3/2/21: EU-US Trade Policies Dynamics

 

Evolutionary dynamics of the U.S.-EU trade policy changes via S&P Global:

26/6/20: Trade Restrictions: European Companies

BOFIT newsletter out today highlights the scale of restrictive trade measures applicable to the EU exporters across a number of significant markets:

Of eleven countries included, three managed to lower trade and investment barriers applying to the EU companies over 2017-2019 period, two countries had unchanged barriers, and six showed increasing barriers to trade and investment. In a way, this reflects a shift away from trade and investment globalization focus on the last three decades toward more regionalized and even protectionist policies.

COVID19 pandemic is likely to accelerate this trend.

15/1/20: What Trade Deal Phase 1/N Says About the Four Horsemen of Apocalypse

Phase 1 of N of the "Greatest Trade Deal" that is "easiest to achieve' by the 'stablest Genius' is hitting the newsflows today. Which brings us to two posts worth reading on the subject:

Post 1 via Global Macro Monitor: https://global-macro-monitor.com/2020/01/15/phase-1-of-potemkin-trade-deal-signed-sealed-and-yet-to-deliver/ is as always (from that source) excellent. Key takeaways are:

• "We never believed for one moment that China would cave on any of the big issues, such as restructuring its economy and any deal would be just some token political salad dressing for the 2020 election."
• "Moreover, much of the deal depends on whether the Chinese will abide by Soviet-style import quotas," or in more common parlance: limits on imports of goods into the country, which is is 'command and control' economics of central planning.
• "We are thankful, however,  the economic hostilities have momentarily ratcheted down but the game is hardly over," with tariffs and trade restrictions/suppression being the "new paranormal".
• "Seriously, after more than two years of negotiations, they couldn’t even agree on dog and cat food imports?"

Post 2 via Market Watch: https://www.marketwatch.com/story/phase-one-trade-deal-wont-end-the-uncertainty-in-markets-hsbc-strategist-says-2020-01-15. Key takeaways:

• "The [trade] environment remains very much in flux and a source of concern and challenge for investors".

My takeaways from Phase 1/N thingy: we are in a VUCA world. The current U.S. Presidential Administration is an automated plant for production of uncertainty and ambiguity, while the world economy is mired in unresolvable (see WTO's Appellate Body trials & tribulations) complexity. Beyond the White House, political cycle in the U.S. is driving even more uncertainty and more ambiguity into the system. The Four Horse(wo)men of the Apocalypse in charge today are, in order of their power to shift the geopolitical and macroeconomic risk balance, Xi, DNC leadership, Putin and Trump. None of them are, by definition, benign. 

The trade deal so far shows that Xi holds momentum over Trump. Putin's shake up of the Russian Cabinet today shows that he is positioning for some change in internal power balances into 2020, and this is likely to have some serious (unknown to-date) implications geopolitically. Putin's meeting with Angela Merkel earlier this week is a harbinger of a policy pivot to come for the EU and Russia and Lavrov's yesterday's statement about weaponization of the U.S. dollar and the need for de-dollarization of the global economy seems to be in line with the Russo-German New Alignment (both countries are interested in shifting more and more trade and investment outside the net of the U.S. sanctions raised against a number of countries, including Iran and Russia).

DNC leadership will hold the cards to 2020 Presidential Election in the U.S. My belief is that it currently has a 75:25 split on Biden vs Warren, with selection of the former yielding a 50:50 chance of a Trump 2.0 Administration, and selection of the latter yielding a 35:65 chance in favour of Warren. The electoral campaigning climate is so toxic right now, we have this take on the latest Presidential debate: https://twitter.com/TheDailyShow/status/1217431488439967744?s=20. Meanwhile, debate is being stifled already by the security agencies 'warnings' about Russian 'interference' via critical analysis of the candidates.

Mr. Trump has his Twitter Machine to rely upon in wrecking havoc, that, plus the pliant Pentagon Hawks, always ready to bomb something anywhere around the world. While that power is awesome in its destructiveness vis-a-vis smaller nations, it is tertiary to the political, geopolitical and economic powers of the other three Horse(wo)men, unless Mr. Trump gets VUCAed into a new war.

BoJo's UK as well as Japan, Canada, Australia et al, can just sit back and watch how the world will roll with the Four punchers. The only player that has a chance to dance closely with at least some of the geopolitical VUCA leaders is the EU (read: France and Germany, really). 

16/10/19: Ireland and the Global Trade Wars

My first column for The Currency covering "Ireland, global trade wars and economic growth: Why Ireland’s economic future needs to be re-imagined": https://www.thecurrency.news/articles/1151/ireland-global-trade-wars-and-economic-growth-why-irelands-economic-future-needs-to-be-re-imagined.

