Great article on trade & China

Required reading for understanding where the US sits with Trump, China & the WTO. It makes a complex issue understandable:

Irwin Stelzer: Will Trump drive off Trumpchi?

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Donald Trump believes the world trading system is rigged against America, and wants to bring it down. He has found the man who will help him do just that. Robert Lighthizer, the US trade representative, comes from an Ohio steel town ravaged by a flood of imports. He agrees with the president that the hollowing out of America’s manufacturing sector has nothing to do with free trade as described in Trump’s dog-eared copy of The Wealth of Nations. It has to do with China’s unfair trade practices, which the World Trade Organisation (WTO) has done nothing to rein in.

China was admitted to the WTO only after promising to become a free-trading market economy, a promise it has not kept. Instead, President Xi Jinping plans to make China great again by selecting the products of the future to subsidise, protect and lead to world dominance.

If American firms want to do business in the People’s Republic, they must find a Chinese partner and turn over to it their technological know-how and any intellectual property China has been unable to steal. So Lighthizer has joined Japan and the European Union in asking the WTO to deny China the benefits that the organisation accords market economies, and allow them to do what Adam Smith recommends in these circumstances — retaliate. If that plea is refused, America will bolt from the WTO and strike bilateral deals with each of its trading partners. RIP, the post-Second World War multilateral trading system.

Trump’s plan to raise tariffs on steel, solar panels and aluminium are mere skirmishes in a war that will intensify next month when China makes clear that it intends to do to America’s car industry what it has already done to swathes of the manufacturing sector while running up a $347bn-and-rising trade surplus with the United States.

At the Detroit auto show next month, China will unveil a range that it hopes will grab a large share of the market from the domestic and foreign companies that make, or at least assemble, vehicles in America. The name is Trumpchi. You read it right: Trumpchi, a brand sold in China long before the managers of its economy ever heard of the Donald or dined at Mar-a-Lago.

China is already the largest car maker in the world, producing more vehicles than Japan and America combined. It has been selling a small number here for a while. Volvo is now owned by the Chinese giant Geely, and markets its made-in-China S60 Inscription here. Some Detroit-based brands are also made in and imported from China, and Ford plans to move production of the Focus from Michigan to China. But now the onslaught of Chinese-branded vehicles is about to start in earnest, using the advantages of what Trump characterises as a rigged trading system.

US trade representive Robert LighthizerANDREW CABALLERO-REYNOLDS/AFP/GETTY IMAGES

We levy only 2.5% duty on each imported vehicle, while the Chinese charge 25% on vehicles from abroad, the highest trade barrier erected by any car producer. That more or less reserves the massive Chinese market for the home-town team, giving manufacturers there the opportunity to obtain the economies of scale needed to crack and eventually dominate the international vehicle market.

The combination of exclusive access to a domestic market and expropriation of superior American technology is hard for any competitor to beat. Lenin once claimed that the capitalists would sell him the rope with which to hang them. Our corporations are turning over their intellectual property to Chinese companies that will use it to outsell them in global markets.

Michael Dunne, formerly a General Motors executive, says that other foreign car makers “are consistently taken aback by GM’s apparently generous technology sharing with Baojun”, China’s fastest-growing auto manufacturer (the company name means “precious steed”).

China plans to sell both gasoline-powered and electric vehicles in America. The electric models will be eligible for any tax credit that US-made cars receive — currently $7,500 (£5,630) a vehicle on the first 200,000 sold by each manufacturer. Since our companies have just about hit that ceiling, and the Chinese companies have not, China will have a $7,500 per car edge when motorists compare the price of its vehicles with those made here. China, however, does not believe that turnabout is fair play. Every electric car sold in China receives a subsidy of $10,000. Well, not every electric car. The subsidy is not available to imported electric cars; only those made in China.

Assume that both an American company and a Chinese competitor market a $50,000 electric car in Beijing. The consumer will face a cost of $62,500, tariff included, for the US vehicle, and a net cost of only $40,000 for the made-in-China car after receiving the $10,000 rebate from the Beijing government. That makes our electric cars uncompetitive in China, while theirs will benefit from the $7,500 paid to US buyers by Washington DC long after American companies have used up their access to the credit. Little wonder that President Xi favours continuation of the current trading system.

GAC, manufacturer of the Trumpchi, is building a $6.5bn industrial park in Guangzhou to, among other things, “carry out the government’s policy”. The company will soon announce whether the Trumpchi name will be retained when the models go on display at the Detroit show. It sounds strange to the American ear, but in the past so did names such as Toyota, Hyundai, Kia and Mitsubishi. One difference. Trump just might intervene to prevent Trumpchi becoming a household name here in America.

