Trade War Escalation and Bombs

Doug Nolan


August 23 – Reuters (Se Young Lee and Judy Hua): “China said on Friday it will impose retaliatory tariffs against about $75 billion worth of U.S. goods, putting as much as an extra 10% on top of existing rates in the dispute between the world’s top two economies. The latest salvo from China comes after the United States unveiled tariffs on an additional $300 billion worth of Chinese goods… scheduled to go into effect in two stages on Sept. 1 and Dec. 15. China will impose additional tariffs of 5% or 10% on a total of 5,078 products originating from the United States including agricultural products such as soybeans, crude oil and small aircraft. China is also reinstituting tariffs on cars and auto parts originating from the United States. ‘China’s decision to implement additional tariffs was forced by the U.S.’s unilateralism and protectionism,’ China’s Commerce Ministry said…”

S&P500 futures were trading up about 0.3% in early Friday overseas trading, boosted by a somewhat stronger-than-expected PBOC renminbi “fix.” The first “Bomb” hit at 8:02 am eastern: “China to Levy Retaliatory Tariffs on Another $75B of U.S. Goods.” 8:04: “China to Resume 25% Tariffs on U.S. Autos From Dec. 15.” 8:17: “China to Impose Extra 5% Tariff on Soy Beans From Sept. 1.” 8:24: “China: Imposes 5% Tariff on U.S. Crude Oil Imports From Sept. 1.”

S&P500 futures dropped as much as 26 points (0.9%) on Chinese retaliation, news that hit two hours before Chairman Powell’s widely anticipated 10:00 am speech to open the Fed’s Jackson Hole Economic Policy Symposium. Powell’s talk was generally considered “balanced” to somewhat more dovish than expected. Markets were relieved to see no reference to “mid-cycle adjustment,” with more attention to trade and global risks. By 10:37 am, the S&P500 was back in positive territory, having fully recovered earlier (China retaliation) losses.

Presidential Bomb drops at 10:57: “As usual, the Fed did NOTHING! It is incredible that they can ‘speak’ without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work ‘brilliantly’ with both, and the U.S. will do great...”

Followed up with a precision bunker buster: “...My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Cluster Bomb inbound at 10:59: “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far....”

“....better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing..”

“....your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE,....”

“....all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop - it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!”

Trading at 2,926 at 10:59 am, the S&P500 was down 1.8% to 2,874 just 11 minutes later (ending the session down 2.6% at 2,847). The tech-heavy Nasdaq100 dropped 2.6% in an hour.

After trading at 1.66% in early overseas trading, 10-year Treasury yields were down to 1.52% by noon eastern (almost matching the low yield since 2016). The implied yield on December Fed fund futures dropped a quick eight bps to 1.55%.

Gold was trading below $1,500 before the Bombs started falling. The shiny metal surged to $1,529 on Trump’s Cluster… (Bomb). Crude (WTI July contract) traded as high as $55.60 in pre-U.S. Friday trading, only to sink as low as $53.24. The yen rallied almost 1% to near the strongest level vs. the dollar since 2016. China’s offshore renminbi dropped 0.5% versus the dollar. The onshore renminbi traded to 7.0955, the low versus the dollar since March 2008.

Beyond the obvious major ramifications of an escalating China/U.S. trade war, expect intensifying debate regarding the mental stability of our Commander and Chief. The President’s, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” is especially alarming. Any suggestion that Chairman Powell is an enemy of the people crosses the line.

Having a disagreement with Federal Reserve monetary management is one thing. The President villainizing the head of the Federal Reserve in the current environment only further undermines a critical institution at a time of troubling market, economic, social and geopolitical instability. And doing so right after Powell delivered a Jackson Hole speech widely viewed as balanced and positively received by the markets does not instill confidence in the President’s rationality. That Friday’s tweets followed by a couple days the bizarre exchange over Greenland and the cancellation of the President’s state visit to Denmark is further disconcerting. And it’s worth recalling that the President threatened China with new tariffs back on August 1st over the objections of his advisors.

And so much for “good friend.” I’ll assume affixing the “enemy” label to Xi Jinping denotes serious trade war escalation. The “We don’t need China and, frankly, would be far better off without them” is frighteningly delusional. Along with the majority of Americans, I’ve believed a tougher stance with China was overdue. Yet I’ve also voiced serious concerns that the President’s abrasive and condescending approach with Beijing stood a low probability of success – with not insignificant odds of dangerous fallout. A Friday afternoon Bloomberg headline resonated: “Much Tougher to Walk Back: Investors on Trump-Tweet Stock Rout.”

As promised, Friday evening the President retaliated against China’s retaliation:

August 23 – Bloomberg (Joshua Gallu): “President Donald Trump said he’s raising tariffs further on Chinese imports in response to Beijing’s retaliation earlier in the day, deepening the impasse over the two nations’ trade policies. Duties on $250 billion of imports already in effect will rise to 30% from 25% on Oct. 1, Trump said in a series of tweets Friday after U.S. markets closed. He also said that the remaining $300 billion in Chinese imports will be taxed at 15% instead of 10% starting Sept. 1. Friday’s events marked a dramatic escalation in tensions between the U.S. and China after months of failed talks to resolve their trade dispute. It’s unclear whether negotiators will follow through with a plan to meet in Washington next month as relations have continued to sour. “China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!),” Trump said on Twitter.”

Friday’s caustic tone and sudden escalation brought into focus the possibility that this trade war has the clear potential to spiral precariously out of control. Will President Trump move forward with measures that would force U.S. companies to retreat from China? Might the Department of Treasury intervene in the currency markets? Could the U.S. further ratchet up sanctions on Chinese companies? What impact will this latest escalation have on already shaky Chinese financial stability? How much closer is China to using its huge trove of U.S. Treasuries to make a point?

And if the day hadn’t already generated bountiful historical subject matter… With an escalating trade war, talk of currency wars and intensifying geopolitical strife, it was an ominously befitting backdrop for Bank of England governor Mark Carney’s Jackson Hole speech, “The growing challenges for monetary policy in the current international monetary and financial system.”

August 23 – Bloomberg (Brian Swint): “Mark Carney laid out a radical proposal for an overhaul of the global financial system that would eventually replace the dollar as a reserve currency with a Libra-like virtual one. Just a few months before he steps down as Bank of England governor, Carney offered his vision for the international economy at a time of sweeping change. Trade wars and the threat of currency wars are hurting growth and upending multilateral cooperation, while central banks are trapped in a low interest-rate world as they struggle to revive inflation… His most striking point was that the dollar’s position as the world’s reserve currency must end, and that some form of global digital currency -- similar to Facebook Inc’s proposed Libra -- would be a better option. That would be preferable to allowing the dollar’s reserve status to be replaced by another national currency such as China’s renminbi.”

