The Fed has exacerbated America’s new housing bubble

Loose monetary policy has buoyed assets but did not create meaningful supply

Rana Foroohar




Hyman Minsky would have had a field day with last week’s US inflation numbers. One of the key points in the late, great economist’s Financial Instability Hypothesis was that there are two kinds of prices — prices for goods and services, and asset prices.

Inflation in the two areas should, as a result, differ. And indeed they have, quite markedly. The latest Consumer Price Index figures show that almost all core inflation, which was weaker than expected, was in rent or the owner’s equivalent of rent (up 0.3 per cent). Core goods inflation, meanwhile, was down 0.2 per cent.

Very simply, this means that the housing market is once again completely out of sync with the rest of the economy. A decade on from the subprime bubble, housing, which is not only shelter but also the biggest financial asset for most Americans, is the only major component of the CPI with a national inflation rate that is consistently above the overall number.

Why is this? Because, just as Minsky would have predicted, loose monetary policy over the past several years buoyed assets, but didn’t create meaningful new supply or, consequently, enough demand in construction and other home-related areas. The point is illustrated in an academic paper, “What the Federal Reserve got totally wrong about inflation and interest rate policy” from the Mario Einaudi Center for International Studies at Cornell University. As its author Daniel Alpert says: “What we have now is a form of inflation that’s never been seen before — it’s all concentrated in housing.”

Over the past decade, the cost of shelter has risen sharply compared with everything else, the report notes. It hit a historic high of 81 per cent of core inflation in the summer of 2017 and remains “the lion’s share”.

There have not been commensurate salary increases. Median household income adjusted for inflation remains hardly higher than it was at the turn of the century.

This asymmetry is not only something that monetary policy, as it exists right now, is unprepared to deal with. It is something the US Federal Reserve has actually exacerbated (albeit unintentionally) via low interest rates and quantitative easing that boosted housing prices in the very cities where the best paying jobs are located.

No wonder millennial Americans are crashing on their parents’ couches even after college graduation in unprecedented numbers — they can’t afford to get on the housing ladder in the same places where they are most likely to find good work.

The whole situation is made more problematic by inflation in another area — higher education. Student loan debt in the US is at a record high and the struggle to pay it off is real — 12 per cent of borrowers are currently 90 days or more delinquent on their loan payments.

A February report from JPMorgan on the impact of student loans on the housing market estimates that high student loan drag has knocked 2m young adults out of the market, resulting in a 1.5 per cent lower home ownership rate. That means they can’t build wealth, which in turn dampens demand. Bill Dudley, the head of the New York Federal Reserve, calls high levels of student debt and default a “major headwind” to future economic growth.

A prestigious university degree is an asset just as valuable as a plum property. Americans will do almost anything for it, including lie and cheat, as was shown last week in the disturbing news of rich parents paying consultants to create fraudulent credentials for their coddled kids. Is it any surprise that there is something of a snowball effect between the bubbles in higher education and housing? Rents in college towns are outpacing those in other cities, in part because luxury property developers looking to appeal to affluent students and parents are churning out apartment complexes with high-end amenities like “lazy river” water rides.

The dysfunctional divide between incomes and asset prices is not just an American problem. It is observable in many international markets as well: including Hong Kong, London, Paris and Singapore. In the US, unsustainable real estate prices have recently begun to falter in bubble cities such as New York, something which historically foreshadows a national downturn.

The economic consequences are obvious. So are the political ones. The US looks more and more like an emerging market economy in the sense that the basics of the American dream — housing, education and upward mobility — have all been compromised.

This may require a rethink of monetary policy (Mr Alpert would like to see the Fed start to separate inflation components more narrowly when crafting rate decisions). But if this housing bubble has proven anything, it is that central bankers can’t fix it all on their own.

Look for Democratic presidential candidates like Massachusetts senator Elizabeth Warren to suggest major infrastructure and industrial policy proposals that would focus more on fiscal stimulus than monetary policy. They are the obvious remedy in what looks increasingly like a Minsky moment.


