There are many problems with trade wars. The unintended consequences are in some ways most alarming. Consequences never anticipated, never thought through, taking many by surprise when they happen.
Take Maine for example. Maine harvests more lobsters than any other US state, more than any Canadian province for that matter. The harvest last year was valued at $450 million dollars. The softer shell Maine lobsters sell for several dollars less than their Northern rivals. It is a price sensitive market.
China is a major market accounting for 25% of total output last year. It was a good year. Exports to China were $137 million, up from $52 million three years ago.
Not for much longer. Following the announcement of a 25% tariff on Chinese products, Beijing has retaliated with an additional 25% tariff on seafood from the US. Sales will be hit. Dealers are considering relocation north of the border. American jobs will be lost as a result of the Trump protectionist measures. This week GM warned of a "Smaller GM" if trade wars escalate. Harley Davidson, has announced plans to relocate some production out of the US to protect sales. There are many problems with trade wars, job losses included.
"There are many problems with trade wars ... job losses included"
Don't expect an easing of trade tensions anytime soon. Trump has now declared the EU, NATO and WTO as Enemies of the State. Tensions are rising in the White House. Lawrence Kudlow, Trump's chief economic advisor has broken with protocol. He expressed the hope, the Fed ‘will move very slowly’ on raising interest rates. The White House, as a rule, refrains from comments on monetary policy.
The Fed is unlikely to listen. Growth in the first quarter of the year was up by 2.8% year on year. Inflation is back to target at 2%. The Fed is set to hike rates at least twice if not three times this year. Growth will near 3% for the year as a whole. Borrowing is increasing as a result of Trump's spending spree. The deficit is set to rise to over $800 billion in the current year and $1 trillion in 2019. Tax cuts will add an additional $1 trillion dollars over the next ten years. Economic chaos will be the lasting legacy for the economics of Donald Trump ... not just in the USA but around the world ...
May Day, May Day, May Day ...
In the UK, Andy Haldane Chief Economist at the Bank of England explained why he voted for a rate rise in the June MPC meeting. It was because of the World Cup! Excellent. So much for a Sheffield BA in economics and a post grad from Warwick. Football is the new "Forward Guidance". Sterling rallied on the news. How Forex markets will soar if England win the world cup. Football may be coming home but your mortgage is set to rise. You may have to sell the new TV and barbecue to makes ends meet.
Andy Haldane : Football is the new Forward Guidance ...
Heads were meeting in Europe this week. The European leaders were meeting to discuss issues of migration and of course Brexit. After all night talks on migration, the EU heads of government spent less than 60 seconds to approve their joint approach on the UK's exit. "Less than a minute" to confirm the stance on Brexit negotiations". Done in 60 seconds. Donald Tusk warned time is running out. "This is the last call to lay the cards on the table". It doesn't bode well. So many cards ... so many packs ... so little time ...
On Friday the ONS revealed the latest estimate of growth in the first quarter. Output increased by 1.1% year on year. Construction was not as bad as first estimated. Manufacturing increased by 2.5%. Service sector growth increased by 1.2%. Leisure spending was up by less than 1%. Government spending was flat. Most analysts now expect growth of just 1.4% this year. The prospects for a rate rise remain finely balanced. Yes even if England win the World Cup. The odds are 8:1 for and England win, evens favorites for a rate rise in August or November ...
The Hit Man Cometh ... makes a move on Pharma
Amazon made a move on the pharmacy market this week The $1 billion dollar acquisition of on line start up PillPack had rivals reaching for the headache tablets.
Panic attacks ensued as almost $18 billion dollars was wiped off the valuations of eight companies within hours of the announcement. Retailers and distributors were hit. Walgreens Boots Alliance and Walmarts led the falls. Walmarts, the under bidder in the PillPack deal lost $3 billion in market cap.
Amazon also announced it would recruit "local entrepreneurs" to handle the "last mile" challenge. A move designed to take business away from established carriers, Fedex and UPS shares fell on the news. $3 billion again the deficit on the day. One word from Bezos and markets tremble, share prices tumble.
Back in the UK, Nissan joined the chorus of car manufacturers concerned about life post Brexit. The UK faces a shock to output in the manufacturing sector of some 10% of total output in the years ahead. It still hasn't recovered from the last recession. According to the latest data from the ONS, output in April was down by 3% compared with the peak in the first quarter of 2008. As a punch drunk fighter returning to the fray, Osborne's dream of the march of the makers rebuilding the workshop of the world, faces another knock out blow ...
That's all for this week, we will be back next week, with more economics ! Have a great weekend.