The hastened formation of an international non-dollar block of economies will surely be one of the momentous consequences of the U.S. China trade war. Countries including Russia, China, Turkey, Iran, Venezuela, North Korea and many others will eventually operate outside of the existing U.S.-dominated structure of trade arrangements, financial relations and payment systems, and sanction regimes. Not only do I expect the unfolding crisis to be of an international scope much beyond 2008. Today’s hostile environment is in stark contrast to the cooperation and coordination that previously ensured a concerted global crisis response. There are today incredibly high stakes tottering on the perception that a unified global central bank community retains the capacity to hold crisis dynamics at bay.

August 22 – Bloomberg (Craig Torres): “Harvard University economist Lawrence Summers warned central bankers that they are staring at ‘black hole monetary economics’ where small changes in interest rates and even more aggressive strategies do little to solve demand shortfalls. ‘Interest rates stuck at zero with no real prospect of escape -- is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation,’ Summers wrote on in a series of tweets… ‘The United States is only one recession away from joining them.’”

Federal Reserve policy is at a critical juncture. The efficacy of global monetary stimulus is at a critical juncture, as are the world’s financial, economic and geopolitical backdrops. The Fed’s Jackson Hole symposium has spurred a most important debate. Several regional Federal Reserve Bank Presidents provided comments notable both for insight and candor. For posterity, I’ve included excerpts from timely interviews conducted from Jackson Hole.

Esther George, President of the Federal Reserve Bank of Kansas City: “As I look at where the economy is, it’s not yet time – I’m not ready to begin to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker here.”

Bloomberg’s Michael McKee: “If you’re not ready to cut rates, are you happy with where rates are given that inflation is lower than anticipated? And would you be happy to leave them at this level for quite some time?”

George: “So I think that’s going to be a process of judging how the economy unfolds. I think where rates are right now – relative to the unemployment rate and inflation - suggests we’re at a sort of equilibrium right now. And I’d be happy to leave rates here – absent seeing some weakness or some strengthening or some kind of upside risk that would make me think rates should be somewhere else.”

McKee “Where would you put the neutral rate right now relative to where you are – are you tight? Are you loose? Accommodative? How do you see it?”

George: “I would judge policy to be at neutral or even accommodative with this last rate cut. If you think about where real interest rates are relative to the rate of inflation and where the Fed funds rate is, we’re operating close to zero with real rates. I can’t believe that that is tight in any sense for the economy right now.”

Eric Rosengren, President of the Federal Reserve Bank of Boston: “My own view [dissenting from the July 31st rate cut decision] was that we have to be careful not to ease too much when we don’t have significant problems. So the focus is not to do something that affects the exchange rate or something that necessarily takes care of the world economy. We’re supposed to focus on unemployment and inflation in the United States. So I think we’re at a pretty good spot right now. And there are costs to easing in times when you don’t need to ease.”

Bloomberg’s Kathleen Hays: “What’s the cost?”

Rosengren: “There are several costs. One is, one of the ways monetary policy works is that you cause people to buy houses and cars earlier than they otherwise would – “inter-temporal substitution”. You choose to make an investment now because interest rates, you think, are going to be temporarily low. And so you make expenditures you might not otherwise make. A second is, that when we lower interest rates we make the cost of debt lower. That means that both households and firms are more likely to be leveraged. And if they get leveraged right before we have more significant problems, they are actually in much worse shape. So we have to think about the financial stability characteristics, and by that it’s thinking of how much do we want households and firms to be leveraged going into whenever we actually do have a significant downturn.”

Rosengren: “What I think has people really focused on whether we’re going to have a recession is a combination of volatility in the stock market: we obviously had a very big movement a week ago when we lost 800 points on the Dow – but in subsequent days we moved back up. And if you look at the long bond [yield], it is very low. It’s around 1.60%. One of the reasons for that is the global weakness. But the cure for global weakness is for countries around the world to expand with either fiscal or monetary policies in their own countries rather than just the United States to be doing the easing.”

CNBC’s Steve Liesman: “Let’s talk about where we are in terms of the economy. What is your outlook for the economy? What is your view of growth right now? Is it too slow?”

Patrick Harker, President of the Federal Reserve Bank of Philadelphia: “No. I think it’s exactly what we had anticipated – a year ago and even two years ago. We are going back to trend growth, roughly 2% growth.”

Liesman: “Where would you say policy is relative to that trend growth?”

Harker: “In December, I was not supportive of the increase. I was supportive of the decrease somewhat reluctantly this time around to get us back to where I think policy should be. We’re roughly where neutral is. It’s hard to know exactly where neutral is – but I think we’re roughly where neutral is right now. I think we should stay here for a while and see how things play out.”

Liesman: “You don’t see a case for further stimulus to the economy?”

Harker: “No. Not right now.”

Liesman: “Why not?”

Harker: “Because you look at the labor markets are strong, inflation is moving up slowly, the last CPI print was a good print. We’ll see how PCE comes in. There are negative headwinds to the economy. But right now I don’t think they call for any drastic action. I think we can take some time and see how things play out.”

Liesman: “Isn’t there an argument to take out an “insurance” cut for the type of potential negative effects?”

Harker: “I’ve heard that argument, but I’m not very sympathetic to the argument. Right now, given the volatility even of the policy itself, we don’t need to make that move right now. Nothing is moving dramatically in a negative direction. There is potential for it to do so. I think we need to keep our powder dry so that when that happens we have the policy space to move.”

Liesman: “How much concern do you have if rates remain too low for too long for the financial stability side of things?”

Harker: “That is the other factor that I have to weigh. I didn’t think the cut was appropriate necessarily, but I went along with it to get back to neutral. But I’m on hold right now. My forecast is just to hold where we are for one of the reasons is that. We run the risk of creating too much leverage in the economy.”

Staring into the abyss

Chinese troops must stay off the streets of Hong Kong

Deploying the army would have dangerous repercussions for China and the rest of the world




IT IS SUMMER, and the heat is oppressive. Thousands of students have been protesting for weeks, demanding freedoms that the authorities are not prepared to countenance. Officials have warned them to go home, and they have paid no attention. Among the working population, going about its business, irritation combines with sympathy. Everybody is nervous about how this is going to end, but few expect an outcome as brutal as the massacre of hundreds and maybe thousands of citizens.

