What Really Happened in Bolivia?

Events in the country remain exceptionally fluid following the ouster of President Evo Morales, who has been given political asylum in Mexico. Nonetheless, three preliminary conclusions can already be drawn.

Jorge G. Castañeda

GettyImages-1182156876


MEXICO CITY – Events in Bolivia remain exceptionally fluid following the ouster of President Evo Morales. There may or may not be free and fair elections within 90 days. Morales, who has been given political asylum in Mexico, may run again for president or seek to return to power by other means.

The Latin American left may recover from the fall of an icon, or continue to lose ground.

Morales’s policies, good and bad, will be overturned by a rightward swing in Bolivia, not unlike the recent anti-incumbency backlash elsewhere in Latin America, or they will outlast him.

Nonetheless, three preliminary conclusions can already be drawn. The first involves the regional implications of Morales’s downfall, regardless of the details of its consummation. After Latin America’s so-called pink tide – roughly from 2000 to 2015 – many of the left’s emblematic leaders were voted out of power, or resorted to various authoritarian stratagems in order to remain in control. Once the commodity boom ended, and when corruption scandals erupted in several countries, many leftist leaders or parties were unceremoniously evicted.

This occurred in Brazil, of course, as well as in Argentina, El Salvador, and Chile. In Venezuela, Nicaragua, and Bolivia itself, the left hung on to power through increasingly repressive and anti-democratic procedures. With the exception of Mexico, where Andrés Manuel López Obrador won the presidential election in 2018, the left has been on the wane across the region.

President Mauricio Macri’s defeat last month by the Peronist candidate Alberto Fernández in Argentina restored hope to the left’s supporters throughout the region. Similarly, the massive, though often violent, demonstrations in Chile since October, frequently seen as anti-neoliberal protests and as a clamor for a “different path,” gave reason for leftists to believe that the pendulum had swung back.

In this context, Morales’s political demise clearly counts as a defeat. He had lasted longer than any of the region’s other leftist leaders. His indigenous roots in one of the region’s poorest countries, together with his charismatic – or grandstanding – anti-imperialism and flamboyance, made him a rock star in much of the world.

The fact that the economy grew impressively, and that his opponents were often racist, also helped. This is now over, despite his best efforts, aided by his Mexican hosts and their Cuban and Venezuelan allies, to maintain his social-media presence in Bolivia and the international press.

Morales and his backers have sought to portray his fall from power as a classic military coup d’état, analogous to those that overthrew Guatemalan President Juan Jacobo Árbenz in 1954 or Salvador Allende in Chile in 1973. In each case, the military steps in, with American support or acquiescence, captures the presidential palace and most of the president’s aides, shuts down the legislature, represses left-wing activists or leaders, and remains in power for years to come.

Having been overthrown, the democratically elected president who wished to continue to govern with a democratic mandate either commits suicide or goes into exile.

None of this is what occurred in Bolivia in October and November. Morales violated the constitution by running for a fourth term. The two Organization of American States Electoral Observation Missions that he himself had invited, and whose terms he had accepted, then refused to certify the outcome. The Bolivian military arrested no one.

True, Morales resigned when the military told him to, and after he had agreed to protesters’ demands for a new vote. But the existing constitutional provisions were subsequently followed.

The Constitutional Court, which allowed Morales to run, deemed the presidential succession legal; timely elections have been promised; and the military have not taken power. Indeed, the high command under Morales, who “suggested” he resign, has been replaced.

The broader, more abstract question is this: If electoral mechanisms no longer suffice to replace a president who is bent on remaining in power, when does an attempt to remove him or her through other means become legitimate? Would a coup to overthrow Venezuelan President Nicolás Maduro, Nicaraguan President Daniel Ortega, or Raúl Castro in Cuba be acceptable?

What about dictators like Chile’s Augusto Pinochet and Argentina’s Jorge Videla in the 1970s and 1980s? Why is it acceptable when millions in the streets demand their leaders’ resignation, but not when the military join them verbally, and without the use of force?

When dictators assume power through electoral means, and then hold onto it through other methods, eliciting demands for their departure by students, unions, women, and indigenous peoples – like in Ecuador, just weeks ago – matters are no longer as clear-cut as they seemed decades ago.

Morales’s fall was brought about by a complex combination of factors, only one of which was the military’s call for him to step aside. Transforming him into a modern-day Allende who survived because he fled may be good propaganda for the radical left in Mexico, New York, and Bolivia, but it does not correspond to realities on the ground.

This leads us to the third conclusion. If the new Bolivian government sticks to the timetable foreseen by the constitution and schedules elections within 90 days, this will foreclose the discussion about coups and non-coups.

If Morales’s party, the Movimiento al Socialismo, fields a candidate other than Morales, it will lend full legitimacy to the process. Morales will almost certainly not be allowed to run, both for having attempted to steal the previous vote, and in view of the existing prohibition on running for a fourth term.

If the center-right opposition wins, it will undoubtedly attempt to overturn many of Morales’s policies and decisions. It is worth noting, however, that Carlos Mesa, who would have contested the run-off vote against Morales if the latter had not proclaimed himself the winner in the first round, is no extreme right-winger.

In fact, he was Morales’s representative at The Hague in Bolivia’s suit against Chile before the International Court of Justice. But that is what elections and rotation in power are for: to change course when the electorate so decides.

Morales will continue seeking to use his Mexican asylum and official sympathy for his cause to return to power. He may even succeed. But that would not address the country’s underlying dilemma. During 200 years of independence, Bolivians, like so many others in Latin America, have failed to transfer power peacefully and democratically over a sustained period of time.

Mandates to govern were interrupted by coups, revolutions, insurrections, or accidents – or leaders remained in power indefinitely. Having Morales pass from the scene for good, while transferring power peacefully and democratically from one president to another for the foreseeable future, would be a major accomplishment.


Jorge G. Castañeda, former Foreign Minister of Mexico, is Professor of Politics and Latin American and Caribbean Studies at New York University.


Gold Will Break Its All-Time High in 2020

By E.B. Tucker, editor, Strategic Investor



I sat down for half a dozen media interviews earlier this year where I called for $1,500 per ounce of gold in 2019.

In several cases, the hosts nagged me about my prediction, asking if I would stick with it. I did. In August, it hit my target.

Now, the price has retreated a bit since, but gold’s still flirting with $1,500 per ounce, as I write.

Here’s why I’m writing you today: I believe $1,500 is only the beginning for gold.

I expect gold to take out its previous high of $1,900. That’s a 27% gain from here. And I expect that to happen in 2020.




In fact, as I told Kitco News recently, from there I see it hitting $2,200 – about a 47% rise from its current price of $1,492 per ounce.