Understanding the Fed’s Dovish Turn

Over the past few years, the US Federal Reserve has been ahead of other major central banks in normalizing monetary policy. But now the Fed has abruptly put further interest-rate hikes on hold, owing to key changes in macroeconomic conditions and the political environment.

Nouriel Roubini  

jerome powell


NEW YORK – The US Federal Reserve surprised markets recently with a large and unexpected policy change. When the Federal Open Market Committee (FOMC) met in December 2018, it hiked the Fed’s policy rate to 2.25-2.5%, and signaled that it would raise the benchmark rate another three times, to 3%-3.25%, before stopping. It also signaled that it would continue to unwind its balance sheet of Treasury bonds and mortgage-backed securities indefinitely, by up to $50 billion per month.

But just six weeks later, at the FOMC meeting in late January, the Fed indicated that it would pause its rate hikes for the foreseeable future and suspend its balance-sheet unwinding sometime this year.

Several factors drove the Fed’s volte-face. First and foremost, policymakers were rattled by the sharp tightening in financial conditions after the FOMC’s December meeting, which hastened a rout in global equity markets that had begun in October 2018. And these fears were exacerbated by an appreciating US dollar and the possibility of an effective shutdown of certain credit markets, particularly those for high-yield and leveraged loans.

Second, in the latter half of 2018, US core inflation unexpectedly stopped rising toward the Fed’s 2% target, and even started falling toward 1.8%. With inflation expectations weakening, the Fed was forced to reconsider its rate-hike plan, which was based on the belief that structurally low unemployment would drive inflation above 2%.

Third, US President Donald Trump’s trade wars and slowing growth in Europe, China, Japan, and emerging markets have raised concerns about the United States’ own growth prospects, particularly after the protracted federal government shutdown with which the US met the New Year.

Fourth, the Fed has had to demonstrate its independence in the face of political pressures. In December, when it signaled further rate hikes, Trump had been calling for a pause. But since then, the Fed has had to worry about being blamed in the event of an economic stall.

Fifth, Richard Clarida, a well-respected economist and market expert, joined the Fed Board as vice chair in the fall of 2018, tipping the balance of the FOMC in a more dovish direction. Before then, Fed Chair Jerome Powell’s own dovish tendencies had been kept in check by a slightly less dovish staff and the third member of the Fed’s leadership troika, New York Fed President John Williams, who expected inflation to rise gradually above target as the labor market tightened.

The addition of Clarida amid stalling inflation and tightening financial conditions no doubt proved decisive in the Fed’s decision to hit the pause button. But Clarida also seems to have pushed the Fed toward renewed dovishness in more subtle ways. For starters, his presence lends support to Powell’s view that the flattening of the Phillips curve (which asserts an inverse relationship between inflation and unemployment) may be more structural than temporary. Some Fed researchers disagree, and have published a paper arguing that uncertainty with respect to the Phillips curve should not stop the Fed from normalizing US monetary policy. But with Clarida’s input, the Fed will be more inclined to focus on actual inflation trends, rather than on the official unemployment rate and its implications under traditional models.

Moreover, while Fed staff members tend to believe that the US economy’s rate of potential growth is very low (around 1.75-2%), Clarida, like Powell, seems open to the idea that Trump’s tax cuts and deregulatory policies, combined with the next wave of technological innovation, will allow for somewhat stronger non-inflationary growth.

Finally, Clarida is spearheading an internal strategy review to determine whether the Fed should start making up for below-target inflation during recessions and slow recoveries by allowing for above-target inflation during expansionary periods. And though the review is still in its early stages, the Fed already seems to have embraced the idea that inflation should be allowed to exceed 2% without immediately triggering a tightening.

Taken together, these factors suggest that the Fed could remain in pause mode for the rest of 2019. After all, even a recent modest acceleration of wage growth does not seem to have produced higher inflation, implying that the Phillips curve may stay flatter for longer. And, given the Fed’s new de facto policy of targeting average inflation over the course of the business cycle, a modest, temporary increase in core inflation above 2% would not necessarily be met with policy action.