Irwin Stelzer is a business adviser

ECB wind down of QE threatens £

Great short article encapsulating monetary policy impact on exchange rates - indirectly. This could form a solid paragraph in any analysis of UK national debt, interest rates, sterling, external shock:

From The Sunday Times

A “tsunami” of cash flowing from the eurozone into Britain is set to dry up as the European Central Bank winds down its quantitative easing (QE) programme — potentially placing the pound under greater pressure.

According to Oxford Economics, about €50bn (£44bn) a year has been pouring into UK debt for the past few years as a response to the ECB’s bond-buying programme, which has pushed up asset prices across Europe, making British debt more attractive for continental investors. The consultancy’s analysis predicts that the volume of cash will halve next year.

The ECB’s huge programme of asset purchases has crowded out private investors in eurozone bond markets, causing them to look overseas to countries, including Britain, for better returns, according to the Oxford Economics research by Guillermo Tolosa, a former senior economist at the IMF.

With the Frankfurt-based central bank set to halve its monthly bond buying to €30bn from next month, Tolosa expects that flow of cash to slow. Once the ECB stops buying, eurozone investors will stop pumping cash into overseas markets altogether, he said. That process could be more disruptive to financial markets than the US Federal Reserve’s own exit from QE, according to Tolosa.

The shift could be felt acutely in Britain. Figures due this week are set to show the UK is on course to run up a current account deficit of £90bn this year, down from last year’s all-time high of £115bn. The deficit means that Britain earns less from exports and income from overseas investments than it pays for imports and dividend payments to foreign investors.

Last year’s widening was partly a result of the fall in oil prices, which meant UK oil companies earned less from their operations worldwide. A rebound in oil prices, along with the fall in the value of sterling since the EU referendum, has helped close the gap slightly, but not by as much as many economists were expecting earlier in the year.

Funding the deficit requires a constant stream of foreign cash flowing into UK assets. Bank of England governor Mark Carney has previously warned that this leaves Britain dangerously reliant on the “kindness of strangers”.

If the eurozone cash dries up, British assets may need to get a bit cheaper before other foreign investors step in, according to Tolosa. That could put pressure on the pound and on the price of UK government and corporate bonds.

“It’s likely there will have to be an inducement for investors from elsewhere,” he said.

Ratings Agencies - background info

September 2017

Financial markets are incredibly complicated.  Although it`s one of the later topics studied on the A` level specification, it`s well worth familiarising yourself with any specialist terminology as soon as you can.

At the weekend credit rating agency Moodys downgraded Britain`s credit rating from the highest rating Aa1 to Aa2. The Credit ratings agency is a relatively new animal on the economic landscape and increasingly influential. Their main function is to provide advice to financial investors such as banks, insurance companies and private equity companiesabout where to put their money. They fulfil a similar function to online companies like Trip Adviser or Go Compare who provide information to customers about holidays or insurance. The 3 main agencies are Moodys, Fitch and Standard and Poor.

Financial investors base their decisions on 2 factors, risk and return. Governments borrow mainly by issuing bonds which are long term securities carrying a fixed rate of interest. For example a 10 year bond of £10,000 issued by the government at 2.5% annual interest will yield £250 interest to the lender annually for the next 10 years.  Importantly the credit rating assesses the risk. When a government bond or other financial asset is given a lower credit rating, it means they are higher risk. Lenders therefore will expect a higher return and this generally puts upward pressure on interest rates.  

The lowest risk rating is Aa1 (also rated as “triple A”), while the highest risk bonds are classified as C or D. In 2010 following the financial crisis and crisis in the Eurozone, Greece`s budget deficit stood at an unsustainable 15% of GDP. Greek bonds were classified by the ratings agencies as,” junk” status. In other words any money lent to the Greek government would probably not be paid back.

In downgrading UK bonds, Moodys justify it by the uncertainty caused by Brexit and the likelihood of higher levels of public sector spending. Should the government be worried? At the start of the year Moodys was fined $864m for providing bad advice in the run up to the 2008 financial crisis. In fact all 3 of the agencies were giving AAA ratings to mortgage products, which really did turn out to be junk and precipitated the crisis!

 So perhaps we shouldn`t be too worried, after all Britain is one of the 10th largest economies in the world and the government hasn`t defaulted on its debt since 1932 during the Great Depression. However politically it is a bit of a kick in the teeth for a conservative government which prides itself in sound financial management. 

For more on this do check the BBC website: http://www.bbc.co.uk/news/busi...