Today, I’ll share why… and how you can start taking advantage…

A Major Gold Rally Is Underway

All of the serious money I’ve made investing came through positioning for a big move and sitting tight. Trading is tough. In and out all the time can work over a short period. But the big gains come from sitting tight and letting the bull market run.

After hitting an all-time high in 2011, the price of gold fell 45% to a low of $1,052 in late 2015.

While the Obama administration and the Federal Reserve experimented with radical money policies, gold stayed stuck. Notice in the chart above it didn’t do much after hitting its 2015 low.

What’s bad for gold is unbearable for gold miners. They commit to projects assuming they’ll sell produced gold for $1,500. Then it falls to less than $1,100. That means the project is bankrupt before it pours the first gold ounce.

That period is over.

I can give you a list of anecdotal evidence as proof. Several large mining firms combined this year in order to survive. These were not bidding war takeovers. CEOs got over their egos and merged to avoid losing their companies entirely.

Political dysfunction and ballooning deficits also set the stage for gold today. The three largest central banks in the developed world recently declared they’ll do anything to stimulate their economies. That’s central bank lingo for “create more money.”

But we need more than strong anecdotes to risk money on the gold sector.

From our view, that’s why the chart of gold is so important. It’s how I determined $1,500 was an important target for gold this year. If it hit that target, which it did, I felt it was a green light to invest more aggressively for higher prices.

The gold chart below goes back to 2014. Notice that after gold hit its low in late 2015 (circled in red), each rally that followed registered a higher low. The pullbacks of 2016 and 2018 (also circled in red) each hit low points higher than the last. To us, this meant it was a matter of time before gold exploded higher.




Breaking $1,500 was the first test. Now, I expect it to correct, which is market speak for rest and get ready for the next leg higher.

That next move for gold will catch mainstream asset managers off guard. As I said above, I expect it to eventually take out its 2011 high. That’s why the current pullback in gold is the perfect time to position for what may come next.

If you haven’t already, the first step is buying some physical gold. If you’re new to gold, start with common 1-ounce coins like the ones offered here by Gainesville Coins.

(I asked Gainesville Coins to create this page as a starting point for Casey Daily Dispatch subscribers who are new to physical gold. We do not receive any compensation from Gainesville Coins for bringing you this offer.)

After owning physical gold, you should consider speculating on select mining stocks, which can provide leverage to a rising gold price.

Let me explain…

Gold Mining Stocks… and the Power of Leverage

The word “leverage” usually means borrowing. That’s not the case at all in the gold market.

If you aren’t familiar with the concept of leverage in gold stocks, here’s a quick example of how powerful it can be…

Say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.

Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1,300. The value of the gold in the ground isn’t simply $1.3 billion (1 million ounces x $1,300 per ounce). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.

Say it costs the company $1,250 per ounce, all-in, to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.

However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold can cause the stock price to increase 40%, 50%, or more.

This is why a small increase in the price of gold can cause a gold stock to soar many times that amount.

It’s happened before…

Gold producers boomed during three separate cycles when gold surged: 1979-1980, the mid-1990s, and 2001-2006.

First up, the king of all gold bull markets: 1979-1980…

Gold more than tripled during this period. But gold stocks more than quadrupled.




This wasn’t the only time gold stocks ran further than gold itself…

There was another boom in the 1990s. The average gold producer went up more than 200%…
Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan Gold & Silver skyrocketed over 760%.

All while gold only rose 8%.

Then, another big boom hit from 2001-2006.

Gold returned 158%, while the average gold producer gained over 400%.

Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.

As you can see, an increase in the price of gold (even a small one) can lead to huge returns.

Now’s the Time to Take Advantage

You don’t want to be sitting on the sidelines while the motherlode of all gold rallies gains momentum…

Remember, before owning a gold stock, it’s wise to have some physical gold.

Then, you can speculate on higher gold prices by buying gold miners, which gives you the chance to multiply your money in a gold bull market.

You can look into an exchange-traded fund (ETF) like the VanEck Vectors Gold Miners ETF (GDX), which holds a basket of gold stocks.

But the best way to take advantage is by following our advice in my newsletter Strategic Investor. In our core portfolio we have a world-class gold miner that shot up 56% during gold’s move from May to September of this year. This is no penny stock. This multibillion-dollar miner turns a profit and pays a dividend.

The same goes for silver. Our top pick surged 83% over the same period. It too pays a dividend.
In short, now’s the time to strike before gold really takes off.

Just remember, gold stocks are extremely volatile. Like in any industry, the stocks of stronger companies will go up more than those of the weaker ones. As always, never bet more money than you can afford to lose.

It only takes a small stake in the right companies to make a fortune as gold prices rise.

Technically Speaking: Everyone Is Swimming In The 'Deep End'

by: Lance Roberts


Summary
 
- As asset prices have escalated, so have individual's appetite to chase risk. The herding into equities suggests that investors have thrown caution to the wind.

- With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally "all in."

- Of course, as the markets continue their relentless rise, investors feel "bulletproof" as investment success breeds overconfidence.

- Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase.

- The stock market has returned more than 100% since the 2007 peak, which is more than 2.5x the growth in corporate sales and almost 5x more than GDP.
    
 
With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.
 
After all, why not?
  • The Federal Reserve cut rates for the 3rd time this year.
  • The Fed is also back in the "QE" game of buying bonds.
  • President Trump has "surrendered" to China in order to end the "trade war."
  • Corporate stock buybacks are on track for the second largest year on record.
  • Earnings, due to buybacks, are beating lowered estimates,
  • consumer sentiment remains near record highs; and,
  • economic data is weak, but not terrible.
 
With those supports in place, markets are pushing new highs as we discussed would likely be the case last month:

"Assuming we are correct, and Trump does indeed 'cave' into China in mid-October to get a 'small deal' done, what does this mean for the market. 
The most obvious impact, assuming all 'tariffs' are removed, would be a psychological 'pop' to the markets which, given that markets are already hovering near all-time highs, would suggest a rally into the end of the year."
This is not the first time we presented analysis for a "bull run" to 3300. To wit:

"The Bull Case For 3300
  • Momentum
  • Stock Buybacks
  • Fed Rate Cuts
  • Stoppage of QT
  • Trade Deal"
All the boxes have been checked.
 
Even more important than these supports, is the overall psychology of the markets.
 
As Doug Kass recently noted, investors "want to believe."