Today, 30 years on, nobody knows how many were killed in and around Tiananmen Square, in that bloody culmination of student protests in Beijing on June 4th 1989. The Chinese regime’s blackout of information about that darkest of days is tacit admission of how momentous an event it was. But everybody knows that Tiananmen shaped the Chinese regime’s relations with the country and the world. Even a far less bloody intervention in Hong Kong would reverberate as widely.

What began as a movement against an extradition bill, which would have let criminal suspects in Hong Kong be handed over for trial by party-controlled courts in mainland China, has evolved into the biggest challenge from dissenters since Tiananmen. Activists are renewing demands for greater democracy in the territory. Some even want Hong Kong’s independence from China. Still more striking is the sheer size and persistence of the mass of ordinary people.

A general strike called for August 5th disrupted the city’s airport and mass-transit network.

Tens of thousands of civil servants defied their bosses to stage a peaceful public protest saying that they serve the people, not the current leadership. A very large number of mainstream Hong Kongers are signalling that they have no confidence in their rulers.

As the protests have escalated, so has the rhetoric of China and the Hong Kong government. On August 5th Carrie Lam, the territory’s crippled leader, said that the territory was “on the verge of a very dangerous situation”. On August 6th an official from the Chinese government’s Hong Kong office felt the need to flesh out the implications. “We would like to make it clear to the very small group of unscrupulous and violent criminals and the dirty forces behind them: those who play with fire will perish by it.” Anybody wondering what this could mean should watch a video released by the Chinese army’s garrison in Hong Kong. It shows a soldier shouting “All consequences are at your own risk!” at rioters retreating before a phalanx of troops.

The rhetoric is designed to scare the protesters off the streets. And yet the oppressive nature of Xi Jinping’s regime, the Communist Party’s ancient terror of unrest in the provinces and its historical willingness to use force, all point to the danger of something worse. If China were to send in the army, once an unthinkable idea, the risks would be not only to the demonstrators.

Such an intervention would enrage Hong Kongers as much as the declaration of martial law in 1989 aroused the fury of Beijing’s residents. But the story would play out differently. The regime had more control over Beijing then than it does over Hong Kong now. In Beijing the party had cells in every workplace, with the power to terrorise those who had not been scared enough by the tanks. Its control over Hong Kong, where people have access to uncensored news, is much shakier. Some of the territory’s citizens would resist, directly or in a campaign of civil disobedience. The army could even end up using lethal force, even if that was not the original plan.

With or without bloodshed, an intervention would undermine business confidence in Hong Kong and with it the fortunes of the many Chinese companies that rely on its stockmarket to raise capital. Hong Kong’s robust legal system, based on British common law, still makes it immensely valuable to a country that lacks credible courts of its own. The territory may account for a much smaller share of China’s GDP than when Britain handed it back to China in 1997, but it is still hugely important to the mainland. Cross-border bank lending booked in Hong Kong, much of it to Chinese companies, has more than doubled over the past two decades, and the number of multinational firms whose regional headquarters are in Hong Kong has risen by two-thirds. The sight of the army on the city’s streets would threaten to put an end to all that, as companies up sticks to calmer Asian bases.

The intervention of the People’s Liberation Army would also change how the world sees Hong Kong. It would drive out many of the foreigners who have made Hong Kong their home, as well as Hong Kongers who, anticipating such an eventuality, have acquired emergency passports and boltholes elsewhere. And it would have a corrosive effect on China’s relations with the world.

Hong Kong has already become a factor in the cold war that is developing between China and America. China is enraged by the high-level reception given in recent weeks to leading members of Hong Kong’s pro-democracy camp during visits to Washington. Their meetings with senior officials and members of Congress have been cited by China as evidence that America is a “black hand” behind the unrest, using it to pile pressure on the party as it battles with America over trade (a conflict that escalated this week, when China let its currency weaken.

Were the Chinese army to go so far as to shed protesters’ blood, relations would deteriorate further. American politicians would clamour for more sanctions, including suspension of the act that says Hong Kong should be treated as separate from the mainland, upon which its prosperity depends. China would hit back. Sino-American relations could go back to the dark days after Tiananmen, when the two countries struggled to remain on speaking terms and business ties slumped. Only this time, China is a great deal more powerful, and the tensions would be commensurately more alarming.

None of this is inevitable. China has matured since 1989. It is more powerful, more confident and has an understanding of the role that prosperity plays in its stability—and of the role that Hong Kong plays in its prosperity. Certainly, the party remains as determined to retain power as it was 30 years ago. But Hong Kong is not Tiananmen Square, and 2019 is not 1989. Putting these protests down with the army would not reinforce China’s stability and prosperity. It would jeopardise them.

Trump’s Deficit Economy

Economists have repeatedly tried to explain to Donald Trump that trade agreements may affect which countries the US buys from and sells to, but not the magnitude of the overall deficit. But, as usual, Trump believes what he wants to believes, leaving those who can least afford it to pay the Price.

Joseph E. Stiglitz

stiglitz261_Drew AngererGetty Images_trump jerome powell


NEW YORK – In the new world wrought by US President Donald Trump, where one shock follows another, there is never time to think through fully the implications of the events with which we are bombarded. In late July, the Federal Reserve Board reversed its policy of returning interest rates to more normal levels, after a decade of ultra-low rates in the wake of the Great Recession. Then, the United States had another two mass gun killings in under 24 hours, bringing the total for the year to 255 – more than one a day. And a trade war with China, which Trump had tweeted would be “good, and easy to win,” entered a new, more dangerous phase, rattling markets and posing the threat of a new cold war.

At one level, the Fed move was of little import: a 25-basis-point change will have little consequence. The idea that the Fed could fine-tune the economy by carefully timed changes in interest rates should by now have long been discredited – even if it provides entertainment for Fed watchers and employment for financial journalists. If lowering the interest rate from 5.25% to essentially zero had little impact on the economy in 2008-09, why should we think that lowering rates by 0.25% will have any observable effect? Large corporations are still sitting on hoards of cash: it’s not a lack of liquidity that’s stopping them from investing.

Long ago, John Maynard Keynes recognized that while a sudden tightening of monetary policy, restricting the availability of credit, could slow the economy, the effects of loosening policy when the economy is weak can be minimal. Even employing new instruments such as quantitative easing can have little effect, as Europe has learned. In fact, the negative interest rates being tried by several countries may, perversely, weaken the economy as a result of unfavorable effects on bank balance sheets and thus lending.

