New Rules for Global Trade | EconVue Spotlight

posted by Lyric Hughes Hale on September 4, 2018 - 9:26am

I returned to Europe this week to hear views from the other side of the pond, as US trade policy continues not just to pivot, but to spin.  There is no doubt that a major reset of key trading relationships is now underway with implications for currencies worldwide.  As the US economy seems to be outpacing growth everywhere except in China and India, will US monetary policy have unintended global spillover effects, especially for emerging markets? And more direct effects from trade policy in developed nations? European PMI figures announced today are down to 2-year lows. 

Jay Powell's speech at Jackson Hole was clear about the lack of certainty around the usual rules of economic behavior, and the Fed's goal of remaining as neutral as possible.  One of the academic papers presented attempted to answer Powell's questions about the seeming disconnect between full employment, low wages, low productivity, inflation, and levels of investment that continue to stagnate below pre-2000 levels. A possible explanation: more and more of what corporations value and invest in is intangible and unmeasured, e.g. brands, which also serve to enable market concentration. 

The coming weeks promise a steady stream of news about NAFTA, US-China trade negotiations, and a possible US pullout from the WTO.  The reality is that all of these agreements are out of date and need to be revamped. The question remains if the new agreements will be any better, or if we are going to continue to witness the megatrend I have been writing about for some time, increasing decentralization, resulting in  a plethora of bilateral agreements.

Bitcoin and cryptocurrencies are yet another manifestation of this trend. In places where central banks have failed, uptake in these currencies is bound to increase and now stands at 18% in Turkey for example. We just posted a new panel on our website that includes a bitcoin maximalist, economist Saifedean Ammous, a self-confessed crypto-contrarian, Dr. Gina Pieters at the University of Chicago, and Grant Hummer, an Ethereum development leader in San Francisco. 

I'm looking forward to seeing friends and colleagues at the GIC's timely conference on trade issues at the Chicago Fed next week.  Details are listed below under our new events section.

Treasury and Bitcoin
Collin Canright 

The U.S. Department of the Treasury issues its FinTech report as bitcoin gains institutional momentum.  Given all the attention to cryptoasset trading over the past two weeks, it's a bit strange that the report makes no mention of it Yet bitcoin was designed and is used as a cryptocurrency, and Treasury and its Office of the Comptroller of the Currency would seem to have some interest in currency regulation.

Data Round-Up: Regional Surveys Show Solid Momentum Overall in August
Michael Lewis 

With the Chicago Purchasing Managers Index remaining above 60 and all Fed bank manufacturing surveys also showing solid expansion, FMI expects the national PMI (Institute of Supply Management data) to come in at 58 for August, the same as July.  

Against the Wind: Hospitals Challenge CMS's Pro-Market Payment Reforms
David W. Johnson 

Over the past month, the Centers for Medicare and Medicaid Services (CMS) announced several pro-market policies that will enhance pricing transparency, stimulate competition (and fair prices) for routine procedures and eliminate burdensome reporting requirements.

Hospitals welcome the regulatory relief but generally oppose measures that improve pricing parity and transparency. They are on the wrong side of history.

Trade & Currencies

Trade war pushes Japanese supply chains out of China
8/28/2018 Nikkei Asian Review

To avoid China tariffs, Japanese companies with flexible supply chains are quietly shifting production to Japan, the US and Mexico.

Protectionism for liberals
Robert Skidelsky 8/14/2018 Project Syndicate

A discussion of the disconnect between liberal politics and protectionism. 

Details on the U.S. - Mexico trade agreement
@inumanak 8/27/2018 Twitter thread

In addition to agricultural tariffs remaining at zero, here is some good news about the US-Mexico trade agreement. Terrific thread that examines all the details and as expected some are positive, others negative.

Trade works. Tariffs don't
8/20/2018 U.S. Chamber of Commerce

State-by-state interactive map of products targeted by new trade tariffs. Illinois's potentially hardest hit product category: $156M of bread, cake & puddings to Canada. Evidently, somebody doesn't like Sara Lee.

Was the U.S. actually ‘built on tariffs,’ as Trump says?
Julia Jacobs 8/15/2018 New York Times

Currency against US Dollar, past year
@spectatorindex 8/29/2018 Twitter

Sweden at -15% against the dollar in the past year. Historic elections on September 9th could further weaken the krona.  Sweden begs the question-where would other European countries be without the euro?

