatory tariffs until the US tariffs are ended.
Negotiations on the metals tariffs might begin soon, but Ottawa warned Washington early on that it won’t exchange tariffs for quotas. This week Foreign Minister Chrystia Freeland, when asked by the Toronto Globe & Mail about such a trade-off, replied — with a pointed slap at the US — “I’m not interested in a centrally planned economy. I actually lived in the Soviet Union.” However, the current Mexican government, unlike the Canadians, has signaled that it might be open to the trade-off.
The chorus of calls for removing the tariffs is getting louder within the US. This week the United Steelworkers union, which represents US and Canadian workers, again called for the tariffs to be ended and not replaced with quotas. The head of Ford Motor Co. is saying that US automakers now pay the highest price in the world for the steel they need to build cars — a blow to their competitiveness.
US shoots self in foot with aluminum bullets
But the perverse effect of the US aluminum tariffs is a scandal of its own. According to the Wall Street Journal (October 26, 2018),
“When President Trump placed tariffs on imported aluminum last spring in an effort to protect American producers, European rivals thought their U.S. profits would come under pressure. But months later European aluminum companies have yet to feel much pain.…Norway’s Norsk Hydro AS A, one of the world’s largest aluminum producers…said foreign producers have generally been able to pass the tariff through to their U.S. customers….Constellium NV, a Dutch aluminum company with manufacturing sites mostly in Europe and North America, said its products remained attractive to U.S. customers despite higher prices. ‘We expect it to be net-net neutral as we substantially pass through duties to our customers,’ said Constellium CEO Jean-Marc Germain. The U.S. tariff doesn’t address the problem of massive Chinese aluminum overcapacity and unfair pricing, he said, and it makes U.S. aluminum companies less competitive globally….
“[O]ne reason the tariffs have failed to substantially boost U.S. production is high electricity costs, which make opening new lines or restarting mothballed smelters uneconomical. Both Century Aluminum Co. and Alcoa Corp. recently decided against restarting more production after activating some smelter lines last spring and summer….
“[US] Aluminum users have been the main casualty of the tariffs. Alcoa chief executive Roy Harvey warned earlier this month that rising costs could encourage more buyers to look elsewhere, including to companies that melt down scrap aluminum for reuse.
“‘Metal in the U.S. is now more expensive than it is in the rest of the world,’ Mr. Harvey said. ‘It starts becoming even more attractive to use the scrap.’”
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