Business and Economics

The World Trade Organization under attack 7-21-18

Source - Economist, Nov 10, 2018: "Trade blockage"     

The Trump administration is trying to break an international system that has kept tariffs low and trade free since the end of WW 2. The average tariff rate between Europe, the US and Japan was 22% in 1947. It has been averaging about 3% since 2000, thanks to the WTO. The WTO has 164 member nations and accounts for 98% of all world trade. To be a member means you agree to keep your tariffs low and apply them to "most-favored nations" equally. Ex: China must put the same (low) tariff on cars imported from the US as it does on cars imported from the EU. The tradeoff: a member nation can't protect its own industries through high tariffs - but it doesn't have to worry about them on its own exports.  Trump would like to leave the WTO and be free to increase or renegotiate tariffs as he sees fit. Leaving the WTO would require Congressional approval (not likely).  

Summer of 2018: the Trump administration has enacted new tariffs affecting $90 billion worth of imports (one-third of which comes from China) and has plans to impose an additional $200 billion in tariffs on Chinese goods alone. These new tariffs are generating disputes normally heard by WTO judges - but Trump is blocking confirmation of new judges. There are 7 WTO judges who must be unanimously confirmed. 3 are assigned to hear disputes. The Trump administration has refused to confirm new judges, meaning by December 2019, the WTO will no longer have enough judges to hear new cases. 

Robert Lighthizer is the US Trade Representative. He believes in the advantages of the WTO but thinks China cheats. Chinese firms often appear to be independent but in fact receive large subsidizes from the Chinese government, meaning that privately owned companies cannot compete. China also requires other firms in joint ventures with Chinese companies to hand over proprietary technology, which is then pirated. The Obama administration sought to tempt China to the negotiating table by trying to enter into deeper trade partnerships in the Pacific Rim (the Trans-Pacific Partnership) and with the EU. The idea being that China would have to change its ways if it wanted a similar beneficial relationship with the US. The Trump approach is to use threats and tariffs to force the Chinese to change their ways. The Reagan administration did this to a certain extent with Japan back in the 1980's - but Japan's economy was only 40% of the US, China's GDP should be 90% of the US by 2023. 

Corporate markups are increasing 7-7-18

Source: "From the many to the few"  

Corporate MarkupsA "markup" is defined as the ratio of selling price to production costs. A markup of 1 for a firm means it is selling everything at cost. A new paper from Loecker and Eeckhout of University College London shows that corporate markups have been increasing steadily since the 1980's. There are obvious tax implications in that increased markups usually result from reduced competition that allows firms to raise prices.

From the article: "America and Europe saw the biggest increases (see chart). But in many emerging markets markups barely rose. In China they fell. That suggests rich-world firms may have been able to increase markups by outsourcing to cut labour costs. Another possibility is that corporate concentration may have increased because of lax antitrust enforcement or the growing heft of companies benefiting from network effects, like internet firms.

Policymakers should take note. Greater market power for firms may also mean less bargaining power for workers, and hence lower wages. A recent study by David Autor of the Massachusetts Institute of Technology and four other economists found that workers’ share of income in America has declined most steeply in the most concentrated sectors.

A recent IMF working paper found that companies with relatively low markups invested more when markups increased, whereas those that had started with high markups invested less. This was particularly evident in highly concentrated sectors. And the ratio of dividends to sales was higher for companies with higher markups. Firms with greater market power, it seems, may not only have higher profits but innovate less."

Global Market Power”, Jan De Loecker and Jan Eeckhout, NBER working paper, 2018
"Global Market Power and its Macroeconomic Implications", Federico Diez, Daniel Leigh, Suchanan Tambunlertchai, IMF working paper, 2018
The Fall of the Labor Share and the Rise of Superstar Firms”, David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen, 2017

Trump's Oil triangle 7-7-18

Source: "Donald vs OPEC"  

Trump faces as "iron triangle" on oil prices in that he has three policy goals that are mutually exclusive. First, he wants cheap gas for the midterms (currently crude is $77 a barrel and gas is approaching or exceeding $3 a gallon). Supplies are tight despite recent increases in production from Saudi Arabia and Russia, mainly due to instability in Libya and Venezuela. Next, Trump wants to punish Iran by forcing American allies to stop importing Iranian oil by November 4th or face sanctions. This will impact about a billion barrels a day with the main squeeze coming in September. Finally, there is the developing US-China trade war. One option the Chinese have warned they will use will be to put tariffs on American oil imports. Some analysts predict that Trump would release oil from the SPR (Strategic Petroleum Reserve) to flood the market and bring down prices. "That would be tantamount to launching a trade war against OPEC and Russia." And whither shale? They simply can't respond quickly enough to changing price signals and thus are not a factor. 

Also of interest from the same issue: "Egypt is optimistic" Egypt will soon be a net exporter of gas thanks to massive discoveries in the Mediterranean off the coast of Sinai. The  Zohr field in 2015, now the Noor field last year. From the article: "Mediterranean gas will have no shortage of buyers. Demand is soaring in developing countries. Consumption in China alone grew by 15% last year. But it would be particularly attractive to Europe, which depends on Russian gas. European imports from Russia hit a record high in 2017. Former Soviet states fear this gives Vladimir Putin, the president of Russia, leverage over them. His country has cut off supplies in the past. Egypt and its neighbors could help Europe diversify its suppliers."

More market volatility likely 3-31-18

Source: Buckle up   

Based on news from the Trump White House, the stock market has reacted with much volatility. In February stocks sank on promises of American tariffs on imported steel. Then, the news of possible future tariffs against a range of Chinese goods caused a further drop on March 22nd. Then reports that China and America were making progress in trade talks caused the S&P 500 index to rise by 2.7% on March 26th, its best day since August 2015. It promptly fell again by 1.7% the next day.

From this article: "...this year has seen a number of worries come to the fore. “The entire complexion of this stock market is changing before our eyes,” says David Rosenberg, a strategist at Gluskin Sheff, a Canadian wealth-management firm. Central banks are withdrawing some of the monetary stimulus that has supported the market rally since 2009. And economic data have not been as positive as before. Citigroup’s “surprise” index, which is based on whether actual numbers turn out to be better or worse than forecast ones, has dropped back from the high levels reached at the end of last year. The price of copper, a commodity that is particularly sensitive to economic conditions, has fallen by 9% so far this year. The prospect of further interest-rate increases has taken its toll on bank stocks, with America’s KBW NASDAQ Bank index dropping by 8% in the week to March 23rd. Led by the FAANGs (Facebook, Apple, Amazon, Netflix and Google), the S&P 500 Information Technology index managed a five-year annualised return of 18.5%. But controversy over the use of Facebook data in the 2016 presidential election prompted a reversal. Fears of extra regulation caused more losses on March 27th. The index has dropped by 5.2% so far in March."

Other indicators: The ten-year Treasury-bond yield has already risen from 2.4% at the start of the year to 2.79%, in part because the market expects America’s tax cuts to lead to a lot more debt being issued. As a sign of tightening liquidity conditions, the real growth rate of the global M1money-supply measure has slowed sharply, from more than 9% to less than 4%, in recent months. Another warning sign is that the gap between short-term and long-term interest rates has shrunk. In the past, a flatter yield curve has signalled an impending economic slowdown.