The lower interest rates do lead to a lower exchange rate. Indeed, this may be the principal channel through which Fed policy works today. But isn’t that nothing more than “competitive devaluation,” for which the Trump administration roundly criticizes China? And that, predictably, has been followed by other countries lowering their exchange rate, implying that any benefit to the US economy through the exchange-rate effect will be short-lived. More ironic is the fact that the recent decline in China’s exchange rate came about because of the new round of American protectionism and because China stopped interfering with the exchange rate – that is, stopped supporting it.

But, at another level, the Fed action spoke volumes. The US economy was supposed to be “great.” Its 3.7% unemployment rate and first-quarter growth of 3.1% should have been the envy of the advanced countries. But scratch a little bit beneath the surface, and there was plenty to worry about. Second-quarter growth plummeted to 2.1%. Average hours worked in manufacturing in July sank to the lowest level since 2011. Real wages are only slightly above their level a decade ago, before the Great Recession. Real investment as a percentage of GDP is well below levels in the late 1990s, despite a tax cut allegedly intended to spur business spending, but which was used mainly to finance share buybacks instead.

America should be in a boom, with three enormous fiscal-stimulus measures in the past three years. The 2017 tax cut, which mainly benefited billionaires and corporations, added some $1.5-2 trillion to the ten-year deficit. An almost $300 billion increase in expenditures over two years averted a government shutdown in 2018. And at the end of July, a new agreement to avoid another shutdown added another $320 billion of spending. If it takes trillion-dollar annual deficits to keep the US economy going in good times, what will it take when things are not so Rosy?

The US economy has not been working for most Americans, whose incomes have been stagnating – or worse – for decades. These adverse trends are reflected in declining life expectancy. The Trump tax bill made matters worse by compounding the problem of decaying infrastructure, weakening the ability of the more progressive states to support education, depriving millions more people of health insurance, and, when fully implemented, leading to an increase in taxes for middle-income Americans, worsening their plight.

Redistribution from the bottom to the top – the hallmark not only of Trump’s presidency, but also of preceding Republican administrations – reduces aggregate demand, because those at the top spend a smaller fraction of their income than those below. This weakens the economy in a way that cannot be offset even by a massive giveaway to corporations and billionaires. And the enormous Trump fiscal deficits have led to huge trade deficits, far larger than under Obama, as the US has had to import capital to finance the gap between domestic savings and investment.

Trump promised to get the trade deficit down, but his profound lack of understanding of economics has led to it increasing, just as most economists predicted it would. Despite Trump’s bad economic management and his attempt to talk the dollar down, and the Fed’s lowering of interest rates, his policies have resulted in the US dollar remaining strong, thereby discouraging exports and encouraging imports. Economists have repeatedly tried to explain to him that trade agreements may affect which countries the US buys from and sells to, but not the magnitude of the overall deficit.

In this as in so many other areas, from exchange rates to gun control, Trump believes what he wants to believe, leaving those who can least afford it to pay the Price.


Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. He is the author, most recently, of People, Power, and Profits: Progressive Capitalism for an Age of Discontent (W.W. Norton and Allen Lane).


Deutsche Bank and UBS Explored European Banking Alliance

Deal talks in June never coalesced but show how far European lenders are willing to go to address a punishing banking environment

By Jenny Strasburg


UBS CEO Sergio Ermotti and Chairman Axel Weber at the company's shareholder meeting in May. Photo: arnd wiegmann/Reuters


Deutsche Bank AG DB -2.79%▲ and UBS UBS -1.41%▲ Group AG this year explored ways to combine their businesses, including talks as recently as mid-June to form an unusual alliance of investment-banking operations, according to people familiar with the discussions.

The talks between Germany and Switzerland’s biggest lenders show how far European lenders are willing to go to address a punishing banking environment. Hammered by negative interest rates and slowing economic growth, European banks are struggling to compete globally and fend off encroachments from bigger U.S. rivals on their home turf.



A deal never coalesced, as the two sides failed to sort out thorny issues, including how to structure and allocate capital to any joint operations, the people said. Deutsche Bank and UBS for years have contemplated exploring a merger, the people said. One person who has been involved in multiple deliberations said the talks have been on and off but never fully off the table.

Inside Deutsche Bank, a tie-up was seen as a way to save Germany’s biggest bank from the painful cuts now in motion, the people said. The banks discussed a full-blown merger earlier in the year, a move that would have created a European banking behemoth more able to compete with Wall Street’s most dominant players, such as JPMorgan Chase& Co. and Goldman Sachs Group Inc. Bloomberg reported in May that the two banks briefly explored a merger. The June talks haven’t been previously reported.

UBS has suffered from volatile performance in its investment bank, and shares currently trade near their lowest point since it restructured its business in 2012. Deutsche Bank’s shares trade just above their all-time low hit this month.

The mid-June discussions, held near Milan, included the finance chiefs of both banks, senior investment-banking executives and advisers, some of the people said. The executives discussed ways to swap some operations and intertwine parts of their investment banks but keep the parent companies separate, according to the people familiar with the talks.

The people said a concept behind an alliance was to play to the strengths of both lenders, as Deutsche Bank, which remains a big player in its fixed-income trading and structuring business, would get referrals from UBS, which pulled back from some of those business lines several years ago. Deutsche Bank would feed business into UBS’s more successful equities franchise, the people said. UBS was interested in some of Deutsche Bank’s deal-advisory teams in the U.S., a person briefed on the discussions said.

Such a venture was seen by some involved as a possible test case, some of the people familiar with the talks said. It might have allowed the German and Swiss banks—and regulators, governments and investors—to gauge whether a merger might make sense, without committing to a new headquarters, regulatory regime or full restructuring, the people said.

Deutsche Bank’s then-investment-banking chief Garth Ritchie was at the meeting in Italy, along with Alexander von zur Muehlen, who is Chief Executive Christian Sewing’s top internal adviser on strategy. So was UBS’s Robert Karofsky, co-president of the investment bank, people familiar with the meeting said.


Deutsche Bank CEO Christian Sewing, right, speaks with Chairman Paul Achleitner at the bank’s annual meeting in May. Photo: Alex Kraus/Bloomberg News


UBS Finance Chief Kirt Gardner attended, and Deutsche Bank’s CFO,James von Moltke, dialed in, people familiar with the talks said. Tadhg Flood, a partner with deal advisory firm Centerview Partners, was advising the German bank, the people said. He previously served inside Deutsche Bank and remains a confidant of Mr. Sewing. On the UBS side was Jonathan Wills, the people said, another Deutsche Bank alum who worked this year for consulting firm Oliver Wyman. In June, Mr. Wills joined UBS as head of investment-bank strategy.

Earlier in the year, when Deutsche Bank was in talks to merge with crosstown rival Commerzbank AG, Deutsche Bank had parallel discussions with UBS to combine their asset management arms, The Wall Street Journal and others reported in April.