"'Price has a way of changing sentiment.'  
- The Divine Ms. M.
  • They want to believe that the trade talks between the U.S. and China will be real this time. 
  • They want to believe that there is no 'earnings recession' even though S&P profits through the first half of 2019 are slightly negative (year over year) and that S&P EPS estimates have been regularly reduced as the year has progressed. 
  • They want to believe that stocks are cheap relative to bonds even though there is little natural price discovery as central banks are artificially impacting global credit markets and passive investing is artificially buoying equities. 
  • They want to believe that technicals and price are truth - even though the markets materially influenced by risk parity and other products and strategies that exaggerates daily and weekly price moves. 
  • They want to believe that today's economic data is an "all clear" - forgetting the weak ISM, the lackluster auto and housing markets, the U.S. manufacturing recession, and the continued overseas economic weakness. 
  • They want to believe that, given no U.S. corporate profit growth, that valuations can continue to expand (after rising by more than three PEs year to date). 
  • They want to believe though that the EU broadly has negative interest rates and Germany is approaching recession (while the peripheral countries are in recession) - that the Fed will be able to catalyze domestic economic growth through more rate cuts. 
  • They want to believe that the U.S. can be an oasis of growth even though the economic world is increasingly flat and interconnected and the S&P is nearly 50% dependent on non-U.S. economies."
The "need to believe" is a powerful force which has lured investors back into the "warm waters of complacency." The sentiment is certainly understandable given the market's advance which has triggered investor's "Pavlovian" response to the ringing of "the bell." This was shown recently by a series of charts from Sentiment Trader.
 
Everyone Back In The Pool
 
As asset prices have escalated, so have individual's appetite to chase risk.
 
The herding into equities suggests that investors have thrown caution to the wind.
 
 
 
With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally "all in."
 
 
 
With net exposure to equity risk by individuals at historically high levels, it suggests two things:
  1. There is little buying left from individuals to push markets marginally higher, and;
  2. The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.
But it isn't just individual investors that are "all in," but professionals as well.
 
 
 
Importantly, while investors are holding very little "cash," they have taken on a tremendous amount of "risk" to chase the market. It is worth noting the current levels versus previous market peaks.

Importantly, what these charts clearly show is there is nothing wrong with aggressively chasing the markets, until there is.
 
As Doug Kass often states: "Risk happens fast."
 
Which brings me to something Michael Sincere's once penned:
"At market tops, it is common to see what I call the 'high-five effect' - that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors."
Michael's point is very pertinent, particularly today. As shown in the two charts below, investors are clearly "high-fiving" each other as risk aversion hits near record lows.
 
 
 
While the fundamental backdrop of the market has materially weakened, the confidence of individuals has surged. Of course, as the markets continue their relentless rise, investors feel "bulletproof" as investment success breeds overconfidence.
 
As Sentiment Trader shows, retail investors (dumb money) are currently pushing levels which have typically denoted short-term market peaks, This should not be surprising as individuals, with regularity, "buy tops and sell bottoms."
 
 
Strongly rising asset prices, particularly when driven by emotional exuberance, "hides" investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase. Unfortunately, it is after the damage is done that the realization of those "risks" occurs.
 
Regardless of what you believe, a "bear market" will eventually come. We don't/won't know what will trigger it, but some unforeseen exogenous event will start a "flight to safety" by investors. The chart below is the "bear market" probability model from Sentiment Trader.
 
Importantly, note the index peaks a couple of years before the onset of a "bear market." (The last peak was in 2015)
 

 
 
 
Here is the point, despite ongoing commentary about mountains of "cash on the sidelines," this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.
 
Again…there is nothing wrong with that, until there is.
 
Which brings us to the ONE question everyone should be asking.
"If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?"
 
Despite the best of intentions, Central Bank interventions, while boosting asset prices may seem like a good idea in the short term, in the long term it harms economic growth. As such, it leads to the repetitive cycle of monetary policy.
  1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
  2. Monetary policy does not create self-sustaining economic growth and therefore requires ever-larger amounts of monetary policy to maintain the same level of activity.
  3. The filling of the "gap" between fundamentals and reality leads to consumer contraction and ultimately, a recession as economic activity recedes.
  4. Job losses rise, wealth effect diminishes, and real wealth is destroyed.
  5. The middle-class shrinks further.
  6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption.
  7. Wash, Rinse, Repeat.

If you don't believe me, here is the evidence.
 
The stock market has returned more than 100% since the 2007 peak, which is more than 2.5x the growth in corporate sales and almost 5x more than GDP.
 
The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed's balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP.
 
 
 
What could possibly go wrong?
 
However, whenever there is a discussion of valuations, it is invariably stated that "low rates justify higher valuations."
 
Maybe.
 
But the argument suggests rates are low BECAUSE the economy is healthy and operating near full capacity.
 
The reality is quite different.
 
The main contributors to the illusion of permanent prosperity have been a combination of artificial and cyclical factors.
 
Low interest rates, when growth is low, suggests that no valuation premium is "justified."'
 
Currently, investors are taking on excessive risk, and thereby virtually guaranteeing future losses, by paying the highest S&P 500 price/revenue ratio in history and the highest median price/revenue ratio in history across S&P 500 component stocks.
 
This valuation problem was discussed last week by our friends at Crescat Capital.
 
To wit:
 
 
There are virtually no measures of valuation which suggest making investments today, and holding them for the next 20-30 years, will work to any great degree.
 
That is just the math.
 
The markets are indeed bullish by all measures. From a trading perspective, holding risk will likely pay off in the short-term. However, over the long-term, the "house will win."
 
Just remember, at market peaks - "everyone's in the pool."

The New Anti-Capitalism

It should not be surprising that our era of rapid technological change has coincided with renewed skepticism of capitalism across Western countries. Yet this time is different, not least because of the rise of winner-take-all markets and a shift in the geographic center of the global economy.

Harold James

james161_Peter MacdiarmidGetty Images_capitalismgrimreaper


PRINCETON – We are currently living through the most dramatic technological and economic transformation in the history of mankind. We are also witnessing declining support for capitalism around the world. Are these two trends connected, and if so, how?

It is tempting to say that capitalism’s growing unpopularity is simply a symptom of Luddism – the impulse that led artisan workers in the early Industrial Revolution to break the machinery that threatened their jobs. But that explanation doesn’t capture the complexity of today’s movement against capitalism, which is being led not so much by distressed workers as by intellectuals and politicians.

The current anti-capitalist wave comes at a time when free-market neoliberalism and globalization are nearly universally excoriated. Opposition to neoliberalism came originally from the left, but has been taken up – perhaps even more vigorously and rancorously – by the populist right.

After all, there was more than a touch of old-style interwar-era anti-capitalist sentiment in former British Prime Minister Theresa May’s 2016 speech denouncing cosmopolitan “citizens of the world” as “citizens of nowhere.” Or as her successor, current British Prime Minister Boris Johnson, put it even more succinctly: “Fuck business.”

Likewise, in the United States, Fox News anchor Tucker Carlson has channeled the pathos of the Trumpian right through lengthy rants against capitalism, complaining about “mercenaries who feel no long-term obligation to the people they rule” and “don’t even bother to understand our problems.”

A partial explanation for the new zeitgeist is that it is a predictable reaction to financial destabilization. Just as monetary conditions following World War I seemed unfair and generated a ferocious reaction, the 2008 financial crisis fueled a widespread belief that the system is rigged.

