The weekly trade report with L.C.
In the foreign exchange market last week, the dollar plunged vs. the yen and euro. Today, March 9th, the dollar fell further against the euro. It was the worst weekly drop for the US currency in four years, and was accompanied by a dive in US government bond yields. But the big news was a major decline in the US and world stock markets, driven by an oil price war and fears that the Wuhan coronavirus was close to being declared a pandemic by the World Health Organization (WHO).
The US Federal Reserve ignored this publication’s advice to coordinate policy with the central banks of its allies so as to not to create trade-destabilizing exchange rate instability. The overriding factor sinking the dollar was the unanticipated 50 basis point (0.5%) cut in the Federal Reserve’s federal funds interest rate target last Tuesday — and the expectation that it will undertake a further cut at its March 18th regular meeting. Since foreign central banks can’t cut as much due to their already low rates, this was negative for the dollar against most currencies.
An op-ed in tomorrow’s Wall Street Journal states correctly that “Rate cuts won’t do much good, but the bank can calm panicky markets and avoid recession by supplying liquidity.” The editor of Real Clear Markets, John Tamny, was more blunt: “Coronavirus Is Priced. Inept Responses from Governments Aren’t.”
Better name than COVID-19 proposed
Under Chinese pressure, the WHO changed the name of the Wuhan coronavirus to COVID-19 to avoid the stigmatization the Beijing government so richly deserved for not quarantining the virus when that was still possible. We suggest, for reasons explained here, here, and here, why the new virus would better be called the “Xi Jinping coronavirus” or “Xi virus” for short.
The current and anticipated future impact of the COVID-19 outbreak has spurred a downgrade in economic forecasts and a rush to safe havens, though the dollar is no longer seen as the safe haven it was regarded as formerly.
Fiscal measures likely, despite indebtedness
With other central banks unable to cut rates — whether sound policy or not — pressure is increasing for governments to ramp up fiscal spending despite their high level of indebtedness.
The US was, on the surface, doing better before the outbreak. The Friday release of the February nonfarm payrolls report showed a robust net 273,000 jobs gained while the unemployment rate ticked down to 3.5% and average wages rose 0.3% month-over-month. But this excellent labor market performance, far above expectations, was in a month before the coronavirus hit the US, and so it wasn’t seen as signaling much about the future.
Status of the “Phase 1” trade agreement with China
For now, the provisions of the US-China Trade Agreement have not been adjusted to take account of the impact of the Wuhan virus outbreak. Treasury Secretary Steven Mnuchin, testifying before the House Ways & Means Committee, was asked about this and responded: “We are not considering that at the moment, but as this progresses… we’ll look at all the options that we think are important to help, particularly SMEs [small- medium-size enterprises] and particular areas of the economy that are impacted by this.”
Although there haven’t been adjustments to the trade deal yet, the likely disruptions from the virus are expected to make it too difficult for China to meet its commitments.
PIEE study
There is a sad irony in the US approach to China. While Washington complains of China’s “state-led mercantilist policies,” it has pushed Beijing into a managed-trade agreement that strengthens its subsidized, state-owned enterprises at the expense of China’s private economy. The Peterson Institute for International Economics (PIEE) published a study this week making this point. Chad Bown, co-author of the report, tweeted:
Trump justified his costly trade war as a necessary evil to confront the Chinese economic model. But for his trade deal to get close to the $200 billion phase one targets, it relies on China’s SOEs [state-owned enterprises] GROWING in economic importance, not shrinking….Trump’s trade deal with China ends up massively inconsistent with what was allegedly one of the big objectives of his trade war – confronting China’s SOEs. So which is it?
Many US exports remain higher-priced in China than competitive products, and therefore private companies won’t find them attractive. To meet its purchase commitments, Beijing will therefore have to pressure SOEs to buy the US goods. “By structuring the deal so that US exports grow only if China’s SOEs increase in importance and at the expense of the Chinese private sector,” the study reports, “Beijing hears double talk. The message is that the Trump administration cares little about China becoming more market-oriented after all. And the rest of the world will hear it the same way.”
Senate takes action on security concerns
Sen. Tom Cotton (R-AR) introduced on March 3rd legislation to revise the CFIUS reform bill that passed last year (the Foreign Investment Risk Review Modernization Act). Cotton’s bill, called the “Protecting American from Foreign Investors Compromised by the Chinese Communist Party Act,” is co-sponsored by Sens. Ted Cruz (R-TX), Josh Hawley (R-MO), and Marco Rubio (R-FL). The proposed changes would remove the exemption from CFIUS scrutiny given to allied countries (the UK, Australia, Canada) if those countries allow Chinese companies to participate in 5G networks. It would require a review of the UK’s inclusion on the “white list” of exempted countries. “Ultimately, protecting US trade secrets from the Chinese Communist Party is our top priority,” Cotton declared. Under the bill, the administration would also have to deliver a report on US efforts to coordinate with allied countries to develop alternatives to Chinese 5G vendors.
And in another congressional move, Sen. John Thune (R-SK) introduced on March 5th a bill to amend the Trade Promotion Authority law to require that trade agreements make global communications infrastructure (that is, 5G) security a negotiating objective. It doesn’t name China or Huawei, but that’s the clear target. But if the bill passes, the UK – if it doesn’t reverse its policy – might be the hardest hit.
US choice for WIPO leader wins
In a significant victory for the US position and defeat for China, the World Intellectual Property Organization (WIPO) on March 4th nominated Singaporean Daren Tang to be its next Director-General. The nomination almost assures the final election of Tang, whose main opponent is China’s Wang Binyang. Tang attracted support from both developed and developing countries.
Washington and many other countries have been intensely concerned over the prospect that someone from China would fill this post, which has influence over international IP rules and also provides access to the content of patent applications before they are publicized.
The final vote will come at a special session of the WIPO General Assembly, May 7-8.
Tang will be the first Singaporean to head a UN agency (Chinese nationals, on the other hand, lead five). Tang studied law in the US and is currently the head of the Intellectual Property Office of Singapore. He has extensive trade as well as IP experience, being a lead negotiator in talks for the US-Singapore Free Trade Agreement, the TPP, and the RCEP, as well as being involved in various WIPO negotiations. Singapore’s IP office under Tang has been widely lauded for its innovation and effectiveness, and he seems well-prepared to lead WIPO as it takes on new issues such as whether Artificial Intelligence can be considered as an inventor.
US officials publicly welcomed Tang’s nomination. Commerce Secretary Wilbur Ross called it “good news for the global economy.”
L.C. reports on trade matters for business as well as Founders Broadsheet.
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