UBS Chairman Axel Weber earlier this year discussed with German officials the potential merits of a UBS-Deutsche Bank deal, and UBS Chief Executive Sergio Ermottiwas also open to exploring the idea, some of the people said.



The full merger talks went on for weeks, but by May they bogged down over regulation of the investment bank and the location of a combined bank’s headquarters—Zurich, Frankfurt, a third location where neither bank is located, or some combination of the three, according to people familiar with the talks.

By June, Deutsche Bank was running out of time. While talking with UBS, the German bank was planning cuts and discussing with other banks selling off stock-trading technology and pieces of its prime-brokerage franchise, which serves hedge funds. French bank BNP Paribas eventually struck a deal for some of those businesses.

The alliance discussions with UBS were short-lived; UBS walked away after the Milan meeting, some people familiar with the negotiations said. Deep cooperation short of a merger is rare in the banking world. People involved in the talks said the two sides decided they couldn’t quickly sort out how to structure the operation or share capital between the entities. One of the people said the idea was a long shot.

On June 21, Mr. Sewing emailed business heads demanding additional details for executives preparing the “equity story” for a major restructuring, people familiar with the internal communications said.

Some inside the bank said the crunch of hurried decision-making left executives little time to finalize senior management and cost-cutting decisions. They say the impact is still felt, with confusion about what services the bank will keep and how much capital those businesses need.

On the first Sunday in July, Messrs. Sewing and von Moltke laid out a reorganization that included the departure of three management-board members, including Mr. Ritchie, and 18,000 job cuts. There will also be a major pullback from the bank’s Wall Street presence, with an exit from most of its equities business and more investment in its strongest fixed-income and advisory businesses.

Central banks have lost much of their clout

Monetary policy is no longer enough to keep the economy on track

Adair Turner


© Jonathan McHugh


As leading central bankers meet this week in Jackson Hole, Wyoming, financial markets and media anxiously await indications of future policy direction. This year’s topic is Challenges for Monetary Policy and, amid slowing global growth, the talk is of interest rate cuts and clearer forward guidance.

In September, the European Central Bank may commit to keeping rates below zero beyond 2020. Some economists think the Bank of England’s Monetary Policy Committee should make explicit interest rate forecasts, mirroring the US Federal Reserve practice.

Many hope that the Fed’s recent 0.25 per cent rate cut will be the first of many. Governor Haruhiko Kuroda of the Bank of Japan faces calls for action to counter stubbornly low inflation. More quantitative easing is possible.

Given the uncertainty, this year in particular the precise words spoken at Jackson Hole will be scrutinised with great care. But, in reality, what central banks can do alone is no longer very important.

It has been clear since the 2008 global financial crisis that when short and long-term interest rates are already very low, further cuts make little difference to real economic activity. If the BoE now cuts its rate from 0.75 per cent to 0.5 per cent the impact on consumption will be trivial.

Because big German companies can already borrow 10-year money at less than 0.5 per cent, using quantitative easing to reduce that to, say, 0.4 per cent will make almost no difference to their investment plans. Pushing policy rates too far into negative territory could instead reduce growth by limiting bank profitability and lending.

Central banks’ attempts to manage expectations are also ineffective. When German bond yields show that investors expect negative ECB rates for a decade, promising they will not rise until 2021 cannot have more than trivial impact.

Despite all this, a mountain of economic commentary is still devoted to predicting minor shifts in central bank policy, and central bankers still obsess over the effectiveness of their communications. Two factors explain this disconnect between economic importance and the focus of economic debate.

The first is that while minor rate changes matter little to consumers and businesses, correctly anticipating them matters a lot to many asset managers, macro hedge funds, investment banks and their investor clients. Central bank-watching is, therefore, a preoccupation for many professional economists. Central bank announcements, with their ability to move markets and the drama of expectations confirmed or disappointed, also create a media buzz.

For financial investors “mixed messages” from central bank governors can turn potential speculative gains into embarrassing losses. When a member of the UK House of Commons Treasury select committee accused BoE governor Mark Carney of being like an “unreliable boyfriend”, it made for good headlines. But, in an era of structurally low interest rates, uncertainty about the timing of small future changes is just not that important.

Monetary easing can have a significant stimulative effect if interest rate changes drive currency depreciation. But that is a zero-sum game. US president Donald Trump wants a weak dollar, while China is allowing the renminbi to depreciate to offset the impact of his tariffs. No exchange rate policy can stimulate both economies.

The second factor is the fear of what follows if monetary policy has become powerless; for either we can then do nothing to offset potential recessions or fiscal policy must take the strain.

But higher fiscal deficits mean rising public debt, unless they are financed with central bank money, and the latter seems to threaten central bank independence. So, for fear of finding something worse, central bankers cling to the hope that some sophisticated wrinkle of monetary policy will at last be effective.

However, large fiscal deficits and forms of monetary finance are already major drivers of global growth. In the spring of 2016, there were fears that central banks were “out of ammunition”. But, triggered by the Trump administration’s 2017 tax cuts, the US fiscal deficit has risen to today’s 4.5 per cent of gross domestic product.

China’s fiscal deficit has grown from 2.8 per cent of GDP in 2015 to 6 per cent in 2019, with some of this financed by People’s Bank of China lending to state-owned banks to buy public bonds. Japan has run large deficits for a decade, fully matched by Bank of Japan purchases of government bonds, which will never be sold back to the private sector. And while Germany has stuck to the path of fiscal rectitude, its growth has relied on exports to these profligate rule breakers.

It is the eurozone that now faces the greatest danger. The Fed’s funds rate is now at 2-2.25 per cent, so the US can still cut by enough to make some difference — and if the economy continues to slow, the Trump administration will unleash increased spending or further tax cuts.

Meanwhile, China and Japan will continue to run large fiscal deficits indirectly financed by their central banks. For the UK, as a smaller economy, exchange rate depreciation is a more powerful option than elsewhere.

But if global demand and eurozone exports remain subdued — and hardliners continue to block a European version of fiscal relaxation lubricated by central bank government bond purchases — there is no feasible action the ECB can take that will make more than a trivial difference to eurozone growth.

The truth is that, acting alone, central bankers are no longer that important.


The writer is a former head of the UK Financial Services Authority


What a Recession Would Mean for Brazil

The country’s recent economic figures aren’t inspiring much hope that it will return to high growth rates.