While governments and central banks rescued large financial institutions in order to prevent a collapse of the entire global financial system and a repeat of the Great Depression, the millions of people who lost their homes and jobs were left to fend for themselves.

The financial crisis alone was enough to sow the seeds of anti-capitalist sentiment. But it also coincided with a much broader technological and social transformation. Innovations like smartphones – the iPhone was unveiled in 2007 – and new Internet platforms have fundamentally changed the way that people connect and conduct business. In many ways, the new mode of business is antithetical to capitalism, because it is based on opaque payments and asymmetric or two-sided markets.

We now obtain services by “selling” our personal information. But we’re not actually aware that we are engaged in a market transaction, because there is no sticker price that we can see: the price paid is our privacy and personal autonomy.

At the same time, zero-sum thinking has become the predominant form of economic analysis. This, too, clearly has roots in the financial crisis. But it has also been fostered by the new information technologies (IT), owing to the power of network effects within winner-take-all markets – particularly with respect to the platform economy and the development of artificial intelligence (AI).

The more people there are on a network, the more valuable it becomes to each user, and the less room there is for any second player in the market. According to a famous Avis advertisement from 1962, “When you’re only No. 2, you try harder.” But now if you’re No. 2, there’s no point. You’ve already lost.

Moreover, the new IT and AI capitalism has a specific geography. It is rooted in the US and China, but the Chinese aim to achieve dominance by 2030. Capitalism has always driven geopolitical change, but now that it is becoming increasingly associated with China – after having been synonymous with America from the interwar period onward – it invites objections from different sources than in the past.

Looking ahead, the radical changes of the post-financial-crisis world will continue to unfold, with the IT/AI revolution altering the nature of most economic activity. Banks will fade away, not because they are evil or systemically dangerous, but because they are less efficient than the new alternatives.

For all of the improvements in electronic communication, bank costs and charges have scarcely fallen; indeed, for many consumers in areas with zero or negative interest rates, fees have actually increased. At some point in the not-too-distant future, most banking services will likely be unbundled and offered individually – and in new and improved ways – through online platforms.

The genius of capitalism lies in its ability to produce organic answers to most problems of scarcity and resource allocation. Markets tend naturally to reward the ideas that prove most useful, and to penalize dysfunctional behavior. They can bring about broad-based outcomes that states cannot, by driving vast numbers of individuals to adjust their behavior in response to price signals.

In today’s warming world, there is obviously a need for effective ways to limit greenhouse-gas emissions. But even a problem as complicated as climate change should not be left to technocrats.

We all need to be involved, as citizens and as market participants. For their part, the defenders of capitalism need to figure out how to make the system more inclusive, so that it can claim the public’s support once again.


Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

Thirty years after the Berlin Wall fell

Germans still don’t agree on what reunification meant

Discontent may even be growing




ON NOVEMBER 9TH 1989, as the Berlin Wall tumbled, Hans-Joachim Binder was on night shift at the potash mine in Bischofferode, a village in the communist-ruled German Democratic Republic. Mr Binder, a maintenance worker who had toiled in the mine for 17 years, had no idea of the momentous events unfolding 240km (150 miles) to the east. The first sign something was up was when most of his colleagues disappeared to investigate what was happening at the border with West Germany, just ten minutes’ drive away. Only three returned to complete their shift.

Less than a year later Germany was reunited, capping one of the most extraordinary stories in modern history. Not only had a communist dictatorship collapsed, releasing 16m people from the fear of the Stasi (secret police) and the stultification of censorship. Unlike any other country ever freed from tyranny, the entire population of East Germany was given citizenship of a big, rich democracy. As a grand, if ill-fated, gesture of welcome the West German chancellor, Helmut Kohl, converted some of their worthless savings into hard currency at the preposterously generous exchange rate of one Deutschmark to one Ostmark.

More than 1m Ossies took advantage of their new freedom by moving to the West, where most thrived. Official statistics no longer counted this group—who were disproportionally young, clever, female and ambitious—as East Germans. For those who stayed behind, however, the 30 years since the fall of the Wall have been a mix of impressive progress, often taken for granted, and sour disappointment.

A price to pay

The harm wrought by four decades of oppression and indoctrination could not be undone overnight. But a people brought up in a society where initiative was ruthlessly crushed had to adapt suddenly to the rigours of capitalism. Unsurprisingly, many could not. Mr Binder was laid off. So were hundreds of thousands of others who previously toiled in safe, dreary and unproductive state-backed jobs.

Despite attempts to save it, including large protests and a hunger strike, the potash mine was shut down—one of 8,500 companies in the east privatised or liquidated by the Treuhand, a new government agency. Mr Binder bounced around in odd jobs for a while, eventually winding up on Hartz IV, the stingiest of Germany’s unemployment benefits, where he languishes today. Like many East German women, his wife retrained and left for a job in the west. Asked how he feels about the reunification of his country, he shrugs. “My safe job was gone. For me, the GDR could have carried on.”

There was no manual to guide the absorption of east into west. The policies that failed people like Mr Binder were always going to be subject to fierce dispute. The surprise, as Germany approaches the 30th anniversary of the fall of the Wall, is the speed with which these debates have roared back into the public sphere. Newspapers and magazines are full of reassessments of the Wiedervereinigung (reunification); westerners are lapping up memoirs and polemics by eastern authors. Never before has Germany debated its reunification with such vigour. Why?

Many observers say the debate grew louder three or four years ago. The most obvious explanation is therefore the migrant crisis of 2015-16. Petra Köpping, the integration minister in Saxony, one of the five eastern states established at reunification, says that when she tried to explain to her constituents why the state was helping refugees, some replied: “Integrate us first!” Many easterners resented the resources being devoted to help newcomers when they felt left behind. They also disliked the labelling of their complaints as racist.

But the refugee crisis merely triggered a deeper shift, says Christian Hirte, the government’s special commissioner for east Germany. One idea, floated by Angela Merkel, who as chancellor is east Germany’s best-known export, is that the east is undergoing something comparable to the experience of West Germany in 1968, when children forced their parents to account for their activities in the Nazi period. Now, the argument runs, young east Germans seek explanations for what happened to their parents in the early years of reunification. “The long-term wounds were concealed because people were absorbed finding a place in the new society,” says Steffen Mau of Humboldt University in Berlin. “Perhaps you need 25 years to realise this.”

This summer Marie-Sophie Schiller, a young Leipziger who hosts a podcast called “East—A Guide”, had an “emotional” talk with her parents about their experiences after 1990. She was astonished to learn about their daily hardships and humiliations. Stefan Meyer, an activist who grew up in East Berlin, remembers watching his parents’ confidence ebb as they struggled to find their feet in the new country.

