December 15, 2019

Initial China Trade Deal Defuses Tensions, but U.S. Still Has Concerns

The pact broke ground politically, gaining the support of Democratic lawmakers and unions that have long derided existing trade agreements and perhaps forging a new bipartisan consensus on trade. But as with the China deal, the United-States-Mexico-Canada Agreement is more a modest improvement than a transformative overhaul to the economy.

In a note to clients, Gregory Daco, an economist at Oxford Economics, called the net economic benefits of U.S.M.C.A. “negligible,” but praised the deal for preventing a potential hit to the economy. The president had threatened to withdraw from NAFTA entirely if his trade pact was not advanced.

“The principal commercial benefit of both agreements appears to be the avoidance of what would have been self-inflicted harm — tariff escalation with China and termination of NAFTA,” said Michael J. Smart, a managing director at Rock Creek Global Advisors, an advisory firm.

The China deal also averts what would have been an economically damaging escalation of the trade war before the holiday season and the 2020 campaign. Mr. Trump had planned to slap 15 percent tariffs on shoes, laptops, toys and other goods on Sunday — a move that would have resulted in the United States taxing nearly Chinese import and likely inciting more retaliation from Beijing.

The United States has now collected more than $39 billion from the tariffs placed on $360 billion worth of Chinese goods, which Mr. Trump says China pays but economists say falls heavily on American businesses and consumers.

Robert Lighthizer, Mr. Trump’s top trade negotiator and one of the administration’s biggest China hawks, said in a briefing that China had made substantial commitments to increase purchases of American agriculture, energy, manufacturing and services products.

China’s farm purchases are expected to grow to at least $40 billion annually over a period of two years, while total exports of food, energy, manufactured goods and services to China will increase by a total of $200 billion, he said. The deal would increase protections for American intellectual property and end China’s practice of forcing American companies to transfer technology to Chinese partners. It would also open Chinese markets for financial services and American exports of beef, poultry, seafood, infant formula and pet food. Tariffs could go back in place if China fails to live up to its commitments, he said.

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Brexit’s Advance Opens a New Trade Era

President Trump has put stock in the unrivaled scale of the American economy in seeking favorable trading arrangements. In his calculus, the United States boasts the advantage in any bilateral trade negotiations and can tilt the rules toward American interests.

This was the logic that prompted Mr. Trump to renounce American participation in the Trans-Pacific Partnership, a trade bloc spanning a dozen countries. It was a project pursued by his immediate predecessor, President Barack Obama, in part to press China to address longstanding complaints that it subsidized key industries, doled out credit to favored companies and manipulated the value of its currency to gain advantage in world markets.

In taking on China, the Obama administration employed the multilateralist mind-set that had guided American policy since the end of World War II. The Pacific trading bloc would set rules on investment, labor and environmental standards. Its members would profit through growing trade, and China would want in. To gain access, China would be forced to adopt the bloc’s rules.

But in Trumpian thinking, multilateralism is for suckers. Shortly after he was sworn in, declaring as his credo “America First,” Mr. Trump ditched the Pacific bloc and weaponized the American market: If China wanted access to the 327 million consumers in the richest country on earth, it would have to buy more American goods and play fair.

On Friday, Mr. Trump cited the preliminary agreement as evidence that his strategy was working. The United States would sharply reduce the tariffs it had affixed to Chinese goods, while China promised to buy more American farm products and respect intellectual property. Mr. Trump called it “an amazing deal for all.”

But economists said the announcement of new farm purchases reflected goods that China was already buying. Even as the scrapping of the next wave of tariffs weighed as positive for the global economy, few were proclaiming the advent of enduring peace. The United States and China have descended into such an adversarial state that they are likely to continue seeking alternatives to exchanging goods and investment. Companies that make goods in China will face pressure to explore other countries, posing disruption to the global supply chain.

China’s leaders have come to construe trade hostilities as part of an American bullying campaign engineered to suppress their national aspirations and deny the country its rightful place as a superpower. Nationalist sentiments and security concerns have become intertwined with trade policy, complicating the pursuit of a final deal.

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Brexit Once Meant a Weaker British Pound, but Not Anymore

The pound has gained roughly 2 percent against the dollar since Parliament voted on Oct. 29 to hold a new election.