When project fear becomes the reality we feared, it's time to wake up and smell the diesel. Airbus will be the first big manufacturer to withdraw investment from the UK. BMW will surely follow. Hard Brexit, outside of the UK, will seriously damage manufacturing and investment in Britain.
As we have long explained, Airbus, Motor, Big Pharma and Financials will be badly hit. Textiles, farming and further education will be badly bruised.
According to the Telegraph today, Boris Johnson's response is "F***" Business ... and they will. This incredible inability to face the reality of isolated life outside the EU will be seriously damaging to growth, jobs, manufacturing, trade and the balance of payments. Airbus is preparing to abandon plans to build wings in Britain and move production to Europe, China or the U.S.A.
"In the absence of clarity, we have to assume the worst case scenario", Tom Williams CEO of Airbus, told the Times this week. "It is the dawning realization, we now have to get on with it."
"The dawning realization we now have to get on with it"
In the UK Airbus employs 14,000 people directly, plus 110,000 indirectly. The company is already stockpiling components ahead of potential major disruption. Parallel manufacturing facilities will be established. China must be a firm favourite. The option, to establish a strong position in South East Asia, will become irresistible.
Airbus has factories in North Wales, Stevenage, Portsmouth, Bristol and Broughton. The impact of closure on the Broughton community would be devastating. according to Gabriella Swerling, in the Times today,
"Half the people who work at Broughton Airbus voted to leave the EU. They were not expecting this outcome. They voted because of immigration and they did not think beyond that." Well there is still chance ...
BMW followed Airbus this week, with a warning about the consequences of Brexit uncertainty. UK boss Ian Robertson argues clarity is needed by the end of the summer, or investment decisions will be at risk. BMW employs 8,000 in and around the Oxford area.
Trump threatened the EU with 20% tariffs on cars this week. The President has a vision of "No Mercs in Manhattan" and "No BMWs on Broadway". Not sure why. A legitimate demand for equal tariffs seems fair but misses the point. The trade growth future for the EU is with China and South East Asia, not with the USA. An ageing superpower with a penchant for introverted myopia does not offer the best deal for the future ...
One day I'll Fly Away ...
One day I'll fly away, leave your love to yesterday ...
The MPC voted to keep rates on hold this week. Ian McCafferty and Michael Saunders voted once again to hike rates. In this they were joined by Chief Economist, Andy Haldane. Which came as a slight surprise.
Andy has been arguing the need for Emotional Intelligence of late, EQ versus IQ. “The future could see a world of work in which EQ rivals IQ for skill supremacy,” "Students may be better off developing emotional intelligence rather than cognitive skills to prepare for a future of work in which they will be competing against robots", the Bank of England’s chief economist has said.
Emotional, yes, it nearly brought me to tears ... tears of laughter of course. The Chief Economist must have a clause in his contract to come up with at least one whacky idea every quarter. If Labour get into power, the Bank is to be charged with responsibility to improve productivity in the economy. Let's hope, this is one parameter left untouched.
"Andy Haldane becomes a hawk ..."
Back to the economics, Sterling rallied against the Dollar but still ended lower in the week. Ten year gilt rates were unmoved by the decision. Markets remain unconvinced rates will rise in August. The preliminary estimates for growth in the second quarter may provide some excitement ... Will rates rise in August? Our forward guidance is ... no idea ...
Borrowing falls, One day I'll fly away ...
The Chancellor explained this week, despite evidence to the contrary, the Treasury is not "Against Brexit". Neither is it a great advocate, the potential damage to the economy is becoming more evident.
It is a great advocate, however, of "fiscal frugal". Borrowing for the first two months of the year fell by almost £4 billion, compared to prior year. Borrowing in May was just £5 billion compared to £7 billion in 2017. The Chancellor is on track to reduce borrowing to just £30 billion in the current financial year compared to £40 billion in 2017/18.
"Borrowing will fall to £30 billion this year"
There is a growing suspicion, the growth figures are understated. Revnues and jobs suggest the economy is growing much faster than official figures suggest.The political pressures are building for a little more largesse.
Austerity is dead. More money for the NHS will trump the Labour move to grab the high moral ground. More for the police force and defense, more for welfare and social services will follow. Taxes may rise, or so Hammond may threaten. Waving the Red Box in the air, will not impress the back benchers with such a thin majority in the House ...
That's all for this week, we will be back next week, with more economics !
Have a great weekend.
It has been a strange week. Trump left Quebec with G7 agreement in hand, destined for Singapore on Air Force One. Trudeau made his statement, he would not be pushed around by the USA. The "Angel" flight nearly turned around. The President threw a tantrum and ordered staff in Canada not to sign the joint statement. War was declared, tariffs were pressed on G7 allies. If only Putin had been there. It could have all been so different. Where are dictators when you need them?