But while the Fed is most likely to remain in a holding pattern for the bulk of 2019, another rate hike toward the end of the year or in 2020 cannot be ruled out. China’s growth slowdown seems to be bottoming out, and recovery there could start to strengthen in the coming months, especially if the current Sino-American negotiations lead to a de-escalation of trade tensions. Likewise, a deal to avert an economically disastrous “hard Brexit” could still be in the offing, and it is possible that the eurozone’s slowdown – especially Germany’s – will prove temporary.

Moreover, global financial conditions are easing as a result of the Fed and other central banks’ renewed dovishness, and this could translate into stronger US domestic growth. Much will depend on whether Trump abstains from launching a separate trade war against the European auto industry, which would rattle equity markets again. Yet, barring more fights over the US federal budget and the debt ceiling – not to mention possible impeachment proceedings against Trump – the US could be spared serious domestic political and policy shocks in the months ahead.

If US GDP growth does remain resilient this year, some acceleration of wage growth and price inflation could follow, and core inflation may even rise above target in the second half of the year or 2020. And while the Fed seems willing to tolerate a period of temporary above-target inflation, it cannot allow that to become the new status quo. Should this scenario arise later in the year, or next year, the Fed could hike its baseline rate by another 25 basis points before settling into a protracted pause. Either way, the new normal will be a US policy rate close to or just below 3%.


Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

A France in Turmoil Weeps for a Symbol of Paris’s Enduring Identity

For centuries, Notre-Dame cathedral has enshrined an evolving notion of what it means to be French. As smoke and flames wafted into the sky on Monday, the symbolism was hard to miss.

By Michael Kimmelman

For centuries, Notre Dame has enshrined an evolving notion of French-ness.CreditCreditDmitry Kostyukov for The New York Times



Notre-Dame has occupied the heart of Paris for the better part of a millennium, its twin medieval towers rising from the small central island wedged between the storied left and right banks.

Now, France is burning.

The fire at Notre-Dame happened on the day that the country’s troubled president, Emmanuel Macron, was supposed to explain how he intended to address the demands of the “Yellow Vest” movement. An anguished, restless nation has struggled to cope with the monthslong uprising and with the frayed social safety net that spurred the protests. Generations that had come to rely on this social safety net, as a matter of national pride and identity, see it going up in smoke.

On Monday, so was the cathedral, which for centuries has enshrined an evolving notion of Frenchness. The symbolism was hard to miss.

As France struggles with social unrest, the symbolism of the fire was hard to miss.CreditIan Langsdon/EPA, via Shutterstock

Before the fire, the cathedral had been undergoing an extensive restoration.CreditThomas Samson/Agence France-Presse — Getty Images

         Parisians gathered near the church as it burned.CreditBenoit Tessier/Reuters


This fire is not like other recent calamities.

When flames killed dozens trapped in Grenfell Tower in London, it exposed a scandalous lack of oversight and a city of disastrous inequities. When a bridge collapsed in Genoa, Italy, also taking life, it revealed the consequential greed of privatization and a chronic absence of Italian leadership. When the National Museum of Brazil burned down, also through unconscionable government neglect, it wiped a tangible swath of South American history from the face of the earth, incinerating anthropological records of lost civilizations.

Notre-Dame, where no one died, represents a different kind of catastrophe, no less traumatic but more to do with beauty and spirit and symbolism.

Visited by some 13 million people a year, the cathedral, established during the 12th century, is the biggest architectural attraction in Paris. It is an emblem of the old city — the embodiment of the Paris of stone and faith — just as the Eiffel Tower exemplifies the Paris of modernity, joie de vivre and change.

Not that Notre-Dame hasn’t changed. Scarred repeatedly, it is a kind of palimpsest of French history. Finding its Gothic architecture outmoded and ornate, Louis XIV destroyed much of the church’s interior and swapped it out for one he regarded as more classically tasteful.

People gathering around a French 2nd Armored Division tank near the cathedral in August 1944.CreditAgence France-Presse — Getty Images

The view from the cathedral in the 1950s.CreditHenri Cartier-Bresson/Magnum Photos

Notre-Dame has occupied the heart of Paris for the better part of a millennium.CreditAgence France-Presse — Getty Images


During the Revolution, insurgents ransacked the cathedral, plundering treasures and decapitating statues of Old Testament figures on the building’s facade, which they mistook for portraits of French kings. They rededicated Notre Dame to the Cult of Reason, melting its great bells.