Synopsis: “Trade conflicts sweeping across the globe today are making these types of narrower bilateral agreements the new reality for our producers and policymakers.”

1/9/19: 'Losin Spectacularly': Trump Trade Wars and net exports

U.S. net exports of goods and services are in a tailspin and Trump Trade Wars have been anything but 'winning' for American exporters. You can read about the effects of Trade Wars on corporate revenues and earnings here: https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html. And you can see the trends in net exports here:

This clearly shows that 'Winning Bigly' is really, materially, about 'Losin Spectacularly'. Tremendous stuff!

31/7/19: Fed rate cut won't move the needle on 'Losing Globally' Trade Wars impacts

Dear investors, welcome to the Trump Trade Wars, where 'winning bigly' is really about 'losing globally':

As the chart above, via FactSet, indicates, companies in the S&P500 with global trading exposures are carrying the hefty cost of the Trump wars. In 2Q 2019, expected earnings for those S&P500 firms with more than 50% revenues exposure to global (ex-US markets) are expected to fall a massive 13.6 percent. Revenue declines for these companies are forecast at 2.4%.

This is hardly surprising. U.S. companies trading abroad are facing the following headwinds:

1. Trump tariffs on inputs into production are resulting in slower deflation in imports costs by the U.S. producers than for other economies (as indicated by this evidence: https://trueeconomics.blogspot.com/2019/07/22719-what-import-price-indices-do-not.html).
2. At the same time, countries' retaliatory measures against the U.S. exporters are hurting U.S. exports (U.S. exports are down 2.7 percent in June).
3. U.S. dollar is up against major currencies, further reducing exporters' room for price adjustments.

Three sectors are driving S&P500 earnings and revenues divergence for globally-trading companies:

• Industrials,
• Information Technology,
• Materials, and 
• Energy.

What is harder to price in, yet is probably material to these trends, is the adverse reputational / demand effects of the Trump Administration policies on the ability of American companies to market their goods and services abroad. The Fed rate cut today is a bit of plaster on the gaping wound inflicted onto U.S. internationally exporting companies by the Trump Trade Wars. If the likes of ECB, BoJ and PBOC counter this move with their own easing of monetary conditions, the trend toward continued concentration of the U.S. corporate earnings and revenues in the U.S. domestic markets will persist. 

22/7/19: What Import Price Indices Do Not Say About Trump's Trade War

A few days ago, I saw on Twitter some economics commentators, not quite analysts, presenting the following 'evidence' that Trump tariffs are being paid for by China: the U.S Import Price index has declined in recent months, to below 100. In the view of some commentators, this signifies the fact that the U.S. is now paying less for imports from the ret of the world because Chinese producers are taking a hit on tariffs imposed onto their goods by the Trump Administration and do not pass through these tariffs onto the U.S. consumers.

The argument is a total hogwash. For a number of reasons.

Firstly, as the U.S. Bureau of Labor Statistics notes (see https://www.bls.gov/mxp/ippfaq.htm), import price indices do not incorporate tariffs and duties charged at the border. They actually explicitly exclude these. The indices do not include any taxes, by design.

The indices are quality-balanced, so they are rebalanced to reflect relative quality of goods and commodities supplied. If the U.S. importer gets a better quality (new model, improved model etc) of a good from the exporting country for the same price as the older model, this registers as a decrease in the import price index.

Worse, as BLS notes: "Import/Export Price Indexes cannot be used to measure differences in price levels among different products and services or among different localities of origin. A higher index number for locality A (or product X) does not necessarily mean that prices are higher than for locality B (or product Y) with a lower index number. It only means that prices have risen faster for locality A (or product X) since the reference period."

Note the words: "reference period". Which leads to yet another major problem with the argument that BLS index shows that 'China is absorbing tariffs costs' from the Trump Trade War: it is based on a spot (one point) observation. So let's take a look at the time series. Remember, Trump Trade War started at the very end of 1Q 2018 (March 2018). So here are 'reference period' consistent comparatives for import price indices for a range of regions and countries:

What the chart above tells us is that over the period of the trade war so far, U.S. imports price index indicates some deflation of imports costs, somewhere in the region of 1.13 percentage points. But over the same period of time, China index experienced a decline of 1.36 percentage points. If China is 'paying for U.S. tariffs', the U.S. is paying more than China does, which is of course, entirely possible, but immaterial to the data at hand.

Worse, if declining import price indices are an indicator of a country 'paying for tariffs', well, Canada seems to be paying for most of the Trump Trade War globally, while Japan is paying a little-tiny-bit. Tremendous! Art of the Deal! And all the rest applies.

