Tuesday 20 March 2018

WTO chief says U.S. wants reform in trade body, has raised concerns

In World Economy News 20/03/2018

The United States has raised concerns about the functioning of the World Trade Organisation and asked for reforms, WTO Director General Roberto Azevedo said on Monday.
Azevedo, speaking to reporters on the sidelines of an informal meeting of 50 WTO members in New Delhi, said the global trade environment was quite risky and the trade body had sought an “open and honest” conversation with its members.
“This is a moment we are facing many challenges inside and outside WTO,” he said.
The meeting is the first time WTO members have gathered since President Donald Trump’s announcement last week of a 25 percent tariff on U.S. imports of steel and 10 percent on aluminium.
The United States is not represented at the New Delhi meeting.
Azevedo said Washington maintained that global trade had changed since the WTO, which deals with the global rules of trade between nations, was set up in 1995.
“The U.S. wants some upgrade and reforms (in the WTO) and the conversations with the U.S. are going on,” he said.
A senior Indian government official said all trade related issues, including the U.S. decision to hike tariffs on steel and aluminium, would be discussed at the informal two-day WTO meeting. The official gave no other details.
Even though the United States has declined to declare the tariffs at the WTO, they can still come under its jurisdiction if countries affected raise complaints.

Source: Reuters (Reporting by Manoj Kumar; Writing by Raju Gopalakrishnan; Editing by Malini Menon)

G20 financial leaders seek ‘free trade’ pledge amid U.S. tariffs concern

In World Economy News 20/03/2018

The world’s financial leaders were seeking on Monday to clearly endorse free trade and renounce protectionism amid concern that U.S. tariffs on steel and aluminum and looming actions against China could trigger a trade war that would hurt global growth.
Finance ministers and central bank governors of the world’s 20 biggest economies are meeting in Buenos Aires to discuss the economic outlook, capital flows, cryptocurrencies like Bitcoin, and how to prevent tax avoidance by international companies.
But since the unilateral decision by U.S. President Donald Trump on March 8 to impose tariffs of 25 percent on steel and 10 percent on aluminum, trade has become the focal point of the meeting.
“I am seriously concerned that the foundation of our prosperity – free trade – is being put at risk,” German Finance Minister Olaf Scholz told German mass-selling daily Bild.
“Protectionism is not the answer to the difficulties of our time. The situation is serious,” he said, adding he would be cautious yet about using the term trade “war.”
On Sunday Scholz said he would seek to dissuade Washington from imposing the planned punitive steel and aluminum tariffs which only come into effect on March 23.
Others at the G20 meeting, which will conclude on Tuesday with a joint communique, shared Germany’s concern.
“There is a solid understanding among the global community that free trade is important,” Japanese central bank governor Haruhiko Kuroda told reporters upon arrival for the talks. Brazilian Central Bank governor Ilan Goldfajn also called on the G20 to work to keep global trade flows open.
The U.S. import tariffs on steel and aluminum have raised alarms among trading partners that Trump is following through on his threats to dismantle the decades-old trading system based around World Trade Organization rules in favor of unilateral U.S. actions.
Potentially broader anti-China tariffs and investment restrictions under consideration as part of a U.S. intellectual property probe have raised concerns that retaliation could seriously diminish global trade and choke off the strongest global growth since the G20 was formed during the 2008 financial crisis.
Morgan Stanley economists said in a report to clients late on Sunday that a broad-based application of U.S. “Section 301” remedies resulting in a 20 percent tariff on Chinese manufactured goods, coupled with a commensurate response from China, would slash annual growth rates in both countries by a full percentage point within a year.
An early draft of the G20 communique seen by Reuters contained the phrase “international trade and investment are important engines of growth.”
It also said that G20 finance ministers stood by an agreement reached by their leaders in July last year in Hamburg.
A G20 official said discussions now centered on whether that language on trade would remain in the communique, which has to be endorsed unanimously, including by the United States.
The agreement from Hamburg, to which the Buenos Aires draft referred, said: “We note the importance of bilateral, regional and plurilateral agreements being open, transparent, inclusive and WTO-consistent, and commit to working to ensure they complement the multilateral trade agreements.”
Unilateral decisions by the United States to impose tariffs are seen as going against negotiated, or “multilateral” measures that would be part of the WTO.
The draft G20 communique also said that while the global economic outlook has been improving, “a retreat to inward looking policies” – suggesting protectionist trade practices – was a risk to growth.

