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US – CHINA TRADE WAR – Why Trump will Win

US – CHINA TRADE WAR  – Why Trump will Win

 The rising trade tensions between the US and its major trading partners, particularly China and European Union have been making news for some time now. It may be recalled that the US imposed tariff on imports of Chinese goods worth $200 billion and had also threatened to impose tariffs on cars imported from EU.

But the European Commission led by Jean-Claude Juncker quickly visited Washington DC and appears to have successfully negotiated and resolved the trade issues, at least for now. The EU plans to buy more US liquefied natural gas (LNG) and soybeans and has agreed to work with the US “toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. Trump seems to have won hands down in the trade frictions with the EU.

But the trade war with China, on the other hand, seems to be following a different course with no resolution in sight yet. China too had imposed retaliatory sanctions on goods imported from the US. The US has further accused China of manipulating its currency and is now considering additional tariffs on goods worth $500 billion.

The consequences of this internecine tension could be severe and reverberate throughout the world. The IMF has warned that the current trade war could slow down world economic growth by 0.5% or cost the world $430 billion by 2020.  In its World Economic Outlook Update published in July 2018 IMF has warned that the global expansion that was witnessed over the last two years has plateaued and has become less balanced. It projects global growth to stay at 3.9% over the next two years. Translation – any trade tensions, particularly among key economies at this juncture may be injurious to all.

While the specter of a full blown trade war is never benign, a close examination of US-China trade data that is publicly available, courtesy US Dept. of Commerce, Census Bureau is indeed revealing. Data for the last eight years (i.e. 2010 through 2018 May) shows US exports to China has been   consistent at just over a US$100 billion. On the other hand, imports from China have steadily grown from US$ 365 billion in 2010 to US$505 billion in 2017. Imports for 2018 will probably be at the same level as 2017.  Please see chart.US China Data1

US imports are almost four times its exports to China thus giving rise to a yawning trade deficit that is undesirable for any county, and most certainly for the US. But President Trump, by imposing high tariffs, may have converted this liability into a powerful weapon. Given its four to one advantage, China is four times more vulnerable, in dollar terms, than the US. The current impact of Chinese tariffs on US farm sector has been stemmed by a $12 billion federal subsidy announced by the department of agriculture.  Hence, any retaliation – both current and proposed – from China will have minimal effect on the US. Trump seems to have the upper hand with China.

One of the key reasons for the imposition of additional tariffs on China – at least the stated objective of Trump – was bringing jobs, particularly manufacturing jobs, back to the US. On this count, however, Trump may have miscalculated. America must wake up to the reality that manufacturing jobs that were squirreled away to China over the decades will never come back.

The fact is that the US is a high cost economy and the final landed cost of manufacture is very high. Secondly the strong US dollar does not help either. Bringing back manufacturing jobs will only price its products out in a fiercely competitive export market. Most manufacturers may not take the bait.

The US government fully understands this. Consequently, over the decades, it has successfully encouraged the migration of the economy to a trade and economic culture that is largely dependent and sustained by innovations and cutting edge technologies. This has helped in the creation of new markets and orient them to where the US will continue to enjoy obvious advantages and hence dominate.

China too understands the nuances of this game and has been in an extraordinary hurry to acquire new technologies at any cost. Hence it is no surprise that China has been consistently accused, over the decades, of industrial espionage and theft of intellectual property (IP) by many countries including the US. It is no surprise that under the given circumstances, President Trump was left with limited options in dealing with an aggressive trading partner like China.

China has not played a good citizen of the world. At every opportunity, it has seized its neighbor’s land in its infamous ‘salami slicing’ strategy to fulfil its expansionists ideology. It has shown no respect for international law – be it the annexation of Tibet or in the blatant militarization of the Spratly Islands in South China Sea, despite the International Court of Justice (ICJ) verdict against it.

If today China has a negative residue of international goodwill, it has only itself to blame. Its emergence as a big economy and world player has not been peaceful.

The fact that China has used the BRICS forum to speak out for “free trade” only underscores its desperation. Further, recent reports have indicated that behind its brave façade of resisting US tariffs, China is deeply worried about the potential for many of its companies to file for bankruptcies.