After 1990 “the whole software of life changed” for east Germans, says Markus Kerber, a bigwig at the interior ministry. Short-term pain was inevitable. Average labour productivity in the east was 30% of that in the west. Kohl’s decision to exchange Ostmarks at a 1:1 rate for Deutschmarks made swathes of firms uncompetitive overnight. Those that survived struggled with the western rules they had to import wholesale. By one estimate, 80% of east Germans at some point found themselves out of work.

Perhaps the Treuhand could have proceeded more gently, some argue today. Maybe the unified country should have developed a new constitution rather than simply extending the western one eastwards. The west might have learned from the more enlightened aspects of life in the GDR, such as free child care and encouraging women to work outside the home. Radical parties on left and right take such arguments to a ludicrous extreme, arguing that reunification was the “colonisation” of a bewildered people by an exploitative west.

Understanding required

Such views tap into a feeling among many easterners that they have struggled to take back control of their own destiny. Ms Köpping says east Germans hold barely 4% of elite jobs in the east. Many rent flats from westerners, who own much of the eastern housing stock. “Sometimes east Germans feel that they’re ruled by others, not themselves,” says Klara Geywitz, a Brandenburger running to lead Germany’s Social Democrats. Nor have east Germans stormed the national citadels of power.

Almost 14 years after she took office Mrs Merkel—and Joachim Gauck, president from 2012-17—remain exceptions rather than a vanguard. Rarely one to dwell on her origins, Mrs Merkel has lately begun to reflect publicly on the mixed legacy of reunification. “We must all…learn to understand why for many people in east German states, German unity is not solely a positive experience,” she said on October 3rd.




One obstacle to such understanding is that Germans view reunification differently. Half of west Germans consider the east a success. Two-thirds of east Germans disagree. Many westerners were oblivious to the upheaval their new compatriots endured. “On October 4th 1990 [the day after reunification], after a night of partying I carried on my life as normal,” says Mr Kerber. “Not a single east German had the same experience.”

In places western stereotypes of easterners have persisted, the Jammerossi (“complaining easterner”), ungrateful for the largesse showered on the east after unification, or Dunkeldeutschland (“dark Germany”), a cold-war term implying backwardness. More recent is the notion of the east as a cradle of neo-Nazism, bolstered by the strength there of the far-right Alternative for Germany (AfD). Portrayals of the east in Germany’s national (for which read western) media have often read like dispatches from an exotic, troubled land, where the far right are always marching in the streets or thumping immigrants.

Such accounts risk ignoring the huge strides made by east Germany since reunification.

Citizens were liberated from the humiliations of life in a surveillance state. They were allowed to choose their leaders, express their opinions and travel, to west Germany and beyond.

Economically, despite the hardships of the early years, the east soon began to converge with the west, and life improved drastically across a range of measures. Today some east German regions have lower unemployment rates than western post-industrial regions like the Saarland or the Ruhr valley.

West-east transfers of close to €2trn ($2.2trn) have reduced the infrastructure gap. (Today they run at around €30bn a year, mainly in the form of social-security payments.) Wages in the east now stand at around 85% of the level in the west, and the cost of living is lower. The life-expectancy gap has closed, the air is cleaner, the buildings smarter.

According to Allensbach, a pollster, 53% of east Germans are content with their personal economic situation, the same figure as in the west. “It all worked surprisingly well, but this story doesn’t fly in the east,” says Werner Jann of the University of Potsdam.

One of the best



Last year Andrea Boltho, Wendy Carlin and Pasquale Scaramozzino, three economists, contrasted east Germany’s post-reunification performance favourably with the Mezzogiorno in Italy, where GDP per person remains little over half that of the north. Perhaps the most apt comparison is with other parts of Europe that shook off communism.

East Germany’s per capita growth has outstripped most other eastern European countries (see chart), despite starting from a higher base. As Richard Schröder, a former East German dissident, notes, the application of western laws and practices saw off the threat of oligarchic corruption that has plagued many of Germany’s eastern neighbours.

Yet if east Germans do not always appreciate their good fortune, it is because their reference points have been Hamburg and Munich, not Bratislava or Budapest. Implicit in the promise of reunification was a pledge that east Germans could finally enjoy what they had so long envied in the west. For years they were forced to witness a lifestyle that remained out of reach, in the packets of coffee and sweets sent by relatives in the west, the western goods on display in Intershop outlets accessible only to those with hard currency, or the commercials on western television beamed across the border.

In 1990 Chancellor Kohl promised east Germans “blooming landscapes”. Instead they got deindustrialisation and mass unemployment. “In 1990 300,000 people came to shout ‘Helmut!’ on Augustusplatz [in Leipzig],” recalls Kurt-Ulrich Mayer, who helped establish Kohl’s Christian Democratic Union (CDU) in Saxony. “Four years later he came back, and we needed umbrellas to protect him from all the eggs and tomatoes.” Unlike Poles or Hungarians, east Germans had someone else to blame when things went wrong.

The convergence between west and east eventually ground to a halt. Today just 7% of Germany’s most-valued 500 companies (and none listed in the DAX30 index) are headquartered in the east. This starves municipalities of tax revenue and contributes to the east-west productivity gap, which has stood at around 20% for 20 years. Most assets liquidated by the Treuhand fell into western or foreign hands, hindering the development of an eastern capitalist class.

For many, the best way to get western lifestyles was to move west. Over one-quarter of east Germans aged 18-30 did so, two-thirds of them women. Rural parts of the east were especially affected. As towns and villages emptied and tax revenues slumped, schools were closed, shops shuttered and housing blocks demolished. The mass emigration of youngsters led to a plummeting number of births. Since 2017 net east-west migration has been roughly zero, but there has been no growth in the number of people moving east; the westward exodus has simply fallen to match it.

The east is also much older than the west. Since 1990 the number of over-60s there has increased by 1.3m even as the overall population has fallen by 2.2m. IWH, a research outfit in Halle, thinks the working-age population in the east will fall by more than a third by 2060. By 2035, 23 of Germany’s 401 Kreise (administrative districts) will have shrunk by at least a fifth, says Susanne Dähner at the Berlin Institute for Population and Development; all of them are in the east. In some districts, there will be four funerals for every birth. Instead of losing people to the west, eastern Germany will lose them to the grave.

The constitutional pledge of “equivalent living conditions” across Germany thus looks unattainable. The government tries to help so-called “structurally weak” regions, in the east as well as the west. But although investment in infrastructure or technical universities may help some towns, it cannot stop the demographic decline in many east German regions.

Coming to terms

The picture is much brighter in some eastern cities. Potsdam, Jena and Dresden have clusters of industry and tourism as well as cheap housing; some, like Leipzig (“Hypezig”, to irritated locals), have been booming for years. The “bacon belt” around Berlin benefits from the success of the capital, especially as older workers move out to the suburbs. Yet even as overall emigration to the west dries up, eastern cities are sucking educated people away from already struggling small towns and villages. That trend may continue, as only half of east German workers work in cities, compared with three-quarters in the west.