Source: Reuters (By Leika Kihara and Gernot Heller, Additional reporting by Anthony Boadle, David Lawder and Luc Cohen in Buenos Aires; Writing By Jan Strupczewski; Editing by Andrea Ricci)

Japan central bank head says G20 to reaffirm need for free trade

In World Economy News 20/03/2018

Group of 20 finance leaders will likely reaffirm their shared understanding on the importance of free trade, Japan’s central bank governor said, rebuffing worries that U.S. President Donald Trump’s import tariffs could spark a trade war.
While refraining from singling out the United States, Bank of Japan Governor Haruhiko Kuroda said protectionist steps would backfire for countries that implement them by disrupting their imports of necessary goods.
“I don’t think protectionism will spread globally,” Kuroda told reporters on Monday upon arrival for the G20 finance leaders’ meeting, adding that the global community shares a common understanding on the need to protect free trade.
“The G20 will likely continue calling on the importance of free trade,” Kuroda said.
Worries about the potential for a U.S.-China trade war and frustration over Trump’s import tariffs threatened to dominate the G20 meeting, which is also set to debate cryptocurrencies and the global economic outlook.
Several G20 officials, including the finance ministers from host country Argentina and Germany, said they will insist on maintaining G20 communique language emphasizing “the crucial role of the rules-based international trading system.”
But it was unclear whether that language will stand given how Washington succeeded in watering down stronger language resisting protectionism at a G20 meeting in Germany a year ago.
On cryptocurrencies, Kuroda said there was active debate among G20 policymakers on how to strike the right balance between the need to protect consumers from theft, and the risk of killing innovation with excessive regulation.
“There may be areas where regulations could be beefed up, such as consumer protection and money laundering. But we also need to make sure we don’t stifle new technology,” he said.

Source: Reuters (Reporting by Leika Kihara; Editing by Andrea Ricci)