It is indeed impossible to guess as to what is on President Trump’s mind in dealing with China. Is he playing hard ball to get China to the negotiating table for a better trade deal? Or is the US planning to bring China on its knees without firing a shot, given China’s flagrant violation of international law in the South China Sea? Or is it Trump’s larger game plan to cut unfriendly nations to size, given his recent experience in winning over North Korea without firing a shot.

Whichever way you look at it, China seems to be the obvious loser. It is only a matter of time before China will get to the negotiating table to work out a “reasonable agreement” very much in line with the EU example. Before long, normal trade will resume, albeit under circumstances that are lot more favorable to the US.

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Europe On A Slippery Slope

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The attack near the UK Parliament on March 22nd this year by 52-year-old Khalid Masood that killed four innocent people and injured over forty innocent people is a stark reminder of the deteriorating situation in not just UK, but in Europe at large. The continuing episodes of terror strikes in the streets of London, Paris, Brussels, Frankfurt and elsewhere in Europe are not the only burning issue haunting policy makers in Europe.

The continent seems to be firmly in the grip of multiple deep impacting forces that can change the face of Europe forever. The rise of Islamic terror, prolonged economic downturn, Euro-skepticism and the potential breakdown of relations with the US could push the continent over the edge. And quickly. This is cause for concern.

Some historical perspectives on Europe is in order. Europe has long set the global EU_unemploymentstandards for state welfare programs and has been a beacon of liberal thinking in a post-world-war-II world. Minimum wages, state funded health care, subsidized/ state funded education, open borders, ban on capital punishment – you name it and Europe was leading the way in liberal welfare economics and thought leadership.

But the developments in the recent past seem to have put the Europe of yore to shame. With calls for stopping immigration, border walls, restricting infra-Europe labor movement etc., it seems to be unmistakably altering course. As long as the economies were strong and resources were aplenty, European liberalism and altruism had thriven. Not anymore.

Unemployment in European Union has been running high for the last several years following the recession of 2008-2009. In fact, unemployment at some EU member nations like Spain, Greece, Italy – to mention just a few – have been at never seen historical highs.  With tanking economies, all surplus and generosity have vanished and now self-preservation seems to overshadow everything – from immigration, to economic and strategic policy decisions. Many of the recent social and political turbulence are symptoms of this deeper economic malaise. With this trend, in just a few years, Europe will slowly but unmistakable lose its sheen.

EU_terror.pngRadical Islamic terror is another menace that Europe is confronted with. Not a day passes without some report of an act of terror or police action against the terrorists. That the terrorists are able to strike periodically, despite the best counter-terror investments speaks of the magnitude of the problem. The following pic (courtesy: Express.co.uk) highlights the toll of the spread of the scourge of radical Islamic terror across the continent.

Radicalization and high unemployment among local youth as well as the recent influx of Muslim immigrants under the age of 35 has only acerbated the problem. The high incidence of crimes against women in Sweden and Germany has shocked all. Even Chancellor Angela Merkel of Germany has stressed the need for the immigrants to respect local laws. Merkel’s conservative Christian Democratic Union (CDU) party has, although belatedly, called for stricter rules for Islamic preachers and a ban on foreign funding of mosques.

Unfortunately, Europe cannot wish away terrorism. Experience of countries like India suggests that it is a war of attrition and states have to be vigilant over the long haul. Europe needs to remain united and share intelligence and expertise to win. However, recent statements by Prime Minister May suggests otherwise. She has linked the issue of terror cooperation with Brexit and has already sent alarm bells ringing in Brussels.

Thirdly, Europe has always been a lead player in projecting military power across the world. Together with the US, Europe has been part of the prime military and economic leadership – the so called ‘West’. The NATO alliance is central to this power manifestation that has successfully policed the world and determined strategic outcomes, regime changes and what have you.

With Trump in office in the US, the future of NATO is on the negotiating Table. Trump has openly called on Europe to pay its fair share of the cost of upkeep of the alliance. Although, Trump has since clarified that he supports NATO, it is anybody’s guess as to what the future will hold. But more important from Europe’s point of view is where it stands in the pecking order in the alliance. One thing seems to be certain. It will not be business as usual and Europe will have to pay to stay, at the very least.

