Business and Economics

US-China trade: Tumbling down 3-31-18

Source: "War games - U.S.and China trade"  

US SuicideThe US under Trump wants to reduce the US-China balance of trade, now titled about $300 billion a year in favor of China. Also, Trump is citing intellectual property theft as a concern. "...by pressing American companies to hand over their technology when they form partnerships with Chinese ones (this is often a condition of operating in China), and by making it hard to enforce intellectual-property rights once a technology-related contract ends, the Chinese state has rigged the system against American companies."

Blocking Chinese investment in US companies would reduce the threat of intellectual property theft. One action..."would be tighter rules on investment between the two countries. The details are unclear. The president can already block investment on national-security grounds, using the Committee on Foreign Investment in the United States (CFIUS)."

Regarding the trade imbalance, it is caused by multiple factors. In fact,a high imbalance is a sign of a prosperous economy on our end. From the article: "Another risk stems from Mr Trump’s obsession with the bilateral trade deficit. No deal can guarantee to bring it down. Whatever the two sides agree to, the fact is that trade is devilishly difficult to manage. Factors beyond China’s control could easily overwhelm the impact of any deal on the bilateral trade deficit. Mr Trump’s cuts to income and corporate taxes mean that America’s economy is about to receive a large stimulus. All else equal, this will suck in imported goods."

"As for Chinese investment in America, the CFIUS committee was already toughening its oversight. According to Rhodium Group, a research firm, this was part of the reason Chinese investment in America fell by 35% from 2016 to 2017 (a Chinese clampdown on outbound capital was the main factor). New rules that give wide discretion to the president, or block investment on economic rather than national-security grounds, could easily be abused."

 

Tough lessons on steel tariffs 3-24-18

Source: Economist: 24 Mar 18 "Steel banned"         

Steel Production Versus Steel Intensive JobsIn 1982, the US put restrictions on cheap steel being imported from Europe. Soon, steel-hungry industries in the US increased imports from non-European nations. End result: steel imports actually increased after the restrictions. Trade is like water, if you try to block its flow in one direction, it merely flows in from somewhere else. Example: under Obama, imports of cheap Chinese steel were restricted. In response, steel imports from nearby Vietnam increased.

More problems with steel tariffs: everyone involved will try and apply for an exemption. It is estimated that the Trump administration will spend 24,000 work-hours evaluating the merits of 4,000 applications for exemptions to the new steel tariff. More importantly, as you can see by the graphic, in the US our steel production sector is far smaller than our steel producing sector. Steel tariffs will harm more workers than they help.

The digitization of trade’s paper trail may be at hand 3-24-18

Source: "Pulp Friction"       

The World Economics Forum estimates that 20% of the cost of transporting trade goods goes towards administratuve and paperwork expenses. Simplifying administrative procedures and reducing paperework could save more money in international trade than eliminating all tariffs. The UN says full digitization of trade paperwork could increase trade by $250 billion in the Asia-Pacific region alone. Sadly, not much progress has been made in this area prior to this year. A 2008 UN convention on the standardization of electronic trade documents only had 4 countries sign on. One source of resistance might be major banks, who currently employ thousands (and charge millions) to review paper documents looking for errors or discrepancies. Technology has also been a problem - how to update and share digital documents in a safe, secure way is a significant challenge.

IBM and Maersk are partnering on a paperless trade document system that will be open-source and based on blockchain technology. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a coded version of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modification of the data. It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. For trade documents, it means that each party in the process could access all the relevant paperwork and update it in real time.

Chinese securities will now be included in global indexes 6-24-17

Sources: "Financial assets, made in China"

After years of having very little connection to the wider world of financial markets, Chinese stocks and binds are being included in global indices, meaning that events in the Chinese economy will be felt around the world. Or put another way, a Chinese recession in the future will have a greater impact on the world economy than it does today.

From the article: "One kind of Chinese good few abroad dare touch: its financial assets. Outsiders own less than 2% of its shares and bonds, far below the levels of foreign ownership seen in other markets. Capital barriers and financial risks have put investors off. This, however, is changing. The globalisation of China’s capital markets is slowly gathering steam, as symbolised by the inclusion of Chinese stocks and bonds in global indices. MSCI, a company that designs stockmarket indices, announced on June 20th that it will bring Chinese equities into two of its benchmarks: one that covers emerging markets; and another that follows stocks around the world. To begin, it will include a small number of shares, just 222 of the more than 3,000 listed in China. But its decision matters to asset managers who track their performance against MSCI’s indices or who invest in exchange-traded funds linked to them. They will in effect be forced to allocate capital to China’s stockmarkets, many for the first time. Because MSCI is giving Chinese stocks a limited weighting (0.73% of its emerging-markets index), the resulting cash inflows could add up to only about $10bn next year, equivalent to less than one hour of trading in China’s frenetic markets. Yet the weighting is likely to increase in the coming years."