By the time Victor Hugo’s “Hunchback of Notre Dame” imprinted the cathedral in the minds of countless readers, the building was pretty much a wreck. Hugo called it a “vast symphony in stone” as “powerful and fecund as the divine creation,” and despaired that it had come to be an object of ridicule.
 

The popularity of his book helped reposition Notre-Dame as a symbol of French identity, inspiring its restoration by the 19th-century architect Eugène Viollet-le-Duc. Viollet attempted to restore the church’s Gothic character, undertaking a vast project of architectural reinvention and private imagination, redoing the figures on the facade, recreating stained glass windows and adding many ornate touches, including to the spire that just burned down.

When the spire collapsed, all those layers of history seemed to evaporate.

Through its many transformations, Notre-Dame has remained “the great stage where great events in France have been rehearsed and repeated for centuries,” as the historian Robert Darnton has put it — where the cathedral’s archbishop blessed the flags carried by French armies going off to war, before crowds of weeping parents and spouses. Where Parisians wept Monday, as they also did along the banks of the Seine and at the plaza of the Hôtel de Ville.

Back in 1871, the Paris Communards, their revolt dying out, adopted a scorched-earth policy and burned down the Hôtel de Ville, with its paintings by Delacroix and Ingres. So the building from which Parisians watched the fire is a reconstruction.

The cathedral had been undergoing an extensive restoration. Gargoyles were broken, balustrades had collapsed, flying buttresses were stained by pollution. Water had seeped through cracks in the spire’s wood frame.

Damaged stone on one of the cathedral’s roofs in 2017.CreditDmitry Kostyukov for The New York Times

Some 13 million visitors a year visit the cathedral.CreditDmitry Kostyukov for The New York Times

Over time, much of the cathedral’s interior was redone, including by Louis XIV.CreditLudovic Marin/Agence France-Presse — Getty Images


What a sad paradox it would be if it turns out that the restoration somehow accidentally led to the conflagration. It seemed, from early reports, to be the wood in the spire that accelerated the blaze, causing most of the roof to collapse.

Promising the French people he would rebuild Notre-Dame, which he called “the epicenter of our lives,” President Macron canceled his speech about the Yellow Vests. He still plans to proceed with his proposals.

France today is wrestling with how to reinvent itself for a new age. Considering the great sweep of time, the current Yellow Vest uprising will no doubt come to seem like just another data point in the long evolution of a nation that has survived setbacks and returned, again and again, to an abiding glory.

In his landmark television series “Civilization,” standing before Notre-Dame, the art historian Kenneth Clark asked: “What is civilization? I don’t know. I can’t define it in abstract terms — yet. But I think I can recognize it when I see it.”

He turned toward the cathedral: “And I am looking at it now.”

Someday, the fire of 2019 may fade into the history of Notre-Dame. It may take many years to repair the damage.

But the great cathedral will reinvent itself, too.

     France’s president vowed to quickly rebuild.CreditVeronique De Viguerie/Getty Images

Macron’s Great Debate Finds What France Wants: Lower Taxes, No Cuts to Services

By Adam Nossiter


President Emmanuel Macron of France speaking last week during the last meeting of his “Great National Debate” in Corsica, France.CreditCreditLudovic Marin/Agence France-Presse — Getty Images



PARIS — The moment of truth approached on Monday for President Emmanuel Macron’s strategy for sucking the wind out of the Yellow Vest protest movement, as his prime minister presented the conclusions of a three-month national consultation in which some 1.5 million French citizens let the government know what they wanted.

The answer? Lower taxes, in a country with the highest tax burden — 46 percent of gross domestic product — of any developed nation. But where, and how, to do so, presents the French government with a tricky conundrum: The same citizens did not come out for any reduction in France’s expansive social safety net or generous provision of public services.