 

The changes in the east have social, cultural and political consequences which are now coming to the fore. Last February thousands of Dynamo Dresden supporters at an away game in Hamburg began an unfamiliar chant: “Ost [east], Ost, Ostdeutschland!” A video of the episode went viral, sparking a lively debate: were the fans expressing a dubious “eastern” variant of militant German nationalism? Or was this a cheerful reappropriation of an identity that for so long was taken to connote stupidity and closed-mindedness?

“Identity is key to understanding east Germany,” says Franziska Schubert, a thoughtful Green who represents Görlitz in Saxony’s state parliament. Fully 47% of east Germans say they identify as easterners before Germans, a far higher proportion than at the euphoric moment of reunification. (The equivalent is true for 22% of westerners.) Regional identity is hardly abnormal in Germany—ask the Bavarians—but in the east it can seem grounded in politics as much as culture or tradition.

When Jana Hensel, a writer, recently gave a talk to a school in her home town of Leipzig, she was astonished to find herself spending half an hour fielding questions from teenagers about an Ossiquote (a proposal to give east Germans preference in public jobs). “More than 25 years after the end of the GDR, students have become east German again,” she says. “If we’re not careful, we’ll lose another generation.”

The AfD has exploited the power of eastern particularism. Under slogans like “The east rises up!” the party has scored 20%-plus in eastern state elections, most recently in Thuringia on October 27th. There, and in recent elections in Brandenburg and Saxony, it was only voters over 60 whose support for the established parties ensured that the AfD did not come first.

In Saxony and Thuringia the AfD was the most popular party among under-30s. This is worrying in a part of the country where extremism has found fertile ground. More than half of Germany’s hate crimes take place in the east, though it has just 20% of the population and few immigrants.

But eastern identity is not the exclusive preserve of extremes. Many young easterners simply developed an “Ossi” identity after encountering ignorance or scorn in the west. Nor need it be only negative. Matthias Platzeck, a former Brandenburg premier now in charge of a commission for the 30th anniversary of reunification, says that the recent election in his state was the worst-tempered ever.

Nonetheless, he hopes for the emergence in the east of healthy self-confidence, built on the back of success stories—and a new focus on the many problems that span east and west. His commission’s informal motto, he says, is “as little state celebration as necessary, as much discussion as possible.” And since the Berlin Wall has gone, no amount of debate will land anyone in jail.

The politics of fiscal stimulus are problematic  

Central banks do not have the tools to tackle the supply side shocks facing the global economy

Megan Greene

30 October 2019, Berlin: German Chancellor Angela Merkel (R) and Minister of Finance Olaf Scholz arrive to attend the weekly cabinet meeting at the Federal Chancellery. Photo: Michael Kappeler/dpa
German finance minister Olaf Scholz and Chancellor Angela Merkel are in no rush to inject a fiscal stimulus into the German economy © Michael Kappeler/dpa


We have heard repeatedly this year that co-ordinated monetary easing is not going to be enough when the next recession comes. Fiscal stimulus will be necessary to maintain global growth. Unfortunately, this pronouncement reminds me of my childhood Christmas wishlist. For several years running, I put a baby brother at the top. But doggedly wishing for something is not enough to make it happen.

There is widespread agreement that central banks do not have the tools needed to address the kind of supply-side shocks the global economy is facing. The world is caught in a liquidity trap, with persistently low interest rates and a glut of savings. Fiscal stimulus would be one way to escape it.

But while the economics are sound, the politics are problematic. In the US, the 2020 election means bipartisan consensus on any major new initiatives is all but impossible. Fiscal stimulus in an election year is not unprecedented — a Democrat-led Congress and Republican president passed a programme in February 2008 amid signs of a sharp slowdown. But US growth in the third quarter this year was 1.9 per cent, slow but not alarming.

Prospects for fiscal stimulus may be limited even after 2020. Democrats and Republicans say infrastructure spending is needed, but for years have been unable to agree on how to pay for it. The recent Congressional Budget Office forecast that US deficits will top $1tn next year makes an agreement even harder.

The chances for significant fiscal stimulus in the eurozone are equally grim. Many look hopefully to Germany, which has a large current account surplus, reflecting an excess of national savings over investment. But Chancellor Angela Merkel’s centre-right Christian Democratic Union views the balanced budget as one of its crowning achievements. In August, finance minister Olaf Scholz suggested Germany could muster a €50bn fiscal expansion, but made it clear he is in no rush to do so.

This is partly because some risks to the German economic outlook — trade and Brexit uncertainty — could abate without public spending. It is also because, as a number of CDU members of parliament explained to me, German politicians are more worried about unemployment than growth. A mild recession would not be enough to trigger a fiscal response.

That would require a spike in unemployment, and so far the labour market remains robust.

Germany’s room for manoeuvre is also limited by its constitution, which prevents the federal government from running structural deficits of more than 0.35 per cent of gross domestic product outside times of crisis. This debt brake would cap stimulus at an estimated €5bn next year and €10bn in subsequent years — hardly a game changer.

France and Italy are still on the long, hard road back to fiscal credibility and have little room to spend. If things got really bad — we are nowhere near that — eurozone fiscal expansion could come in the guise of climate change initiatives.

Germany recently launched a €54bn programme to counter climate change. Eurozone governments and companies could ramp up the issuance of green bonds to finance environmental projects, which the European Central Bank is already buying.

When Chinese growth slowed in 2008 and 2015-16, authorities provided overwhelming stimulus that reflated the economy and buoyed global demand. This time, Beijing’s stimulus has been more targeted and domestically focused, diminishing spillover benefits.

I wouldn’t hold my breath for significant fiscal stimulus from the world’s largest economies.

The real question we should be asking is, what happens when it fails to materialise. There’s an old saying: hope is not a strategy. I wanted a baby brother. I have three sisters.


The writer is a senior fellow at Harvard Kennedy School

The end of Evo Morales

Was there a coup in Bolivia?

The armed forces spoke up for democracy and the constitution against an attempt at dictatorship



There are few more emotive words in Latin America than “coup”, and for good reason. From 1930 to the 1970s, the region suffered the frequent overthrow of civilian governments in often bloody military putsches. The victims were usually of the left.

In 1954 a moderate reforming government in Guatemala was ousted in the name of anti-communism by the cia. Other coups followed, including that of General Augusto Pinochet against Salvador Allende, a radical socialist, in Chile in 1973.