By Allison Fedirka

 
It’s easy to see why the estimates are so pessimistic; the country’s economic activity index – seen as an indicator of growth – declined by 0.13 percent in the second quarter, and the economy contracted by 0.2 percent in the first. Another consecutive quarter of contraction would put the country in a technical recession.
Either way, the Brazilian economy is clearly struggling, and the government appears to be preparing for the worst, introducing stimulus measures to try to boost growth.
 
Slow and Painful
Brazil’s modest recovery from its two-year recession has been slow and painful. Since 2017, the government has adhered to budget spending caps and has slashed spending on social programs. Unemployment reached 12.7 percent in the first quarter of this year, and though it has since fallen to 12 percent, it remains well above pre-recession levels, and an additional 28.5 million Brazilians (25 percent of the working-age population) are considered underemployed.
Productivity has dropped as more people settle for informal work or leave the workforce altogether. Research from the Brazilian Institute of Economics found that labor productivity fell 1.1 percent in the first quarter of this year, led by declines in the manufacturing and services sectors.
The deceleration is even more stark when compared to the 2.8 percent increase in productivity in the last quarter of 2018. Real income has also declined throughout the year. In May, the average household monthly real income was 2,280 reals ($560), down 1.5 percent from the previous quarter.

To address these issues, the government of President Jair Bolsonaro has made structural reforms a top priority. The cornerstone of the reforms has been changes to the pension system – including an increase in the retirement age – through which the government hopes to save $800 billion to $900 billion over the next 10 years.
According to the Bolsonaro administration, spending on social security and other social assistance programs in Brazil ranks among the highest in the world, and it’s becoming a bigger burden as the Brazilian population ages and its growth rate declines.
 
 
The government’s structural reforms also include privatization efforts to reduce support of unprofitable companies and public sector presence in the economy. In agriculture, the government has moved away from subsidizing production in favor of new and larger lines of credit for farmers. There are also proposals for modifying labor laws to generate more jobs. It’s hoped that deregulation will make it easier for companies to do business in the country and, therefore, attract more private investment at a time when the government’s own ability to stimulate the economy through spending is limited. To that end, the government has introduced the Direct Investment Ombudsman, whose purpose it is to support foreign investors with general inquiries and questions over legislation and administrative procedures related to investing in Brazil.

Several factors, however, have complicated these reform efforts. Passing social security changes is challenging in any country, but it is especially so in a country as diverse and divided as Brazil. Brazil’s lower house has approved the pension reform bill, but the Senate has yet to vote on it. And as economic growth has stalled, the government has had to repeatedly cut back spending to meet the self-imposed spending cap. It froze $2.2 billion in spending in late May and another $2.3 billion in late July. Despite these cutbacks, the government is at risk of exceeding its budget deficit target of 139 billion reals for the year because of lower-than-expected revenue. It has worked with state-level governments, which are also struggling financially, to harmonize national and state plans and avoid state bankruptcies.
 
 
The U.S.-China trade war is also partly to blame. Exporters and major industries across Brazil delayed or reduced (by hundreds of millions of dollars) investment plans because of the trade war, and there’s growing concern that, as the war escalates, Brazil’s window of opportunity for recovery will narrow.

Meanwhile, the country’s third-largest trade partner – Argentina – is in the middle of a recession, which has naturally hurt bilateral trade. Argentine purchases of Brazilian products fell 41.7 percent to $5.3 billion in the first half of 2019. This has significantly affected Brazil’s automotive industry, and it’s a major reason that Brazil’s manufacturing sector has struggled over the past two years.
 
Introducing Stimulus
The government has therefore introduced some economic stimulus measures. Though it initially wanted to hold off on a major stimulus package until after the reforms were implemented, the government believed it could no longer wait to try to encourage spending. In July, the government loosened rules over when and how workers can access their FGTS retirement accounts. (Previously, these funds could be accessed only in case of retirement, severe illness or to purchase a home.)

The measure is expected to inject up to 42 billion reals into the economy by 2020. Another 21 billion reals were made available through another social welfare fund, but only 2 billion reals are expected to be redeemed. This month, the government also announced plans to reduce the financing rate by as much as half for home buyers. For its part, the central bank said that, for the first time in 10 years, it would sell dollars on the spot currency market because of increased demand for liquidity – a move previous administrations were very reluctant to allow for fear of draining its foreign reserves.
 
 
The government has tried to encourage trade to supplement weak domestic demand. In the past, domestic demand has been a major driver of the Brazilian economy, while exports have accounted for only 15 percent of GDP. But after two years of recession and a weak recovery, domestic demand has slipped, and there’s an increasing need to look to foreign consumers.

But Brazil’s top three export destinations – China (27.6 percent), the U.S. (13.4 percent) and Argentina (4.7 percent) – are all showing signs of downturn. This explains in part why Brazil has worked to loosen trade restrictions within Mercosur – the South American trade bloc consisting of Brazil, Argentina, Uruguay and Paraguay – and why, after 20 years of negotiations, Brazil helped push through a free trade agreement between the European Union and Mercosur. The agreement hasn’t been ratified yet, but Brazil is already pursuing free trade agreements with other partners, including the United States and South Korea, and it reached a trade deal with Mexico on light vehicles, subject to a 40 percent regional content requirement, after six years of talks.

The government introduced several measures to try to recover from its last recession – measures that are now being used to stave off another downturn. It finds itself in the same position as many other major economies trying to avoid recessions of their own. More changes – including another possible stimulus package – may be on the way, and with an interest rate at 6 percent, there’s room for maneuver on monetary policy, too. 

But whether these steps are successful in preventing another major downturn remains to be seen.

The Biggest Migration Since the Barbarian Invasions of Rome

by Doug Casey



International Man: Former Libyan leader Muammar Ghaddafi once warned that "Europe runs the risk of turning black from illegal immigration… it could turn into Africa."

Since the United States and NATO helped overthrow Ghaddafi in 2011, millions of migrants from Africa and the Middle East have poured into Europe. Many transited from Libya.

This is all well known, and all signs point to this trend accelerating. What’s your take on where this is going?

Doug Casey: First, it’s a pity Ghaddafi was taken out. Another disastrous US policy decision.

Not that he was a nice guy—no one running an artificially constructed nation-state can be. But it was at least a stable situation. Now it’s been replaced by a bloody and costly war. And it’s complete chaos. Nice work Hillary and Obama. But let’s talk about Africa at large.

Africa, or at least migration in and out of Africa, is going to be the epicenter of what’s happening in the world for the rest of this century.

Africa has gone from being just an empty space on the map in the 19th century, to a bunch of backwater colonies in the 20th century, to a bunch of chaotic failed states that most people are only vaguely aware of today. Soon, however, it will be continuing front-page news. This is because Chinese are moving to Africa in record numbers while Africans are leaving as fast as they can.