Trade and currency weapons
Agnès Bénassy-Quéré, Matthieu Bussière & Pauline Wibaux 6/20/2018 SSRN

The twin levers of tariffs and currency devaluation in a trade war work differently when interest rates approach the zero lower bound.

China central bank reintroduces measure to bolster the Yuan
Lingling Wei8/24/2018 Wall Street Journal

Float down, manage up. That’s countercyclical.

Countries most at risk from a currency crisis
8/17/2017 Geopolitical Futures

Non-bank dollar denominated debt stands at an all time high--nearing $12T dollars. As comparison, the borrowings of all governments everywhere in the world total $63T.

Let’s roll back the hyper-globalization rules of the WTO
Nathan Gardels 8/20/2018 Washington Post

Flexibility is key in a world rocked by political, economic and technological changes. Global regulators simply can't keep up.


Greece is in ‘Hotel California’: Checked out but it can never leave
Theodore Pelagidis 8/22/2018 Brookings

“Of 100 euros, a professional has to pay 45 euros income tax, 28 euros toward SS, 10 euros in solidarity tax, and a “tax-payment in advance” for the next year that evaporates the remaining 17 euros (no kidding). And we expect this country to recover?” Italy won’t follow Greece.

How central bankers shape financial markets
Benjamin Braun 8/23/2018 Financial Times

A different take: How central bankers shape financial markets, instead of the other way around.

Framing Turkey’s financial vulnerabilites: Some rhymes with the Asian Crisis, but not a repeat
Brad W. Setser 8/20/2018 Council on Foreign Relations

Turkey's firms have around $335 billion in foreign currency debt, and it certainly seems that a number of the firms that took out foreign currency loans don't really have natural hedges. The CME has now delisted LIRA futures.

Can China, the world’s biggest pork producer, contain a fatal pig virus? Scientists fear the worst
Dennis Normile 8/21/2018 Science Magazine


Trump calls off Pompeo’s North Korea visit, citing a lack of progress on denuclearization
John Hudson, David Nakamura and Josh Dawsey 8/24/2018 Washington Post

What are the odds that this meeting is reinstated, just like the Trump-Kim Summit?

It is not unusual for a president to fight the Fed and Trump may have good reason to
Richard X. Bove 8/21/2018 CNBC

Terrific commentary and history of Federal Reserve “independence” since inception. 

I do not understand why the left should want a sovereign wealth fund
Mike Konczal 8/28/2018 Medium

A US sovereign wealth fund to create a market with socialist characteristics is one of the most unrealistic proposals to reduce income inequality.

Why Chicago's pension obligation bond plan is even worse than it seems
Elizabeth Bauer 8/24/2018 Forbes

Instead of going into more debt to cover a $28B shortage, Chicago could restructure its pensions so they are sustainable. 


Stop worrying about how much energy bitcoin uses
Katrina Kelly-Pitou 8/20/2018 Science X

Remember peak oil? Useful addition to the debate about Bitcoin energy consumption. Projected uptick in electricity use, much like oil consumption 20 years ago, will spark major technical innovations with impact beyond cryptocurrencies.

Why Google and Facebook should be treated like banks
Pavel Bains 8/23/2018 Entrepreneur

As well as protecting our intangible personal assets, should Google and Facebook be required to share financial returns with users? Thought provoking.

Federal courts now accepting cryptocurrency for bail
Allison Levitsky 8/15/2018 Daily Post

Federal courts now accepting cryptocurrency for bail: "If the value of the currency were to fluctuate dramatically, Simmons said he was “certain” that either party could file a motion to change the bail amount."

Aspen St. Regis Owner Ditches REIT Plan, Says the Hotel Will Be Sold on Blockchain
Matt Grossman 8/23/2018 Commercial Observer

Luxury resort would be the first major commercial asset to be ‘tokenized’ in the U.S.

Bitmain IPO fiasco
Samson Mow@Excellion 8/26/2018 Caijing

Bitmain, a key player in cryptocurrency hardware, will face increasing competition

The blockchain chickens bringing the future to free-range
Nicole Lim 8/23/2018 Sixth Tome

China & Blockchain Chickens link to food safety.


GIC Events: Trade, Trade Wars, & Economic Impacts and Outlook on Agriculture, Manufacturing & Tariffs

The Global Interdependence Center (GIC) is partnering with the Federal Reserve Bank of Chicago to discuss an outlook on agriculture, manufacturing and tariffs. This day-long conference on September 12, 2018 will be held at the Federal Reserve Bank of Chicago.