Of course, what the declines in the vast majority of import price indices suggests is the opposite of the 'China is paying for the U.S. tariffs' story. Instead, they tell us about the inherent weakening in the global demand, the deflationary pressures in key commodities markets (yes, oil, but also soy beans, etc), the deflationary pressures from new technologies and, finally, the changes in currencies valuations.

No, folks, there are no winners in the trade wars, but there are smaller losers and bigger losers. When you impose tariffs on final and intermediate goods, consumers and producers loose. When you impose trade restrictions on imports of basic commodities, without altering global markets supply and demand, you are simply substituting suppliers (see https://trueeconomics.blogspot.com/2019/05/14519-agent-trumpovich-fails-to-deliver.html).  The latter change might involve some costs, but these costs are much lower than restricting trade in higher value added goods.

30/3/19: The Art of Trade Fudge: USMCA

Much-lauded Trump's Nafta 2.0, officially known as the United States – Mexico – Canada Agreement (USMCA) came to being on November 30, 2018. In his State of the Union speech on February 5, 2019, President Donald Trump claimed that the USMCA will replace “the catastrophe known as NAFTA” and “deliver for American workers like they have not had delivered to for a long time.” In a brief summary of the USMCA, Vox (see https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained) has effectively argued that the new Agreement is largely a rehashing of the original Nafta - a step in no new direction, with only minor modifications of the Trump-hated agreement.

Last week, the IMF piped in with its own analysis of the Agreement. The new IMF paper (see: https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680) provides "an analytical assessment of five key provisions in the new agreement, including:

• tighter rules of origin in the automotive, textiles and apparel sectors, 
• more liberalized agricultural trade, and 
• other trade facilitation measures." 

So how good is the USMCA in driving forward trade and investment flows between the three economies? Per IMF, the "results show that together these provisions would adversely affect trade in the automotive, textiles and apparel sectors, while generating modest aggregate gains in terms of welfare, mostly driven by improved goods market access, with a negligible effect on real GDP. The welfare benefits from USMCA would be greatly enhanced with the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place."

So, repealing the problem created by Mr. Trump - steel and aluminum tariffs - has more potential for welfare gains for Mr. Trump's electorate, than the new Nafta agreement that Mr. Trump claims to be one of his Administration's major achievements.

Mr. Trump has referenced, on many occasions, the need for reducing U.S. trade deficits with Mexico and Canada as the core justification for altering Nafta. IMF analysis of the USMCA shows that under the most welfare-enhancing scenario of USMCA introduction, accompanied by normalization of trade in steel and aluminum, U.S. trade deficit with Mexico can be expected to improve by only USD576 million per annum (0.58%), and with Canada by USD 1,781 million (4.31% improvement). However, U.S. trade balance with the rest of the world is expected to worsen by USD 2,698 million (a deterioration of 0.375%), more than offsetting the gains from Canada and Mexico trade.

Worse, U.S. workers will see no material gains from USMCA, as the IMF estimates presented in Table 9 (below) show:

As noted above, IMF projects no material growth boost from USMCA. More detailed analysis - by sector - shows that under the scenario involving repeal of Trump tariffs (the only scenario with positive welfare impact of USMCA), only two non-agricultural sectors of the U.S. economy can expect gains in output: food manufacturing and Other Manufacturing. In contrast, six sectors are likely to see their output decline:

All in, the IMF research shows the extent of economic fudge that is the current Administration's trade and investment policy. The art of the deal seems to be the art of faking soundbites and slogans, while delivering nothing new.

17/1/19: U.S. Imports Demand and Final Household Consumption

A great post from the Federal Reserve Bank of San Francisco blog (https://www.frbsf.org/economic-research/publications/economic-letter/2019/january/how-much-do-we-spend-on-imports/) showing estimates for total imports content of the U.S. household consumption, with a break down of imports content across domestic value additive activities and foreign activities.

Key results: “Our estimates show that nearly half the amount spent on goods and services made abroad stays in the United States, paying for the local component of the retail price of these goods. At the same time, imports of intermediate inputs make up about 5% of the cost of production of U.S. goods and services. Overall, about 11% of U.S. consumer spending can be traced to imported goods. This ratio has remained nearly unchanged in the past 15 years”.

Note: Top bars in both panels are computed directly from PCE and headline trade data. Bottom bars in both panels reflect authors’ adjustments to account for imported content of U.S. goods and U.S. content of imported goods.

The above shows that imports play far lesser role in the U.S. households' consumption than popular media and public opinion tend to believe. This, in part, explains why Trump tariffs war with China has had a very limited adverse impact on domestic demand in the U.S.