What we’re looking at is actually the biggest migration since the barbarian invasions of the Roman Empire. There will be tens of millions—scores of millions—of Africans trying to get into Europe. I don’t know how the Europeans will keep them out. I used to say Europe was going to be a petting zoo for the Chinese, but it may be more of a squatter’s camp for the Africans.

Africa is the only part of the world where the population is still growing and growing rapidly.

Africa south of the Sahara was about 6% of the world’s population in the ’50s, now it’s about 16%. But by the turn of the century, it’s going to be 45%. Assuming there isn’t some kind of catastrophe. It’s not clear that the Africans can grow enough food for billions more people.

In fact, if the West stops supporting the continent with capital and technology, it could be in for very tough times. Wakanda, the country in "Black Panther", doesn’t exist. On the contrary, the continent is full of Gondwana lookalikes. Gondwana is where most of the action takes place in Speculator, the novel John Hunt and I wrote. It’s the first of seven in the High Ground series.

Few people realize how fast the population is growing, and things are changing in Africa. I ask knowledgeable people what they think the biggest cities in the world will be at the turn of the next century. They all guess cities in China or India.

But that’s not true. Eighty years from now, Lagos, Nigeria, will be the largest city in the world.

It’s on track to have a population of more than 90 million. The world’s second biggest city will be Kinshasa in the Congo with about 80 million people. Dar es Salaam, Tanzania, will be the world’s third biggest city with a population of roughly 75 million people. It’s quite amazing.

When I first visited Dar in the early ’80s, it was a quiet, exotic seaport with old tramp steamers in the harbor.

Now all those people have cell phones, and they’re well aware of the fact that the standard of living is vastly higher in Europe and every other part of the world than in Africa. And they’re well aware of the fact that there are welfare benefits of all types if they can get to Europe.

There are hundreds of NGOs encouraging Africans to come across the Mediterranean to Europe. Or for that matter, flying them to the US. Exactly who paid the airfare and legal and living expenses of the 200,000 penniless Somalis who were transplanted to Minnesota?

It’s a growing tidal wave. With the European population diminishing and the African population growing, you’re going to see Europe basically taken over by Africa in the next several generations.

International Man: What we don’t hear as much about is the massive migration of the Chinese to Africa that’s taking place.

Doug, you’ve spent a lot of time in Africa. What’s going on with all this?

Doug Casey: We’re seeing a veritable recolonization of Africa. Each time I visit Africa, there are more Chinese. It doesn’t matter which country; they’re everywhere.

Rich Chinese are smart to diversify to developed Western countries. Poor Chinese go to backward countries to try to become wealthy. Africa is the prime recipient.

It’s supposed to be official Chinese policy to migrate about 300 million Chinese to Africa in the years to come. They’re employed in building roads, railroads, ports, mines, and other infrastructure. It’s partially driven by their Belt and Road Initiative.

The Chinese are lending billions to African governments. African governments are, by an order of magnitude, the most corrupt in the world. And the people who run these African governments are being well compensated for making deals with the Chinese. And in effect, selling out their countrymen. All these governments are full of people trying to be "Mister 10%."

The worst case for them is to retire as centimillionaires, to live high off the hog in France or Switzerland. So, they’ve got nothing to lose. It’s a fairly unstoppable trend at this point.

Regardless of how much is stolen, however, I expect the Chinese are going to want the money they loaned to the Africans back, with interest.

If bribing or intimidating political leaders proves ineffective in getting it back, it’s possible that they’ll put soldiers’ boots on the ground. They could send in the People’s Liberation Army (PLA) to defend their assets. Or send in assassins to take out recalcitrant African politicians.

I wouldn’t be surprised to find the PLA in Africa in the years to come, physically collecting on those debts. And to make it easier for them, they’re going to be greeted by lots of Chinese already there.

It will be interesting to see what happens when a couple hundred million Chinese are living with a radically expanding native African population.

If the Africans were unhappy with European colonization, I think they’re going to be very, very unhappy with the Chinese colonization. The Chinese will not be "inclusive" and PC like today’s Westerners. It has the makings of a race war a generation or so in the future.

International Man: What about Africa piques the interests of the Chinese?

Doug Casey: It’s important to remember that Africa doesn’t produce anything besides raw materials—and people. There’s close to zero manufacturing—like 1% of the world’s total—in sub-Saharan Africa. And almost all of that is in South Africa.

The Chinese see Africans as no more than a cheap and dispensable labor source. That’s at best. Other than that, they’re viewed as a complete nuisance. Basically an obstacle—a cost—standing in the way of efficient use of the resources of the continent itself.

What do the Chinese people think of Africans? They don’t hold them in high regard. Of course, you’ve got to remember that China has viewed itself as the center of the world since Day One.

They see all non-Han people as barbarians, as inferiors.

That was absolutely true when the British sent an ambassador, Macartney, to open relations at the very end of the 18th century. He was treated with borderline contempt—pretty much the way Europeans and Americans have treated primitive peoples since the days of Columbus.

It’s actually the normal human attitude when an advanced culture encounters a backward culture. The Chinese see their culture as superior to even that of the West and believe—probably correctly—that they’ll soon be economically and technologically superior as well.

International Man: If China comes to dominate Africa and its resources, what does that mean for its rivalry with the US?

Doug Casey: Well, the US government is basically bankrupt at this point. The only thing that the US exports in quantity is US dollars. And sometime soon, the Chinese, the Russians, the Malaysians, the Iranians, and the Indians, among others, won’t need or want US dollars. They don’t want to accept them now, because it’s an asset of their adversary or even their enemy.

They’re unhappy about having to settle accounts in dollars that all have to clear through New York.

So, they’re going to come up with their own alternative. And I suspect they’re going to use gold.

Why? Because they don’t trust each other’s paper currencies. And why should they?

How’s the United States going to react to that?

It’s going to be left out in the cold. No one needs or wants their dollars—they want and need real goods, not the paper obligations of a hostile, unpredictable, bankrupt government. Also, the US isn’t in a position to export people, except for some unwelcome soldiers. The Chinese are in an excellent position to export a couple hundred million spare people. The bottom line is that the Chinese are going to take over Africa financially, and they’re going to take it over demographically as well.

International Man: What kind of speculative opportunities do you think this trend will create?

Doug Casey: Well, I’ve often said that if I were 30 years old today and wanted to make my fortune, I would definitely go to Africa. The reason for that is that you don’t want to be on a level playing field. You want to be on a field tilted in your direction as much as possible.