On to Singapore to find one and meet with Kim Jong-un. Trump arrived one day ahead of talks. "Why can't we just get on with it now!", the impatient Trump declared. "It will only take a few minutes to sort this out". Staff explained there was still prep to do. More importantly, world press coverage would be maximized by waiting until the allotted time. The delay was assured. You just have to know Trump's push points to get the right decision.
"Great beaches and great spots to build condos"
When Donald met with Kim, peace was declared in the peninsula. They have great beaches and great spots to build condos. Denuclearization in the province. The US would stop bomb runs on the DMZ. US War Games would end. The bombers were flying in from Guam in a twelve hour round trip. Expensive! Peace and parsimony. Uncle Sam saves money ... and the world need no longer need to quiver with fear about a nuclear holocaust.
Trump extolled the virtues of Kim Jong-un. A "very talented man", a "smart man" and a very good negotiator". "When he speaks, people sit up and pay attention". They also clap a lot. Better to keep you hands in the air for risk of being shot or hit with a short range missile.
Trump loves Kim, true. " He even gave me his phone number" "I said "Call me if you have any difficulties". The calls came but not from the North. The decision to end the war games left South Korea and Japan a little confused. Yep it even came as a surprise to the US military.
The deal with Kim was criticized by many and praised by few. No nukes and the prospects of US troop withdrawal. They can now be sent to the Mexican border to do a proper job, splitting familes. It's a win win. Trump will be handed the peace prize, Beijing will grasp the real prize. It's a good week for peace in the peninsula and a great year for Chinese hegemony in South East Asia ...
Trade Wars with the West ...
Peace in the East, trade war with the West. Trump will talk with Nato next month. "Pay up or we ship out" will be the message. It could be a war zone. For the moment, Trump is marching to a trade war on every front, with the imposition of tariffs on Steel, Aluminium and other things.
The US slapped tariffs on $50 billion of goods from China including semi conductors, machinery and plastics. Excluded from the initial list were flat screen TVs, a concession ahead of the world cup presumably.
The Chinese responded in kind with super charges on farm products, seafood, SUVs and crude oil. Soybeans, pork, chicken and seafood were chosen to hit states supporting Trump. Pork barrel politics takes another twist with Trump in the White House.
"Soybeans, pork, chicken and seafood were chosen to hit Trump states".
China issued a warning to US firms to buckle up! US companies with a foothold in the mainland including IBM and Qualcomm received strong advice to lobby the Trump administration to avoid a trade war. Boeing may be badly hit. More than 25% of world wide revenues were derived from exports to China. It will bet worse before it gets better. Pork and Pickups are already piling up at ports …
The IMF looks on ...
The Fed hiked rates this week with a 25 basis points increase this month and the promise of two more rate rises this year. US base rates could end the year at 2.4%, with 3.5% in prospect by 2020 according to the Blue Dot forecast.
Forecasts for growth this year were pushed higher. The US economy could grow by 3% in 2018. The unemployment rate will fall to 3.6%. Inflation may nudge over the 2% target rate.
The IMP warned this week of the danger of recession in the US, or a significant slowdown in the years ahead. Christine Lagarde is worried about the impact of Trump's economic plan. Spending will increase central government borrowing and debt, with an impact on inflation and the trade deficit. The boost to growth will be short lived. Needless to say the IMF is also worried about the looming trade war ...
"The IMF looks on and warns of rising debt and inflation"
In the UK there was a raft of data released this week, on manufacturing, construction, jobs, earnings, retail sales, inflation and trade. Our monthly review to be released on Monday will provide a full update.
That's all for this week, we will be back next week, with some economics perhaps!
Have a great weekend.
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Away days ... what's next in Quebec ...
The G7 meet in Quebec this week-end. A difficult long week-end in the Fairmont Manoir Richelieu will follow. An apt location? Perhaps. Cardinal Richelieu was "First Minister" in the Government of Louis XIII.
Appointed as foreign minister in 1616, he survived in office until his death in 1642. Richelieu sought to consolidate royal power, crush domestic dissonance and develop French hegemony in central Europe, largely at the expense of the Hapsburg dynasty.
Political intrigue was of second nature. Religious dogma would accommodate alliances with Protestant rulers. Domestic enemies were confounded by the "Jour des Jupes" "Day of the Dupes". A day in November 1630 in which the enemies of Cardinal Richelieu mistakenly believed that they had succeeded in persuading Louis XIII, to dismiss Richelieu from power.