Whether the government’s formula for resolving the dilemma, which has yet to be determined, will be enough to satisfy the for-now quiescent protest movement is uncertain. The Yellow Vests rejected the “Great National Debate” from the beginning, though the protest movement has hit its lowest ebb in numbers and public support.

Mr. Macron’s subordinates insist that they have heard the message. “We’ve reached zero fiscal tolerance,” Prime Minister Édouard Philippe told an audience of officials at the Grand Palais in Paris Monday, presenting the conclusions of the Project.

“We’ve got to lower taxes,” Mr. Philippe said. “There is an immense fiscal exasperation.”

It is now up to Mr. Macron himself to find concrete measures to translate the citizens’ demands in the coming weeks. The Yellow Vest protest itself began as an uprising over a raise in gas taxes, which Mr. Macron rescinded soon after.

Mr. Macron came up with the “Great National Debate” idea as the Yellow Vest demonstrators were wreaking havoc in French cities, smashing in store windows and prompting some in the president’s own circle to fear for his future. Half in desperation, he reached for a surefire national sedative: Let the French talk it out.

Local talk-fests, spearheaded by the president himself, aired citizen grievances, with the hope of stifling a principal Yellow Vest complaint, that the French were not being heard. Plenty now have been, though how representative the talkers were has itself become a matter of debate.



Prime Minister Édouard Philippe, second from right, delivered the findings of France’s “Great National Debate” in Paris on Monday.CreditPhilippe Lopez/Agence France-Presse — Getty Images



Many of those who attended around 10,000 local debates were elderly or retired, in a country where the retirement age is a mere 62, and there are many, many citizens with lots of time on their hands.

But the endless hours of meeting with local officials, often with Mr. Macron doing most of talking, may have more successfully bludgeoned the Yellow Vests into submission than any number of riot police.

Only 22,300 people marched in the Yellow Vest protest across France Saturday, the lowest turnout yet, and less than a tenth of those who took part in the first marches on Nov. 17 last year. And only about 35 percent of the French still support them, less than half the figure at the movement’s peak.

Mr. Macron, by going week after week deep into the country and standing for hours on end lecturing and taking questions, has clawed back some of the popularity he lost at the height of the Yellow Vest movement.

He is now supported by some 29 percent of the French, according to an IFOP poll last week, around his level of support at the beginning of the protests. After weeks of trailing Marine Le Pen’s far-right Rassemblement National party, formerly the National Front, in polls for May’s elections to the European Parliament, Mr. Macron has finally crept out in front.

“Renewing dialogue and deflating the anger — in one sense, he’s succeeded,” said Chloé Morin, a public opinion expert at the Ipsos consultancy in Paris. “But, it was just one part of the French” who participated in the “Great National Debate,” said Ms. Morin.

“It was a certain category of the population, and not necessarily a representative one: city-dwellers, those who are reasonably off. So, it’s been a relative success,” she said. “He’s managed to regain his base of popularity — with his electorate, and with the right.”

But the large segment of the population that once identified with the Yellow Vests is another matter.
“I have a fear that whatever decisions Emmanuel Macron takes, even if they are strong ones, that knowing the Yellow Vests as I do, there is a kind of suicidal tendency, a tendency to say, ‘All politicians are rotten,’” said Sonia Krimi, a 36-year-old member of Parliament in Mr. Macron’s party.

Yellow Vest protesters at La Defense, Paris’s financial district, on Saturday. Only 22,300 marched across France, the lowest turnout yet for the movement’s mass protests.

Yellow Vest protesters at La Defense, Paris’s financial district, on Saturday. Only 22,300 marched across France, the lowest turnout yet for the movement’s mass protests.CreditIan Langsdon/EPA, via Shutterstock


In a National Assembly where dissent from the presidential line is rare, Ms. Krimi, a Tunisian-born lawmaker who represents part of Cherbourg, is known for sometimes opposing the president, and she has in the past expressed sympathy for the protesters.

“It’s like two parallel lines,” she said, referring to the government and the Yellow Vests, “and the lines never join.”

Others also expressed concerns about the representativeness of the government’s sample.