“Huge” Trade Deficits Are Smaller Than You Think

In World Economy News 20/03/2018

There are many good economic reasons why President Donald Trump is wrong to obsess over the U.S. trade deficit with China. One is that this bilateral deficit isn’t as severe as he thinks — and, in any case, the structural factors that caused the imbalance in the first place are changing. Before launching a U.S.-China trade war, the White House needs a more accurate picture of how the world, in fact, trades.
America’s goods deficit with China indeed hit a record level last year — around $375 billion. But, that’s arguably a data point from another era. The rise of global value chains in the 1990s and 2000s has fundamentally recast the landscape of world trade. Gone are the days when cargo ships primarily carried finished goods from one country to another. Instead, vast streams of manufacturing components now crisscross borders to feed globally diverse and fragmented production networks.
Simply measuring gross exports and imports, which the trade deficit does, fails to capture this new reality. Take mobile phones. Inside any “Made in China” phone, you’ll find all manner of processors, circuits and parts from South Korea, Taiwan, Japan and elsewhere — even the U.S. Yet, according to official trade statistics, the entire value of the phone counts as an import from China.
New data can be used to map how these global value chains are structured and thus to assess bilateral trade relationships more accurately. One such data set comes from the University of Groningen’s World Input Output Database (WIOD), which can be used to calculate a metric called “value-added trade.” Value-added exports and imports isolate the actual economic value produced in one country and consumed in another, stripping out the value of foreign-made components.
Using this data, we calculate that the U.S. trade deficit in goods and services with China in value-added trade terms in 2014 (the most recent year for which WIOD data sets are available) was $200 billion. This compares to the official estimate of $315 billion. Meanwhile, U.S. value-added imports from China were worth $320 billion that year, not $483 billion as the official statistics would lead one to believe. (U.S. value-added exports to China totaled $121 billion, not $167 billion.) This recalculation captures both goods and services exchanged directly between the U.S. and China, as well as indirect trade, or goods and services exchanged via intermediary countries.
Not only is the deficit less severe than commonly thought, but U.S. trade balances with nations that supply China with components are distorted. Factories in Korea that produce memory chips for Chinese-assembled mobile phones, for example, benefit from U.S. demand for these phones. These chips constitute indirect Korean exports to the U.S. that don’t show up in traditional U.S.-Korean trade data.
Adding to this increasingly complicated picture, a significant volume of our imports from China emanate from U.S. manufacturers producing there. Blunt, China-focused tariffs won’t consider these nuances; the casualties will include U.S. companies and their suppliers and resellers, many of them in the U.S.
It’s also important to recognize that the real trade deficit with China may be plateauing. This is because the structural factors that drove U.S. manufacturing to China in the late 1990s and early 2000s — low labor and other production costs — are diminishing. Production costs in China are rising markedly and outpacing productivity growth there, which means that Chinese competitiveness in manufacturing is on the decline.
At the same time, the digitalized goods of the future will likely be manufactured closer to home. When it comes to highly technical export categories — such as smart, interconnected devices and new-energy vehicles — localized technology requirements and the benefits of market proximity should encourage considerable “reshoring.” Those structural drivers help explain Foxconn Co. Ltd.’s major investment in an intelligent, flat-screen TV production facility in Wisconsin, for instance. They also explain why China is pouring so much money into advanced manufacturing industries, through its “Made in China 2025” plan.
The Trump administration should be focused on the mercantilist features of Chinese trade policy, rather than the decreasingly relevant transactional inequities of the past. Instead of raising barriers to “Chinese” imports, the U.S. should be pressing China to open up its own markets wider, to allow greater investment access and a level playing field for U.S. firms vis-à-vis local players.
The U.S. has leverage to press these demands, given China’s obsession with economic stability at this critical juncture. The aforementioned value-added trade data also tell us that only 0.7 percent of U.S. GDP depends on Chinese consumption of American-made goods and services, while 3.1 percent of China’s GDP is derived from U.S. demand. So, in any tariff battle, China would likely suffer more.
That said, the earnings, employment, investment and shareholder value of U.S. firms dependent on China would undoubtedly be hurt badly by Chinese retaliation. The Trump administration should be cautious about launching a trade war that’s aimed at the wrong problem — and will only create new ones.

Source: Bloomberg

ECB debate shifting to interest rate path from QE – sources

In World Economy News 20/03/2018

European Central Bank policymakers are shifting their debate to the expected path of interest rates as even some of its most dovish rate setters accept that lucrative bond buys should end this year, sources close to the discussion said.
Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.
After more than three years of bond buying totalling nearly 2.5 trillion euros (£2.2 trillion), ECB policymakers are now debating how to phase out their unconventional tools and normalise policy in a time of robust growth but weak inflation.
“The only point in extending the programme would be to push out rate hike expectations and anchor the yield curve,” one of the sources said. “But that can be done with other tools, like a more precise forward guidance or more long-term refinancing operations.”
The ECB declined to comment and the sources said that no decision has been taken on the future of the bond-buying programme.
The central bank’s bond-purchasing scheme, already extended several times, is now due to expire at the end of September, and ECB staff projections assume that they would be wound down over three months thereafter.
“I haven’t seen a serious case for another extension,” a second source said. “But we need to carefully manage rate expectations, especially given the trade and fx risk.”
Worried about a potential trade war with the United States and increased volatility in foreign exchange markets, the sources said that the key decision on bond buys beyond September is likely to be taken relatively late, such as in June or July.
While the trade tariffs announced by the United States have a relatively small impact on growth, they foreshadow retaliation with potentially greater ramifications, the sources added.
ECB President Mario Draghi and chief economist Peter Praet have both argued that the amount of unexploited capacity in the euro zone economy, such as in its labour market, could be greater than earlier seen, which may slow the rebound in inflation.
The ECB is targeting an inflation rate of just below 2 percent, but it expects price growth to miss its target for at least the next three years. Greater slack in the economy would suggest an even slower rise.
Money markets are fully pricing in a 10 basis-point interest rate rise in the second quarter of next year and at least one more hike is priced in for 2019, with forward money market rates suggesting the ECB’s minus 0.40 percent deposit rate will rise to zero percent in two years.
While more conservative policymakers are comfortable with the market’s pricing, dovish members said these projections could be repriced quickly and the ECB needs to ensure that only gradual hikes are anticipated, the sources said.
“With any move we take, markets will start pricing the next one and you could see quite a sharp rise in the (expected) rate path,” a third source said. “These expectations need to be very firmly anchored by the time we take the first policy decision.”
No big decision is likely to be made at the ECB’s April meeting and only minor tweaks in the communication stance are expected for now, the sources added.