So the G7 leaders meet in Charlevoix for Trump's "Day of the Dupes". Trump seeks to consolidate his perceived royal power, crush international dissonance and to develop Trump hegemony in international affairs. "Surreal Politik" replaces "Real Politesse" as domestic and foreign advisers alike are confounded by the twists and turn of Trump's twitter diplomacy.
"G7 in Canada ... Day of the Dupes"
Tariffs on allies, tough talk on trade. Trump arrives in Quebec complaining about Canadian dairy taxes, blaming Trudeau for burning down the White House (1824) and wishing Putin was here (2018), to rejoin the club.
Can't stay long, "I have a world to run" says Trump. Time to shoot off to Singapore to bring about peace
in Korea and a Trump Tower Hotel in Pyongyang. No need to prep. "I can just wing it". May be a few notes on Air Force One, and hopefully Fox news will run a "What everyone should know about North Korea" feature before landing.
Trump complains about the 270% tariffs on Canadian dairy imports and the 33% tariff on dairy imports into the EU. How the 10% tariff on EU car imports contrasts with the 2.5% tariffs on EU car imports into the U.S. He talks of further tariffs if trade talks are not successful; Of a day when Manhattan is free of Mercedes. Yet late Friday, Trump hints of a complete abolition of tariffs in North America and Europe completely.
No one but Trump knows what happens next. This includes the State Department and the White House staff. First create confusion, grab the attention and then close the deal. The "Day of the Dupes" is taking place. There are nuggets of truth to what Trump says about trade as the Washington Post explains today. The EU must make some concessions, if a trade war is to be averted. No one, including Trump wants a trade war …
Away Days ... Cabinet at Chequers ...
In the UK, no one wants a trade war, especially in cabinet. It just goes with the territory. David Davies came close to resigning this week. All to do with an Irish backstop to max fac or CU Plus apparently.
No need to resign over something Michel Barnier has made clear the EU will not accept. Theresa May compromised with an end date to the back stop. This seemed to appease the Secretary of State for Leaving the EU, not to leave Cabinet for the moment.
Boris Johnson was nearly "asked to leave". He accused the Treasury of being a hot bed of remainers, "The Heart of Remain", a quivering wreck when it comes to identifying the economic opportunities post Brexit. So much for Collective Cabinet Responsibility. Business is confused and no wonder.
Business leaders met with Theresa May this week. With just ten months before Britain leaves the EU, Government has still not made clear, what it wants to achieve. Business is becoming impatient and more nervous. This week the Dutch Government advised local firms to reduce purchases from the UK. The UK could face a ban on car exports to the European Union. The SMMT warned the proportion of domestic content in UK car production was more like 25%, well below any rules of origin threshold.
"Cabinet at Chequers ... Another Day of the Dupes".
The Prime Minister will hold a crunch summit at Chequers next month to hammer out detailed plans for the UK’s future partnership with the EU. Theresa May has promised a paper to be published on the basis of the planned deal. Away day at Chequers to thrash out the deal? More like another "Day of the Dupes". Brexiteers and remainers will be convinced, each of the other, they have been removed from power. There is no real solution or compromise possible on the entrenched positions either side of the deal …
Away Days ... In Singapore ...
In Pyongyang. Kim Jong-un is prepping for the summit meeting with Trump. The Chinese will provide the auto cue for a carefully scripted ask. The prize is huge for the North Korean leader and for Korea specifically.
Peace in the Peninsula, denuclearization in the North. The removal of US troops in the South and the abolition of sanctions specifically. A move to unification with peace guaranteed by China and the US. No need to involve the Russians. In South Korea a population of 50 million enjoys GDP wealth of $1.4 trillion dollars. It is the 11th largest economy in the world.
In the South a population of 25 million struggles with GDP wealth of $30 billion dollars. A unified Korea with a target of economic equalization within ten years would push Korea into the top five economies in the world.
The prize of peace and unification is much greater than Macdonald's, KFC and a Trump Tower in Pyongyang. Trump may win the Nobel peace prize. President Xi has his eye on a much larger peace prize. The Chinese would be the real winners in South East Asia. The enlarged trading block would surpass the economic strength of Europe and North America. Truly global Britain outside of the EU and the three largest trading blocks in the world would be a mere sprat in an EU fishing net in comparison.
"Peace in Pyongyang ... the Chinese will be the real winners"
That's all for this week, we will be back next week, with some economics perhaps!
Have a great weekend.
Trump acted this week to set up tariffs on steel and aluminum. "It's not a trade war, it's a trade discussion", explained White House Economic Adviser Larry Kudlow. As in any chat process, first you have to grab the attention, I guess.