“The problem is, who actually came to the debates, in relation to those we never hear from?” asked Jean-Michel Clément, a parliamentarian who left Mr. Macron’s party last year. “It was people who were already in the know. Those who weren’t either didn’t come or didn’t talk.”

Whatever the source, the government insisted it has heard. “We’ve gotten the message loud and clear,” Mr. Philippe, the prime minister, said at the Grand Palais Monday.

The “message” as received by Mr. Philippe translated into a series of abstractions that could be difficult to translate into concrete policy. He said the French who took part had also expressed concerns about “isolation, abandonment and indifference” from public officials, about having “a democracy that is more representative and efficient,” and about climate change.

“As for the conclusions that are to be drawn, I’m waiting to hear them,” said Mr. Clément. “We’re faced with some contradictions. We’re hearing less taxes on one side, and on the other more public services. So its going to be a complicated equation,” he said. “A delicate exercise.”



On the streets of Paris there was skepticism all around, as there often is. “The Great National Debate won’t put an end to anything,” said Marc Flandrin, 48, a butcher in the suburb of Alfortville. “Soon it will be the turn of the retired people to demonstrate. I think that in September it is going to get worse.”

Marc Denis, a 51-year-old auditor for the national railway company, the S.N.C.F., approved of the debate, but wondered whether it would change anything. “I don’t think the Yellow Vest movement will end,” he said. “It is now rooted in France.”

Ms. Krimi, the parliamentarian, said, “It’s too early to talk of success or failure.”

“It’s a complex situation, and it needs a complex response,” she said. “There has to be a political vision. People are sick of politicians and their promises.”


Constant Méheut contributed reporting.


Will the US Coast Guard Enter the South China Sea ‘Grey Zone?’

An incursion into the area by the U.S. Coast Guard could cause an escalation the U.S. would rather avoid.

By Phillip Orchard

 

For all the headlines and Chinese pique that freedom of navigation operations in the South and East China seas generate, their strategic value is actually pretty limited. But one such operation carried out two weeks ago was different. On March 24, the USS Curtis Wilbur, a guided missile destroyer, cruised through the Taiwan Strait. For the first time in the waters, sailing alongside the destroyer was a U.S. Coast Guard cutter. The vessel, the USCGC Bertholf, is a 4,600-ton National Security Cutter that was sent to the Western Pacific in early March. It’s set to be replaced in the coming by months by another Legend-class cutter. This has raised an important question: Will the U.S. send its Coast Guard into the South China Sea next? The Coast Guard could help fill holes in existing U.S. strategy in the Western Pacific, but it would mark a substantial shift in U.S. tactics and appetite for risk. And as it stands, there’s little evidence that the U.S. “white hulls” will be attempting to pacify the turbulent waters anytime soon.
 
China’s ‘White Hulls’ and ‘Little Blue Men’
The idea of sailing the U.S. cutters into the fray in the Western Pacific has been floating around in the Pentagon for years – ever since China dramatically upped usage of its own coast guard to assert its claims over the South China Sea. China’s coast guard is the world’s largest by far – in terms of both the overall size of the fleet and the size of its vessels. By 2020, according to the U.S. Naval War College’s China Maritime Studies Institute, it is expected to have nearly 1,300 vessels, including 260 offshore patrol ships displacing 500 tons of water or more (compared to around 50 similar ships for the U.S. Coast Guard). The largest of these, the 10-12 thousand ton, 541-foot Zhaotou-class patrol ship, sports a 76 mm main gun, anti-aircraft weapons, and enough space for two helicopters or unmanned aerial vehicles. It’s roughly 20 percent larger than the USS Curtis Wilbur, the ship that sailed through the Taiwan Strait two weeks ago. Control over the coast guard was transferred to China’s Central Military Commission last year.

 


 
The coast guard’s presence is bolstered by hundreds of vessels in China’s maritime militia, or its so-called “little blue men.” Most of these ships are fishing vessels that act as Beijing’s eyes and ears around potential flashpoints. Some, however, are large vessels camouflaged as fishing boats, featuring water cannons and oversized rails suitable for ramming (and probably light weaponry), and manned by dedicated teams of army veterans. All report directly to the People’s Liberation Army. The largest, most professional units are rotationally forward deployed to hot spots across the South China Sea. They are rarely seen doing any actual fishing.