Since the democratisation of the region in the 1980s, coups have been rare. But the very idea has become a potent propaganda tool, especially for leftists. Scarcely a week goes by without Nicolás Maduro, Venezuela’s fraudulently elected dictator, claiming that he is threatened by one. Daniel Ortega in Nicaragua says the same. Dilma Rousseff, a leftist president in Brazil who spent her way to a second term in violation of the country’s fiscal responsibility law, also claims that her impeachment in 2016 was “a coup” even though it followed strict constitutional procedures.

The latest claim involves the fall of Evo Morales, Bolivia’s leftist president since 2006. He resigned on November 10th, fleeing into exile in Mexico. This prompted a chorus of denunciations of a coup from the Latin American left and even some European social democrats. This time, at least, the critics are wrong.

True, Mr Morales’s term was not due to end until January. His fall followed violent protests and a mutiny by the police, who failed to suppress them. The final straw came when the head of the armed forces “suggested” that he quit. But that is to tell only a fraction of the story.

Mr Morales, who is of Aymara indigenous descent, long enjoyed broad popular support. He imposed a new constitution, which limited presidents to two terms. Thanks to the commodity boom and his pragmatic economic policy, poverty fell sharply. He created a more inclusive society.

But he also commandeered the courts and the electoral authority and was often ruthless with opponents. In his determination to remain in power he made the classic strongman’s mistake of losing touch with the street. In 2016 he narrowly lost a referendum to abolish presidential term limits. He got the constitutional court to say he could run for a third term anyway. He then claimed victory in a dubious election last month. That triggered the uprising.

An outside audit upheld the opposition’s claims of widespread irregularities. His offer to re-run the election came too late.

Mr Morales was thus the casualty of a counter-revolution aimed at defending democracy and the constitution against electoral fraud and his own illegal candidacy. The army withdrew its support because it was not prepared to fire on people in order to sustain him in power. How these events will come to be viewed depends in part on what happens now.

An opposition leader has taken over as interim president and called for a fresh election to be held in a matter of weeks. There are two big risks in this. One is that ultras in the opposition try to erase the good things Mr Morales stood for as well as the bad. The other is that his supporters seek to destabilise the interim government and boycott the election. It may take outside help to ensure a fair contest.

That the army had to play a role is indeed troubling. But the issue at stake in Bolivia was what should happen, in extremis, when an elected president deploys the power of the state against the constitution. In Mr Morales’s resignation and the army’s forcing of it, Bolivia has set an example for Venezuela and Nicaragua, though it is one that is unlikely to be heeded.

In the past it was right-wing strongmen who refused to leave power when legally obliged to do so. Now it is often those on the left. Their constant invocation of coups tends to be a smokescreen for their own flouting of the rules. It should be examined with care.

Tariffs Aren’t the Only Driver of Auto Stocks

Hopes that the trade war is easing have buoyed the European auto sector in recent weeks, but another profit warning from Daimler is a reality check

By Stephen Wilmot



Trade-deal hopes have given investors a useful opportunity to bail out of European auto stocks. Daimler’s latest profit warning shows why they should seize it.

Europe’s auto sector has had a strong few weeks on the stock market as fears about a global trade war have eased.

Not only have the U.S. and China edged toward a deal, but the White House has also quietly backed away from its threat to slap a 25% tariff on imported cars, which would have been devastating for German brands popular among American consumers.

The Euro Stoxx Autos & Parts index is up almost 11% so far this quarter.

Tariffs aside, though, conditions are only getting tougher for Europe’s vehicle industry.

Daimler, which makes Mercedes-Benz DMLRY -0.89%▲ cars and Freightliner trucks, spelled out the problem in sobering investor days in London on Thursday and New York on Friday.

Investors had hoped that a brand new management team led by Chief Executive Ola Källenius,who took the top job from longtime boss Dieter Zetsche in May, would somehow reinvigorate the Daimler investment case after a string of profit warnings—possibly even by splitting the company up.

Instead, Mr. Källenius’s first big step has been to lay out the immense scale of the challenge.

Daimler stock fell 4.5% Thursday and was also down in early trading Friday.

This year has been “relatively difficult,” said Mr. Källenius, but next year will be even worse—and even after that the recovery appears highly risky.

The operating margin of the flagship Mercedes-Benz car division, which accounts for roughly half the company’s revenue, will fall to roughly 4% in 2020 from 5% this year.

Analysts had been expecting something close to 6%.

The company now says the margin only will recover to that level by 2022.

Even these downbeat forecasts seem dependent on punchy assumptions: No recession, sales growth approaching 3% and no tariffs.

If President Trump’s trade talks fall apart and China increases its tariffs on vehicle imports from the U.S. next month, as threatened, the Mercedes-Benz operating margin would barely exceed 3% next year.

Daimler exports sport-utility vehicles to China from its plant in Tuscaloosa, Ala.

There are two big reasons why margins are falling: the need to sell less profitable electric vehicles to meet new European emissions regulations that partially come into force next year and higher depreciation charges.

Daimler has been investing heavily in recent years, but the impact on its earnings has been masked because it has counted an increasing part of the bill as capital rather than current spending.

At some point it has to pay for that approach: Capital must be depreciated, while the proportion of capitalized costs can’t rise indefinitely.

Daimler needs to offset these pressures.

The main lever available is squeezing suppliers to cut material costs, but the company is also reducing staff numbers, particularly in the car division.

In total it said staff costs would be reduced by €1.4 billion ($1.54 billion), which will irk Germany’s powerful unions but equates to less than 1% of the company’s €167 billion in revenue last year.

Daimler is an extreme example, given its history of under-managing costs, but all car makers face the same formidable regulatory conditions in Europe and China.

For now, the U.S. is taking a longer road to electrification, easing the pressure on Detroit, but U.S. car makers are working toward the same ultimate destination.

Seeking refuge in scale, which gives car makers more leverage over suppliers, is one response—hence the merger plan under negotiation between Fiat Chryslerand Peugeot,and the platform-sharing deals between Volkswagenand Ford.

After the recent rush of trade optimism, the Euro Stoxx Autos & Parts index fetches roughly eight times expected earnings—close to an 18-month high. Now is a good time for investors to limit their exposure.

Whatever happens with Mr. Trump’s tariffs, next year’s emissions regulations will cause an almighty pileup.


If Firms Leave China, Will US Tariffs Follow?

By: Phillip Orchard


Stroll down the electronics aisles of any big box store in America, and you’re bound to see an array of products from companies that are moving manufacturing from China to Southeast Asia.

Much of the components in Apple’s AirPods, Google’s next Pixel phone, and Nintendo’s Switch, for example, are now made largely in Vietnam.

Sony has moved operations to Thailand, while Samsung is shifting notebook and smartphone production to Taiwan and Malaysia.

This is, to a large extent, the result of the U.S.-China trade war, which has sent firms scrambling to adjust their supply chains to minimize the effects of existing or scheduled U.S. tariffs.

But firms in China haven’t exactly been stampeding for the exits. Among other sources of hesitation is major uncertainty about where the White House’s trade war might expand to next.