A 25% hike on imported steel is set to hit trade with Canada, Mexico, Brazil and South Korea specifically. Friend and foe, ally and enemy, all to be treated much the same. There is no ryhme or reason in Trump trade policy and certainly no alignment with foreign policy.
The US is the largest importer of steel in the world. In 2017, the US imported 35 million metric tonnes of steel, valued at around $30 billion dollars. Import penetration is around 33%. The largest exporters to the US were Canada (17%), Brazil (14%) , South Korea (10%) and Mexico (9%). NAFTA is under threat. The South Koreans and Japan (4%), must be baffled by Uncle Sam's tough love, at such a delicate time of nuanced talks with Pyongyang.
Russia (8%) and Turkey (6%) are next in line. Within the EU, Germany is the largest exporter to the US, accounting for 4% of overall imports. Despite all the fears of Chinese over capacity, imports into the USA are just 2% of total.
A 10% tariff was also imposed on aluminum products. Canada and Mexico are in the top five importers along with China and Russia. Can Trump really win a trade war? China, Japan, Germany, France and India are the largest importers of US white metal. Retaliatory tariffs will follow and damage exports from the US. Trade wars really are a zero sum game.
In the absence of domestic substitution, tariffs are inflationary. US domestic steel costs are up by 37% this year. The US faces the threat of retaliation. The White House is keen to defuse the tension. The day after Trump slapped tariffs on Canada, Mexico and the EU, Larry Kudlow framed the tenor or "trade talks between the US and other countries, as more of a family disagreement.
"No trade war ... more of a family disagreement"
Within the EU, the reaction was swift. "America First will be confronted by a Europe United". Europe United with the UK on the bench, perhaps. Cecilia Malmström the European trade commissioner claimed the US was playing a "dangerous game". There would be consequences for American customers. The global recovery could be damaged. Levi Jeans will cost more!
The EU has sent a formal complaint to the WTO. Retaliatory tariffs are likely to follow on Harley Davidson, Levi Jeans and Bourbon Whiskey.
"No easy riders for US exports".
No easy riders for US exports. The EU, along with China will target products and produce from the areas politically sensitive in the up coming mid term elections. Stock up on corn, orange juice and soya beans. It could get rough in the Mid West and the rust belt.
On balance, it has been a good week for Trump. The talks with Kim Jong-un are back on in Singapore. Tough issues on the agenda. Denuclearisation, plus the Americans have to find a way to pay for the North Korean trip. Staying at The Fullerton, a "magnificent neoclassical hotel on the mouth of the Singapore river", the cost of $6,000 dollars per night would rapidly exhaust the regimes foreign currency reserves.
No doubt the talks won't last too long. Kim Yong-un's security retinue would rack up $ one million per night alone! Peace in our time? Perhaps but probably not on the 12th June.
Good news on jobs in the USA. The unemployment rate fell to 3.8% in May. The economy created a further 233,000 jobs in the month. President Trump was unable to conceal his excitement. Breaking with protocol, established over many decades by Republicans and Democrats alike, Trump couldn't resist the tweet.
"Looking forward to seeing the employment numbers at 8:30 this morning"
The message was timed at 7:21 a.m. Within seconds of Trump's post, the dollar strengthened and Treasury yields rose. The jobs data will force the Fed to act in June. A rate rise is now inevitable this month. Unemployment at 3.8%, pay rising at 2.7%, inflation on the increase, expect at least one more increase, if not two, before the end of the year.
In the UK, the steel industry is ready for the worst. Britain exports around 350,000 tonnes of steel to the US, worth around £360 million. America is the second biggest export market. The EU is the largest.
Fears of a slowdown in US demand are overshadowed by the threat of Turkish exports, forced to find markets elsewhere. Turkish exports to the US, were worth around $1.5 billion dollars in 2017. Exports into the EU were up significantly in 2016. The UK fears more will come, if entry is denied into the USA.
The UK is hoping high value steel products will not be substituted any time soon in the US. The EU is taking a hard line with the Trump administration. An EU united will slam the "Easy Rider" products along with cranberrries, orange juice and American pie.
Theresa May adopted a more cautious line. Expressing "disappointment" with the "unjustified" decision to impose tariffs on steel and aluminum. Liam Fox was in agreement with the more cautious approach. A play on the special relationship perhaps ...
"Dear Donald, Liam and I are very disappointed with the decision to ..."
P.S. "Don't forget we have a special relationship" Love Theresa. Liam sends his regards.
Yep that should do it. That's all for this week, have a great weekend.
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.