The EU was again in the spotlight for the wrong reasons. Jean-Claude Juncker, President of the European Commission spoke of breaking up of the US. This unbelievably shocking statement came at a time when the US President Trump has openly stated his disdain for the Union and actively encouraged Britain’s exit. It is the worst diplomatic faux pas a senior functionary of that rank can commit.  You don’t mess with the world’s sole super power and get away with it. The fall out will be keenly watched.

Whichever way this is looked at, it is indeed the rock bottom of relations between two important and powerful bodies in the world. It is very difficult, under the current climate, to see improvement in relations between them. In this clash with the titan, there will be only one winner – and it is the mightier US. The loser in the bargain is obviously the EU. In the coming months, one can expect a frosty pond that will widen the chasm between the allies.

In another disturbing development, Turkey vent its anger against Denmark and Germany in a manner that has startled the diplomatic corps world over. Upset over the ban imposed by Denmark in preventing its ministers from meeting expatriate Turks, Turkey called them “racists” and “Nazis”. These epithets are rarely used and heard in diplomatic exchanges, whatever be the provocation.  What equally surprised observers was the almost effete response from Europe. The Europe of a decade ago, would have called for sanctions against Turkey at a minimum, if not military strikes. But that points to a weakening Europe and Turkey definitely seems to have sensed this.

Europe is a huge economy and a major military power – individually and collectively and most certainly may have the resilience to withstand choppy waters. But the deep impacting forces that are acting in confluence will indeed be a test of every fiber of strength and ingenuity the Union possesses. The biggest worry is the continuing weak economy that could prove to be the tipping point. Europe desperately needs help and must stay united to survive.

Every nation, alliance and trade grouping constantly faces problems. But it is the ability to resolve them that will determine their longevity. The deep impacting problems described above, by themselves, may not be an existential threat. But what is really disconcerting observers is the absence of statesmanship and the inability of European leaders to reach out -bilaterally and multilaterally – and hammer out policy prescriptions that will meet the changing aspirations of newer generation that has suddenly discovered its nationalistic pride. It is equally important to reach out across the pond to the US and partner the Trump administration, rather than confront it. But what we are hearing are shrill jingoistic dialects that create mores fissures and unite none.

While it is too early and almost churlish to predict the demise of the EU in the short term, it definitely does not seem to have a great future even beyond the medium term.

 
 

Britain’s Hard Brexit Strategy – Unraveling of the European Union?

Britain’s Hard Brexit Strategy – Unraveling of the European Union?

In a hard-hitting speech on the 17th of January 2017, British Prime Minister May clearly spelt out the country’s stand on Brexit. She made it clear that the UK will come out of the single market as well as the customs union and promised to build a truly “global Britain” that would reach out beyond Europe to build  “new partnerships with old friends and new allies”.  Mrs. May cited discontent over directives coming from Brussels that weakened local democracy, tensions over jurisdiction of the European Court of Justice, record immigration et al – all of which fueled the Brexit vote last year – as the driving factors for Britain’s decision.

Prime Minister May underscored Britain’s relationships across the world, specifically outside Europe.  She hinted that Britain would revitalize trade relations with erstwhile British colonial ecosystem of the mid-twentieth century and seek to regain its preeminence as a great trading nation. Specifically, she talked about the new trade negotiations underway with Australia, New Zealand and India to drive home the point that Britain will not be seriously impacted by Brexit.

Mrs. May also warned the EU against resorting to “punishing” the UK. This, she warned, would be calamitous for the Union.  Not surprisingly, the hard-hitting speech was meant for the local British constituency as well as the EU, particularly Germany and France who have advocated a tough line against Britain. Following last years’ referendum in Britain, there has been a lot of sound, fury and venting from Europe. Worried that other countries may follow Britain, several EU ministers had demanded punitive measures that would showcase to other nations that leaving the EU could be very expensive an affair.

The Prime Minister’s speech did not wave an olive branch as many observers had expected. It definitely looked more like a resolute leader preparing for war. Indeed, the Brits appear to have done their homework and are prepared to take big risks.

Two developments that have spawned the new-found confidence in PM May are the election of Donald Trump as the President of the US and the resilience of the British economy in that order.