A stronger pound can be a bad thing for British companies, making it harder for them to sell their goods in the eurozone and beyond and diluting the profits they bring back from overseas. Nonetheless, British markets have also risen since the campaign began, reflecting the prospect of a Conservative victory that would not only reduce the chances of a no-deal Brexit but also avoid the nationalization ambitions of the opposition Labour Party.

The FTSE 250 is up more than 3 percent over that period, pushing the benchmark index of British stocks to a nearly 19 percent gain for the year.

Yields on government bonds have also risen slightly, suggesting that investors are starting to move away from safer investments. Bond yields rise when bond prices fall, and vice versa.

“The market has become less worked up about the chance of a Labour government, and also some hope that a good-sized Conservative majority could kind of lift some Brexit uncertainty,” Andrew Wishart, U.K. economist for Capital Economics, a consulting firm, said before the voting.

Such signals have been a welcome development for the British economy, which has slowed since the 2016 referendum. Amid weak business investment and consumer confidence, economic growth fell to a 1 percent annual rate in the third quarter, the slowest pace in about a decade.

While the pound rallied in recent weeks, it is roughly 10 percent lower than it was immediately before the 2016 referendum. Markets were unprepared for the result, and in the hours after the vote the pound plummeted by about 10 percent. That is the equivalent of an earthquake in the normally subdued foreign-exchange markets. Daily moves of 1 percent are considered quite large for the currencies of rich nations like Britain.

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U.S. Settles on Outline of Elusive China Trade Deal

On Thursday, three powerful Senate Democrats, including Chuck Schumer of New York, sent a letter to Mr. Trump, warning that any first-phase deal that did not include meaningful changes to the way China structured its economy would be “a severe and unacceptable loss for the American people.”

Some mocked the president for solving a crisis of his own making.

“China Phase-1 deal is the equivalent of a gunman, who had taken hostages, surrendering to authorities, with no one killed, but his manifesto never published,” Jorge Guajardo, the former Mexican ambassador to China, tweeted. “No harm done to anyone, back to normalcy, madman contained, but the shopping mall lost a lot a customers during standoff.”

For a year and a half, Mr. Trump has alternated between praising China and ratcheting up tariffs on the country as he tried to press Beijing for trade concessions. In October, Mr. Trump announced that the United States and China had reached an agreement in principle on the first phase of a trade deal. But in the weeks since, a concrete agreement proved elusive as the two countries grappled over its precise terms.

Chinese negotiators pushed their American counterparts to remove as many of the existing tariffs as possible, while the Trump administration pressed China to make more purchases of soybeans, poultry and other goods to help relieve the pressure the trade war had put on American farmers. Mr. Trump also wants China to buy more American products to help narrow the trade gap between what the United States sells to China and what it imports.

To ensure that China keeps its commitments, the Trump administration has insisted on periodic reviews, as well as an agreement that China’s agricultural purchases would not drop below a certain amount. If China violates the terms of the agreement, tariffs that the Trump administration had removed would snap back into place.

China has been willing to discuss purchases of American agriculture, especially since a disease has devastated its swine population and led to spiraling pork prices. But in previous discussions, Chinese negotiators had pushed back against promising set purchase amounts far into the future, saying such an arrangement could anger its trading partners and violate its commitment to the World Trade Organization to treat all members equally.

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A Recession Hasn’t Arrived (Yet). Here’s Where You’ll See It First.

What it was saying in July: Partly cloudy.

What it is saying now: Mostly cloudy.

Discussion: With manufacturing in a slump and business investment falling, the economy is relying more than ever on consumers to keep the expansion on track. So it is a worrying sign that consumer sentiment is the only indicator on this list that has grown unambiguously gloomier since July.

Consumers are not panicking by any means: Confidence is still relatively high by historical standards. But it has fallen over the past year, which has historically been an early warning sign of an economic slowdown. The Conference Board’s confidence measure was down 8 percent in December from a year earlier; economists at Morgan Stanley have found that a 15 percent drop is a reliable predictor of a recession. (Another closely watched measure, from the University of Michigan is also down but not by as much.)

The indicators above have historically been among the most reliable canaries in the economic coal mine. But there are plenty of other measures that warrant attention. Here are four that I highlighted in July:

Temporary staffing levels: Companies hire and fire temp workers quickly in response to fluctuations in demand, making temporary staffing a good measure of business sentiment. Employment levels fell for three straight months in the spring and summer, but have since rebounded.

The quit rate: The rate at which workers voluntarily leave their jobs has been holding steady at a near-record level for more than a year. That is a sign of confidence, since people are generally reluctant to quit if they are worried about the economy.