After all, China has never been the sole focus of the United States; Washington kicked off the trade war in spring 2018 with metals tariffs applied almost globally, and it’s been gradually ramping up pressure on dozens of other countries.

Over the past few months, U.S. President Donald Trump has claimed that both the European Union and Vietnam are worse trade abusers than China.

On Oct. 25, the U.S. revoked special trade privileges affecting some $4 billion in exports from Thailand – a move similar to ones it also made this year against India and Turkey (and threatened against Indonesia and Kazakhstan).

Bottom line: Few low-cost manufacturing hubs are safe from U.S. pressure altogether. But trade pressure is hardly the same thing as a trade war, and Southeast Asia will largely be spared.

A Partial Exodus From China

Relatively few firms are abandoning China as a manufacturing base altogether.

Most companies that make things in China do so in part to ensure their ability to sell their products to Chinese consumers, who make up the world’s second-largest consumer market.

The fact that other major consumer markets – Japan, South Korea and Europe, in particular – have politely declined to follow the United States’ lead with tariffs on Chinese exports of their own further diminishes the need for firms to pull up stakes.

Moreover, though Chinese exports to the United States are finally starting to show sharp declines, U.S. consumers continue to eat a large portion of the costs of U.S. tariffs on China.

The reality is that moving operations is expensive, disruptive and time-consuming, so many firms are reluctant to do so – especially since at least some of the U.S. tariffs are likely to be lifted if and when Washington and Beijing eventually reach a trade deal.

Of course, the trade war has made abundantly clear the risks of being too reliant on any one place, along with the fact that many frictionless supply chain models have been optimized to the point of becoming excessively fragile and vulnerable to disruption.

And for firms in high-tech and advanced manufacturing sectors with national security implications, U.S. restrictions on China-made imports are quite likely to remain in place for the long haul.

As a result, we’re seeing an increasing trend of firms considering moving just enough operations out of China to be able to put the uncertainty of the trade war behind them and get on with business.

But even among those for whom relocating is worth the time and expense, there’s still the issue of finding a suitable alternative to China. There are two main problems with Southeast Asia and other low-cost hubs.

First, no single alternative hub boasts China’s combination of advantages.

Despite its rising labor costs and loss of some low-skill manufacturing to frontier markets, China remains uniquely attractive as a well-oiled export machine for goods further up the value chain.

Its infrastructure, near-bottomless pool of well-trained workers, and the abundance of financial incentives available from local governments keen to prevent large-scale job losses have helped offset the rising costs of production.

India, for example, has the bottomless low-cost labor pool, but not the infrastructure, streamlined regulatory schemes or tech sector experience needed to lure away firms en masse – and it’s too far from East Asia’s most important tech clusters to fit seamlessly into the industry’s tightly integrated supply chains, anyway.

Malaysia and, to a lesser extent, Thailand rate highly on infrastructure and tech sector expertise, but not on labor pool depth, and both are a bit too far from other regional hubs to be considered ideal.

Vietnam has the ideal location, the low labor costs and open access to consumers in its fellow Trans-Pacific Partnership members, but its weak infrastructure became quickly oversaturated after the trade war exodus began.

Infrastructure can of course be built, and regulatory and incentive schemes can be adjusted to meet exporters’ needs.

But these are long-term projects.

And there’s little that can be done to offset these countries’ geographic or demographic disadvantages.

Trade Pressure on Southeast Asia, Not a Trade War

The second main problem is the concern that U.S. tariffs might just follow exporters from China to the next low-cost export hub.

The U.S. tariffs on China are indeed starting to hurt Chinese exports.

U.S. imports from China have fallen 12.5 percent so far this year, compared to 2018.

But this has done little to benefit employment in U.S. manufacturing outside of a small number of industries.

On the whole, U.S. exports of goods have declined around 3 percent year on year since the beginning of 2019, and U.S. manufacturing activity has contracted for two consecutive months, according to the Institute for Supply Management. (Some of this is due to the global slowdown more than the trade war.)

Other low-cost manufacturers, meanwhile, have generally benefited from the trade diversion.

Vietnam, for example, has been the clear winner at this point, with its exports to the U.S. surging some 40 percent year on year.

U.S. Import Growth by Country
(click to enlarge)


If the overriding goal of the Trump administration's tariffs is to revive the lost glory of labor-intensive U.S. manufacturing, then it stands to reason that eventually it would have to expand tariffs to other low-cost manufacturers running large trade surpluses with the United States as well. (The U.S. would probably also have to wage war on automation.)

To be sure, some in the Trump administration have certainly advocated for a much sharper turn toward autarky.

But that was always politically unrealistic. And if that were indeed the overriding goal, we probably wouldn’t be seeing the White House prepping the public for a deal with China that will almost certainly relax some tariffs.

And we wouldn’t have seen the Trump administration settle for largely cosmetic changes in its renegotiated trade deals with Mexico, South Korea and Japan.


(click to enlarge)


Rather, the two main goals of the tariffs are to pressure China into immense structural reforms and to contain China's accumulation of power more broadly.

We’re doubtful of the ability of tariffs to really do much toward either goal and think that the United States will eventually move away from tariffs as its favorite tool for resetting its trade relationships.

But the belief that China must be pressured to change one way or another and/or that China poses an intolerable threat to U.S. strategic interests is widespread on both sides of the aisle in Washington – far more so than the base of support for tariffs aimed at reshoring low-cost manufacturing jobs.

And expanding the trade war in full force to Southeast Asia and low-cost hubs elsewhere would conflict with both of these larger goals.

This doesn’t mean countries like Thailand, Vietnam and India are immune to U.S. pressure altogether.

The U.S. has long sought to nudge exporters everywhere to comply with global trade rules on issues like currencies and subsidies, whether with stick or carrot.

To maximize its campaign against China, the United States also has strong incentives to crack down on Chinese transshipments through regional hubs.

Perhaps the biggest risk for tech sector firms is that the U.S. expands measures aimed at mitigating supposed Chinese technological threats to U.S. national security to high-tech manufacturing operations elsewhere in the region – particularly Taiwan, countries vulnerable to Chinese intelligence, or countries with governments considered too cozy with Beijing.

Otherwise, U.S. trade measures targeting regional states will be relatively light, aimed at addressing narrow issues that are largely resolvable in negotiations. (The U.S. move against Thailand, for example, affects just 15 percent of Thai exports to the U.S. and was driven ostensibly, at least, by correctable human rights issues in the seafood industry.)

Most important, none of these countries has the capacity to fundamentally threaten the United States’ core interests economically or strategically.

Quite the contrary, in fact.

To establish long-term incentives to persuade China that it’s in its best interest to play by established rules and to undermine its coercive power regionally if it doesn’t, the United States will have greater reason to work with the region, not against it.