If a young Westerner goes to Africa and travels around, he’ll find it quite easy to move with the top levels of society. Because he’s unusual. And people are interested in things that are unusual.

The fact that you’re a Westerner means that you’ve probably associated with people who have much more money, much more sophistication, much more knowledge than any of the locals do.

You have unique advantages in Africa. If a young Westerner stays at home, however, he has no marginal advantages.

It’s very hard to vault yourself to the top in a Western society, because there are tens of millions of people just like you with the same education, background, and abilities.

But in Africa, you’re automatically on the top of the heap. And you’re noticeable. So, it’s a great place to go for entrepreneurial reasons.

At the same time, I don’t think Africa is a place to invest unless you’ve got the PLA standing behind you. It’s a place for a hit-and-run type of entrepreneurialism. Or perhaps political entrepreneurialism.

As corrupt as Africa is, the way almost everybody makes money is by getting hooked up with the government. And that’s possible to do. You could go to any number of African countries, hang out there for a month, and be sitting down with the president.

That’s not going to happen if you try to do the same thing in North America or Europe or for that matter even South America or Asia.

International Man: If you were 30 years old and looking for opportunity in Africa, what countries in particular would you be most interested in?

Doug Casey: Well, I wouldn’t jump off the deep end at first. Don’t go to a place like Nigeria to start. Nor is South Africa ideal for this purpose. It’s too developed, and there are too many people of European descent—although that’s changing. White people are making what the Rhodesians called "the chicken run" and for the same reasons. There’s too much anti-white racism in South Africa, and besides, the economy is going into reverse.

I would go to a country like Namibia, which is large, empty, and pretty mellow. I would definitely look at Mozambique. Or Mauritania—a huge country, where nobody goes. São Tomé and Príncipe, an obscure island country off the west coast. If you’re adventurous, the Central African Republic, which is probably the most backward country in Africa.

International Man: Thank you for your insights Doug.

The Real Cost of Trump’s Trade Wars

Economic analysis suggests that bilateral trade wars are unwinnable in an interconnected world. By firing his latest tariff salvo against China, US President Donald Trump has further raised the stakes in an increasingly damaging dispute – and America is likely to emerge as the bigger loser.

Daniel Gros

gros125_GettyImages_yuanoverlayingdollar


BRUSSELS – For a while at least, trade tensions between the United States and China seemed to have settled into a “new normal.” After both countries imposed high tariffs on a substantial proportion of each other’s goods, US President Donald Trump refrained from further escalation. But, following another inconclusive round of bilateral trade talks in Shanghai last week, Trump announced that the US will impose 10% tariffs on a further $300 billion worth of Chinese goods, effective September.

Should this new measure take effect, almost all US imports from China will be subject to tariffs. (The US already levies 25% tariffs on $250 billion worth of Chinese imports.) Although the US has also imposed non-tariff barriers in its trade war with China, reciprocal tariffs are the most visible component of the dispute – and are likely to hurt America more than China.

One way to compare the restrictiveness of countries’ trade policies is to look at their average tariff rates. For the US, this seems to paint a fairly reassuring picture. Before Trump took office, the average US tariff rate on industrial imports was about 2%, somewhat lower than that of China.

Even under Trump, this figure has (so far) not increased that much. Imports from China account for about one-quarter of all US imports, and the 25% tariff affects about one-half of imported Chinese goods. This implies that the average US import tariff has increased by about three percentage points, to 5% or so, which does not appear excessive.

But the average tariff is a misleading indicator. Economic theory suggests that tariffs have disproportionately negative effects on the welfare of consumers and producers. A doubling of a tariff, for example, will lead to more than double the welfare loss. A 25% tariff on a limited share of trade is thus much more serious than an average tariff of 3%.

Many countries have high import tariffs on a certain number of specific products, with a rate above 15% usually considered to be a “tariff peak.” But whereas these peaks apply to less than 1% of total imports for most industrialized countries, they cover a far larger share of US imports.

Moreover, Trump’s tariffs discriminate against China: the 25% tariff is paid only by Chinese producers, not by their European, Latin American, or Asian competitors. Such a country-specific tariff is equivalent to levying a general tariff on all imports while providing a production subsidy for competing producers outside China – with this subsidy paid by US consumers in the form of higher prices.

Because non-Chinese producers can raise their prices by up to 25% and still remain competitive in the US, prices for American consumers are likely to increase on a wide range of goods. The indirect effect of Trump’s China tariffs on consumer prices is therefore likely to be much greater than the recent estimate of a direct impact of only 0.1%. These indirect harmful consequences of country-specific tariffs are the main reason why the “most favored nation” principle has long been a cornerstone of the global trading system.

Moreover, preliminary studies suggest that Chinese producers have not significantly lowered their prices as a result of Trump’s tariffs. And even if they did, the small gain to US consumers from lower Chinese prices would likely be far outweighed by higher prices on competing imports diverted to the US market by Trump’s country-specific tariffs.

Although China previously imposed a reciprocal 25% tariff on many of its imports from the US, the negative impact on the Chinese economy is likely to be limited because US goods account for less than one-tenth of China’s overall imports. Chinese retaliatory tariffs thus have a small impact on the Chinese economy. And China has actually lowered tariffs on its imports from the rest of the world.

Moreover, a large share of China’s imports from the US consists of agricultural commodities such as soybeans, which the country could easily import at a similar price from Brazil if necessary. The US would then presumably export more soybeans to markets formerly served by Brazilian producers, including in Europe. (This would reduce America’s trade deficit with Europe and might ease US pressure on the European Union in that regard.)

The US has also ratcheted up non-tariff barriers as part of its aggressive trade policy toward China. Most notably, Trump has put Chinese tech giant Huawei on the list of entities to which US firms are forbidden to sell American products. True, Trump has also said that for the time being, US suppliers should obtain the necessary licenses to continue to supply Huawei. But from now on, US technology companies will clearly think twice before entering long-term contracts with Huawei or other prominent Chinese firms that might be at risk of being included on the “entities list.”

In parallel, China’s government and businesses will redouble their efforts to become independent from the US in sourcing key technological components. The mere threat of the entities list will henceforth act as a significant hidden barrier to US-China trade. And because this barrier is also discriminatory (directed only at China), it will have the same high costs as country-specific tariffs.

Economic analysis suggests that bilateral trade wars are unwinnable in an interconnected world. By firing his latest tariff salvo against China, Trump has further raised the stakes in an increasingly damaging dispute. And America is likely to emerge as the bigger loser.


Daniel Gros is Director of the Centre for European Policy Studies.