Source: Reuters (Reporting by Balazs Koranyi; Additional reporting by Dhara Ranasinghe; Editing by Hugh Lawson)

Three ECB policymakers optimistic on inflation despite disappointment

In World Economy News 20/03/2018

Three European Central Bank policymakers struck an optimistic tone on the outlook for euro zone inflation on Sunday despite stubbornly slow price growth so far this year.
The broadly positive picture painted by Francois Villeroy de Galhau, Klaas Knot and Jens Weidmann was likely to cement market expectations for the ECB to wind down its 2.55 trillion euro bond buys this year and start raising interest rates in 2019.
“We are making progress on the inflation front… although a bit slower than we had expected,” Villeroy de Galhau, the governor of France’s central bank, said before attending a G20 summit in Buenos Aires.
“Our policy is on a path to normalisation,” Villeroy added, stressing this process would be gradual.
Euro zone consumer prices grew by a slower-than-expected 1.1 percent last month because of a fall in unprocessed food prices and reduced energy inflation, data from the European Union’s statistics office Eurostat showed last week.
Price growth is not expected to hit the ECB’s target of just under 2 percent until 2020, according to the bank’s latest quarterly estimates, and has been lagging it since 2013.
Yet Knot emphasized the ECB’s forecasts have been roughly stable for several quarters, which he sees as evidence of a durable recovery in price growth.
“Inflation has been fairly stable so that provides me with a high degree of confidence that actually inflation will pick up and will at some point approach the definition of price stability,” Knot, a policy hawk who heads the Dutch central bank, said in Buenos Aires.
Fellow hawk Jens Weidmann reaffirmed his call for “a rapid end” of the quantitative easing scheme.
“I personally think that the good economic developments and the inflation forecast would allow a rapid end to the bond purchases,” Weidmann, who is expected to be Germany’s candidate to take over as ECB President when Mario Draghi’s term ends late next year, told newspaper Neue Osnabruecker Zeitung.

Source: Reuters (Reporting By Francesco Canepa; Editing by Andrea Ricci)

Forty-five U.S. trade groups urge Trump to avoid tariffs against China

In World Economy News 19/03/2018

Forty-five U.S. trade associations representing some of the largest companies in the country are urging President Donald Trump not to impose tariffs on China, warning it would be “particularly harmful” to the U.S. economy and consumers.
The organizations said in a letter sent to Trump on Sunday that potential tariffs on China would raise prices on consumer goods, kill jobs and drive down financial markets.
The letter marks the latest in a growing rift between Trump and the business community on trade policies, as the president has begun to take more aggressive steps he says are needed to protect domestic industry.
“We urge the administration not to impose tariffs and to work with the business community to find an effective, but measured, solution to China’s protectionist trade policies and practices that protects American jobs and competitiveness,” the groups wrote.
“Tariffs would be particularly harmful,” they said.
The groups called on Trump to work with trade allies to push for changes to China’s policies. The business groups said while they had serious concerns about China’s approach to trade, unilateral tariffs by the United States would only separate the country from allies, and encourage them to replace the U.S. business presence in China when Beijing retaliates.
Trade associations publicly pushing back include the U.S. Chamber of Commerce, the National Retail Federation and the Information Technology Industry Council.
The Trump administration is said to be preparing tariffs against Chinese information technology, telecoms and consumer products in an attempt to force changes in Beijing’s intellectual property and investment practices.
The Republican president recently announced plans to impose tariffs on certain steel and aluminum imports, despite opposition from some business sectors.
The groups also called on Trump to allow industry experts to comment on the economic impact of any changes in trade policy before the measures take effect.
“We urge the administration to take measured, commercially meaningful actions consistent with international obligations that benefit U.S. exporters, importers, and investors, rather than penalize the American consumer and jeopardize recent gains in American competitiveness,” they said.

Source: Reuters (Additional reporting by David Lawder; Editing by Peter Cooney)