25/3/18: Average Tariffs: 2000-2016

So how do the world's largest 50 economies (by size) score when it comes to the average trade tariffs they have in place? Who is the free trade champion? And who is not?

Here is the data on top 50 largest global economies (I have aggregated EU members of the top 50) into one group, as they share common tariffs against the rest of the world:

Source: data from the World Bank

One thing is clear: tariffs did come down quite substantially between 2000 and 2016. Average world-wide tariff in 2000 stood at just over 8.69%, which fell to just under 4.29% by 2016.

Another interesting fact is that the U.S. average tariff of 1.61% is matched by the EU's 1.6%, with both higher than Australia's 1.17%, Canada's 0.85%, Japan's 1.35%, and Norway's 1.02%. So, the free trade champions of the U.S. and EU are, sort of, poorer than average for the advanced economies, when it comes to trading free of tariffs protection.

Third point worth noting relates to the BRICS: these the largest emerging economies, jointly accounting for 32.0% of the global GDP (PPP-adjusted). Brazil's average tariff in 2016 stood at 8.01%, down from 12.69% in 2000. Russia's average tariff in 2016 stood at 3.43% and we do not have that figure for 2000, while India's was at 6.32% (down from 23.28% in 2000), China's fell from 14.67% in 2000 to 3.54% in 2016, while South Africa's average tariff declined from 4.5% in 2000 to 4.19% in 2016. So, amongst the BRICS, today, Brazil imposes the highest tariffs (86.8% higher than the global average), followed by India (47.4% above the global average), S. Africa (2.3% below the global average),  China (17.4% below the global average), and Russia (20% below the global average). In other words, based on average tariffs, Russia is the most open to trade economy in the BRICS group, followed by China.

Of course, tariffs are not the only barriers to trade, and in fact, non-tariff protectionism measures have been more important in the era of the WTO agreements. However, the data on tariffs is somewhat illustrative.

Here is the same data, covering 2010 and 2016 periods, arranged by the order of magnitude for 2016 tariffs:

Source: data from the World Bank

26/12/2014: The Empirical Evidence on Globalisation

Much has been written around the alternative, and even mainstream media about the perils of globalisation. Not to discount these arguments without a serious treatment, economics mainstream tends, on the other hand, view globalisation as a net positive force for betterment of the economy. Of course, there non-linear transmissions from economics to the broader society, and there are non-linear effects of globalisation on various social and economic agents: there are winners and losers in the process.

Here is an interesting paper that looks at the core macroeconomic consequences of globalisation. Potrafke, Niklas' study "The Evidence on Globalization" (see: CESifo Working Paper Series No. 4708: http://ssrn.com/abstract=2425513) surveys the empirical literature on globalisation focusing on the KOF indices of globalisation "…that have been used in more than 100 studies. Early studies using the KOF index reported correlations between globalization and several outcome variables. Studies published more recently identify causal effects."

The evidence shows that "globalization has spurred economic growth, promoted gender equality, and improved human rights. Moreover, globalization did not erode welfare state activities, did not have any significant effect on labor market interaction and hardly influenced market deregulation. It increased however within-country income inequality."

Worth a read. 

16/7/2013: Doing Good By Altering Trade Flows & Incentives? Not so fast...

An interesting paper on commodities prices and policy responses to these based on actual experience with food prices inflation in 2008.


CEPR DP9555, titled "Food Price Spikes, Price Insulation, and Poverty" by Kym Anderson, Maros Ivanic, and Will Martin, published this month "considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis".

Those changes ranged from reductions in import protection (allowing for more imports to flow into the countries heavily dependent on imports of food) to increases in export restraints (aimed at reducing exports of food from the countries experiencing rising domestic prices).

The changes "were meant to partially insulate domestic markets from the spike in international prices. We find that this insulation added substantially to the spike in international prices for rice, wheat, maize and oilseeds". In other words, domestic measures to ease prices by distorting international trade flows resulted in higher international prices for these foodstuffs.

"As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than in the absence of such insulation." Thus, domestic measures to combat food inflation have been beggar-thy-neighbour in their effect on other markets.

The study also estimates "the combined impact of such insulating behavior on poverty in various developing countries and globally." The study found "that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by8 million, although this increase was not significantly different from zero." Doing good, it turns out, can cause harm. Or alternatively, you might think global trade regime in food is evil, but try telling that to 8 million people impoverished by altering that regime to superficially re-direct flows of food away from established trade patterns in just one (single and short-lived) episode.

Authors point of view on policies? "Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike." No knee-jerk reactions, please...