Residential building permits: Housing construction has picked up in recent months, buoyed by low interest rates. But while housing has historically been an important indicator of the health of the economy, the sector is smaller today than in the past, so it may be less meaningful as an indicator.

Auto sales: The picture here has not changed much since the summer — or since 2016, for that matter. Car sales have been holding more or less steady for years.

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Natural Gas Boom Fizzles as a U.S. Glut Sinks Profits

Gas producers have struggled in part because New York and other Northeastern states have made it harder to build pipelines to transport the fuel. But analysts point to a far bigger problem: The industry is just producing too much gas. In some oil fields where gas bubbles to the surface with crude, it has become cheaper for producers to burn the gas than gather it and send it to market.

“Natural gas is in the tank,” said Patrick Montalban, president of Montalban Oil Gas Operations. “We’re looking at a project right now of over 200 wells in Montana that are for sale, but they are uneconomic. Not only are the wells uneconomic, the gathering of the gas is uneconomic.”

American natural gas inventories are about 19 percent higher than a year ago, according to the Energy Department. The government estimates that the average spot price for natural gas will be $2.45 per million British thermal units in 2020, about 14 cents below this year’s average. At its peak in 2008, the benchmark price topped $10 per million British thermal units.

Exports of liquefied natural gas are rising sharply, but future profits may be meager. SP Global Platts warned this week that European gas prices could slide next year, reducing how much money United States exporters can earn.

Moody’s Investor Service predicted that several gas exploration and production companies active in the Marcellus will face heightened financial risks over the next three years because of the debt they have accumulated. Between 2021 and 2023, companies such as Antero Resources, CNX Resources, EQT and Gulfport Energy will need to refinance between $3.5 billion and $4 billion in debt. All told, the producers have to repay lenders more than $12 billion during that period.

“If low natural gas prices persist beyond 2020,” the Moody’s report said, “companies may need to reduce debt to maintain compliance with financial covenants or amend covenant levels.”

Many smaller companies have sought bankruptcy protection or indicated that they could go out of business. Shares of Chesapeake Energy, the Oklahoma-based champion of shale gas drilling, traded at more than $60 in 2008. Now they sell for less than a dollar. Chesapeake warned in a recent securities filing that if prices remained low and it was unable to comply with the conditions of its debt, “there is substantial doubt about our ability to continue as a going concern.”

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China’s Companies Binged on Debt. Now They Can’t Pay the Bill.

Two years ago, officials began to tackle the mess. They clamped down on an unruly shadow banking sector, where murky platforms linked borrowers with lenders willing to hand over money in exchange for big returns. They allowed more bankruptcies, hoping to send a message that companies that spend recklessly will be allowed to fail. State-backed banks were told to pull back on easy cash for state-owned enterprises and rein in risky lending. Beijing then cut much of the financial assistance that local governments had once enjoyed.

As a result, money has become harder or more expensive to come by for many companies. In May, Chinese regulators seized a bank, Boashang Bank, for the first time in two decades. In response, smaller banks across the country raised their rates for lending to riskier banks and companies. This, in turn, put more pressure on companies that needed financial help.

But regulators are walking a tightrope. Slowing lending has contributed to faltering economic growth. Beijing continues to look for ways to pour fresh money into the financial system even as it tries to clean up the mess left behind by some of its biggest borrowers.

“You can take the fuel out of the car, but that’s going to create problems,” Mr. Wright said. “You can’t make the car go at the same speed if it’s powered by something different.”

While most of the lending comes from banks, Chinese borrowers have increasingly turned to the bond market to get money they need to run their businesses. Now the bill is coming due.

According to SP Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due.

At home, Chinese companies will have to pay $694.6 billion to bondholders next year and $706 billion in 2021.

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Unions Skeptical Trump’s Trade Deal Will Bring Back Auto Jobs

Ryan Connelly, a senior analyst at DuckerFrontier, a research firm, said the revised trade pact was unlikely to have a substantial effect on the sector, either positive or negative. “At its best, it will probably prevent some of the losses that you would expect anyway as the industry gets more efficient and more automated,” he said.

In March, Brian Reinbold and Yi Wen, of the Federal Reserve Bank of St. Louis, wrote that while the U.S.M.C.A. wage requirements might benefit workers in the United States, the rules could also drive up the cost of cars produced in the three countries.