The election of Donald J Trump as the US President has an obvious role in the tough stand on Brexit. Trump has been a vocal supporter of Brexit. He has also come out openly in support of the UK. His opposition to Transatlantic Trade Partnerships is also well known.

Secondly, the strong performance of the economy is a key factor that has emboldened PM May. Data on the performance of the British economy in 2016, and in particular post Brexit is indeed revealing. Most European nations, including Britain, continue to face a sluggish economy. But latest statistics released by the Office for National Statistics (ONS) shows that Brexit, by and large has had minimal impact on the UK. For example, unemployment was at a record low – in fact the lowest in a decade. Unemployment fell by 52,000 to 1.6 Million in the three months post Brexit. Per the ONS, unemployment hovered at 4.8% – a 11 year low. Average weekly earnings excluding bonuses increased by 2.7% compared to a year earlier. Overall employment rate hovered at an encouraging 74.5%

brexit_dataIn an update to its biannual World Outlook published on 16 January 2017, the International Monetary Fund (IMF) has forecast that the British economy will grow by 1.5 percent this year, 0.4 points more than expected in October, after 1.6 percent growth in 2016. The IMF says that  “domestic demand held up better than expected in the aftermath of the Brexit vote”. But it has revised its 2018 forecast for the UK down by 0.3 points to 1.4 percent growth.

I have maintained all along that Brexit will have negative consequences only in the short term and had disagreed with many pundits who talked about a collapse of international trade and globalization. Brexit is a trade dispute between the UK and the EU and projecting this as a global trade malaise is an exaggeration. It is a local contagion and will have minimal impact on world trade.

Britain has had a complicated relationship with the EU. The EU continues to be dominated by Germany and France giving it little say. The UK has always harbored an ambition to re-emerge as a world leader and has consistently sought to use every opportunity to project its military, political and economic leadership. Given this agenda, it would be only logical to not expect the UK to play second fiddle in the EU for long.

While the bravado may be applauded back at home, the UK is definitely taking a big risk. Non-EU exports for November 2016 stood at $18.6 billion while EU exports stood at $17.34 billion. On the other hand, non-EU imports stood at 24.2 billion while imports from EU stood at $28 billion. (Data: UK Trade Info). In other words, give or take,  50% of UK trade is with EU. This is a sizeable chunk and the UK will have to work hard to protect this trade.

I am of the view that human ingenuity and innovation will take the lead in crisis situations. I had already expressed this in my earlier piece. My guess is that a new trade deal will be carved out by the UK with its “old friends and new allies”. It is too early to predict an unraveling of the European Union. But suffice it to say it will no longer be the same again. But from what appears in my crystal ball, I can safely say a new trade order and tariff regime is in the offing.

The powerful economies of China and India have been bystanders to this awesome spectacle called “Brexit”. Britain seems to be working overtime to woo these two economic power houses. And rightly so as any future trade grouping and tariff regime can no longer ignore them.

For now, Brexit is not truly any exit. It is the ushering in of a new era in international trade.

 
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Posted by on January 20, 2017 in #Brexit, Economics, European Union

 

The hype over #Brexit

The newspapers, TV and internet sites are all about it. In case you woke up late and missed it all, we are talking about #BREXIT, a hashtag that was treBrxit2nding in twitter for long. The Brits voted in a referendum to leave the European Union or EU. Many have called it a devastating and shocking development that could plunge the world into economic chaos.  True – David Cameron the British Prime Minister plans to step down as stock markets around the world went into a cold shudder. The NASDAQ, DJI, S&P in the US reacted nervously and hit negative territory.

Donald Trump, the presumptive Republican Presidential nominee voiced his opinion too. He called it a victory for UK “since the people had taken back their country”.  However, other US leaders on both sides of the aisle were cautious in their response. If the US response was cautious, it had good reasons to be so. It reminded Washington and Capitol Hill of the fragility of the European Union and warned of a potential exodus by other states. An already weak Europe caught in the Brexit crisis, has stoked fears of a full blown European recession and similar consequences on the US economy.  Many European and world leaders worried that if a special US ally like UK could exit, there was no stopping other countries.