“Based on our previous analysis, U.S.M.C.A. is a solution searching for a problem in regard to auto trade,” they wrote. “It also could make North American automakers less competitive in a global marketplace.”

That could be important for some automakers that export American-made cars to China and other countries. BMW has moved some production of its popular X3 sport utility vehicle to China from its plant in Spartanburg, S.C.

Researchers at the International Monetary Fund arrived at a similar conclusion to the Fed researchers.

In April, the United States International Trade Commission published a nearly 400-page report on the potential consequences of the proposed deal, finding its effects would be mixed for the automotive industry.

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A Preview of the December Fed Meeting

The Fed’s own policy approach probably contributed to the September issues. The central bank had been gradually shrinking its portfolio of government-backed bonds — swollen by post-recession stimulus programs — until late this summer, draining money from the financial system in the process. As of October, it began to buy Treasury bills again to ensure that there are enough cash holdings at the Fed, or reserves, to keep markets well supplied.

For now, Fed officials will probably signal that they are ready to act to keep money markets under control headed into the end of the year, when banks tend to hoard their reserves for regulatory reasons, potentially pushing repo rates up again.

“I would expect them to effectively say that we’re going to do whatever it takes to make sure that year-end goes smoothly,” said Michael Feroli, chief United States economist at J.P. Morgan.

Political dynamics are also likely to be a consideration heading into 2020, even if Mr. Powell and his colleagues would prefer not to talk about them.

Mr. Trump has regularly pressured the central bank to ease monetary policy more aggressively, calling for negative interest rates and labeling Mr. Powell both an “enemy” and a bad golfer over the last 12 months.

The central bank, which is independent of the White House but answers to Congress, has done its best to stay out of the fray. But it could remain in Mr. Trump’s sights as he returns to campaigning, given that he regularly criticized the Fed while on the 2016 campaign trail.

“They’d really love to stay on the sidelines — and stay out of the news — in an election year,” Ms. Swonk said. But if trade conflicts or other risks threaten the economy, the Fed will need to stand ready to move again, political cycle notwithstanding.

“The biggest challenge is to stay on the sidelines,” she said, “but to also know when that won’t be right.”

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Paul Volcker’s Greatest Lesson Wasn’t on Economics. It Was on Being a Public Servant.

If a central bank views higher pay for workers as a potential cause for alarm, but is more sanguine when corporate profits rise, it’s reasonable to expect that the share of national income going to capital, versus labor, will rise over time. And that is exactly what has happened in the United States since the Volcker era.

These kinds of re-assessments are important for taking the right lessons from Mr. Volcker’s era. After all, he left the Fed chairmanship 32 years ago. What made Mr. Volcker a great economic statesman was not so much the details of his analysis of inflation dynamics and the money supply in 1979. It was a culture and mind-set he brought to that job, and all of those he held over a career in public service that stretched from the Eisenhower administration to the Obama administration.

Mr. Volcker was a civil servant’s civil servant. At the Treasury Department in the Kennedy, Johnson and Nixon years, he toiled at rethinking an international monetary system that was breaking down.

Despite jobs at the epicenter of world financial power — early in his career he worked at Chase Manhattan, and he would lead the Federal Reserve Bank of New York before Mr. Carter picked him as Fed chair — he seemed uninterested in the trappings of wealth and power.

Always rumpled, always mumbling, his 6-foot-7-inch frame often slumping, he was not trying to be a globe-trotting master of industry or political mover and shaker. He was often dismissive of the views of powerful bankers and politicians. And he lived modestly, wearing ill-fitting suits and smoking cheap cigars and living in a small, not-at-all-posh apartment in Washington with his family back in New York. He didn’t focus much on his own status, which made him especially suited to resist the inevitable political pressure that arose when his course of action caused mass unemployment in the early 1980s.

The tidy story of Mr. Volcker’s early years at the Fed — that a central banker needs to be willing to tank the economy to prevent inflation — is not necessarily the most important lesson. What made Mr. Volcker such a consequential figure is that he did not merely take the conventional wisdom of public policy as he inherited it. He was willing to rethink the Fed’s policy based on what was happening on the ground, not on the theories of politicians and tradition-bound economists.

Right now, Fed leaders are grappling with an opposite set of problems from those that Mr. Volcker inherited. Inflation is too low, not too high. Workers’ wages are rising too slowly, not too fast. With interest rates persistently low, it’s not clear how central banks will fight the next recession.

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