Markets in Europe and Asia also reacted negatively to the will of the Brits, it appeared. All this reaction was in response to the referendum result. The UK referendum itself was unprecedented. With the highest turnout since 1992, 72% came out and had their say with 51.9% voting to ‘Leave’ and 48.1% wanting to ‘Remain’. The referendum also showed the geographic split -Brits wanting to ‘Remain’ were concentrated in London, Ireland and Scotland areas whereas the hinterland was rooting to ‘Leave’.

To start with, Brexit itself is at the heart of a complex problem. Many have attributed it to the large influx of immigrants in the recent past as the trigger. In a bad economy, the influx has only aggravated the pressure and really tested the very concept of the ‘welfare state’. Per data released by the Britain’s Office of National Statistics net migration to the UK reached a record 330,000 in the year ending March 2015 while the size of the foreign-born population reached 8,277,000. Many have opined that this could stress the government and infrastructure. For example, the net influx would put pressure on an already aging UK water supply system, not to mention the increase in students enrolled per class in the primary schools.BRexit_Migration.JPG

The referendum also had important lessons for other European nations like – France, Germany, Denmark where nationalist movements have gained strength in the recent past as a reaction to the flood of immigrants.

It may be hard for many to imagine that a net influx of 330,000 migrants could tip the scales in a developed economy like UK.  That number may be small by the standards of the US or other large population centers elsewhere in the world. But it has to be conceded that for a small geography like the UK, these numbers are significant. This issue, has been the last straw on the camel’s back and has created the chasm that has polarized the UK. ‘Remain’ activists have accused the ‘Leave’ activists of xenophobia which in turn has only fueled the growing gap. But the truth is that a long running recession leading to near desperate economic conditions provided the fuel and immigration the spark to ignite the Brexit bomb.

Many observers have raised fears of a recession in Europe and potentially in the US too as a direct consequence of Brexit. The nervousness in stock markets around the world has only accentuated this fear. Some have even predicted the end of globalization and a collapse of international trade.  Others have pointed out that the falling UK currency – the pound – has its own benefits like making exports cheaper and attracting more tourists to the UK. All this may be true in the short run. But I will not bet on the fall of the pound over the long run and hence these benefits may be short lived.

Will Brexit spawn these severe consequences as many fear?  For sure, opinions are deeply divided. First off, much of the fears of a disaster are impulsive reactions and as often happens in such cases, are exaggerated. The stock and currency markets will stabilize soon. Many of the uncertainties we fear today are over the short term.

Truth is that global trade is in the throes of reinventing itself. Brexit, in all probability, portents to the emergence of a new trade order and tariff regime. The crisis itself can catalyze the emergence of new trading paradigms or partnerships – bilateral as well as multilateral – that more accurately reflect the global economic and trade realities, rather than proximity, political and militaristic calculations. There are historical parallels and the emergence of EU itself was a product of such negotiations.  In this context, it is worth pointing out that many of the extant trade blocks and treaties as well as those in the works exclude some heavy weight economies like India and China and hence by definition are not representative of economic and trade realities. For example, Brexit could engender a new trading block that includes UK, Japan, Germany and India sooner than many have imagined. Any permutation of economies that are bound by mutually beneficial trade could emerge.

When we step back and take a 30,000 feet view of the Brexit crisis, we see one country has filed for divorce from a trade alliance. The UK is not the United States in terms of geography or size of its economy. Both the EU as well as UK will continue to trade with each other, albeit in a different tariff regime, and with the rest of the world. Hence painting a doomsday scenario is untenable and devalues human ingenuity and the genius to execute profitable global trade.

The emerging economies of Asia, specifically India and China, will continue to trade with UK and EU. So by no means this is the end of globalization or global trade. In fact, the world will suck up Brexit and move on, faster than many have imagined. Nor will the world go into recession.

Having said that, in all probability, UK businesses in the short to medium term will suffer adverse economic and trade consequences. The Bank of England may lose some serious treasure defending the pound.  But human ingenuity and survival instincts will prevail and new beneficial bilateral trade deals will be worked out.

 
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Posted by on June 25, 2016 in #Brexit, Economics, European Union, Trade

 

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