Combined, the three sea forces – the PLA-Navy, the coast guard and the little blue men – typically engage in layered “cabbage tactics.” Here, the militias are deployed as foot soldiers tasked with squatting on disputed waters, or forming a cordon around Chinese holdings or assets, with the coast guard close by to intervene if things get messy. The PLA-Navy remains at a distance, available if, say, a foreign navy shows up, but otherwise keeps a low profile to avoid provoking a U.S. response and to maintain a shred of credibility to Beijing’s claims that it is merely trying to stabilize the waters. In 2012, for example, after a Philippine warship attempted to arrest Chinese fishermen in the hotly disputed Scarborough Shoal, 140 miles (225 kilometers) west of Luzon, two Chinese coast guard cutters and several militia vessels rushed to intervene, leading to a two-month standoff. The U.S. brokered a mutual withdrawal, but China quickly disregarded it, occupying the reef and blocking Philippine fishermen for more than four years until the Philippine president came hat in hand to Beijing. In 2014, the sea forces were used again to protect a giant oil rig China had moved into Vietnamese waters. Since January, per open source satellite imagery, several hundred Chinese coast guard and fishing vessels have been camped out in a show of intimidation around Thitu Island, the Philippines’ largest holding in the Spratlys. Last month, Hanoi claimed the Chinese militia sunk a Vietnamese fishing boat around the disputed Paracels.

China’s combined sea forces haven’t been limited to harassing weaker South China Sea claimants, with the tempo of incursions in waters controlled by Taiwan, Japan and South Korea increasing as well. Beyond just keeping waters open to actual Chinese fishing fleets, the basic goal here is to give a glimpse of China’s ever-growing heft and further the notion that the future of East Asia is Chinese – even if doing so is pushing each of these states to accelerate their own military buildups in the process. The U.S. Navy has also been a target. In 2009, for example, maritime militia joined with a contingent of Chinese coast guard and naval ships to harass two U.S. Navy ocean surveillance ships, attempting even to sever one ship’s towed sonar array and forcing it to take evasive action until a U.S. destroyer arrived to escort it to safety.

 


 
Of course, in terms of challenging the U.S. for supremacy in Chinese littoral waters, these forces matter little. If conflict erupted with the U.S., it’s possible that they’d play an asymmetric role conducting, say, swarm attacks on U.S. warships and supply lines. But they’d be easily outgunned otherwise and could do little to solve China’s ultimate strategic dilemma: the U.S. ability to establish a blockade at a string of regional chokepoints. But China has no appetite for war anytime soon. And its use of paramilitaries has allowed it to engage in a “salami slicing” strategy, asserting de facto control over the waters bit by bit without firing a shot or, most important, provoking a clash with the looming U.S. Navy.

Indeed, by flooding the South China Sea with these paramilitaries, China has established, as the chief of the U.S. Indo-Pacific Command put it last year, control over the South China Sea in “all scenarios short of war with the U.S.” In other words, it can effectively dictate terms to Southeast Asian states like the Philippines and Vietnam on where their fishermen can fish, where their oil companies can drill, what they can build on their own contested reefs, and so forth. If regional states want access to the natural gas or the fish or the atolls, they have to ask nicely. Naturally, this gives Beijing leverage on any number of other matters and opens opportunities to forge political agreements reducing the scope of military cooperation with the United States and its allies. And by cementing its presence around its new bases on reclaimed islands in disputed waters, it leaves the U.S. with few options short of direct confrontation to roll back China’s militarization of the disputed islands on behalf of these allies, straining their faith in U.S. security commitments.
 
Is There a Role for the U.S. White Hulls?
The U.S. Coast Guard is considered the most sophisticated in the world, and it too has very big vessels, including its 4,600-ton Legend-class National Security Cutters. From time to time, it deploys these on deepwater assignments far from home. The Bertholf, for example, was sent to the region after the collapse of the Hanoi summit primarily to monitor North Korean smuggling. Coast Guard cutters can also be placed under U.S. Navy command under certain conditions, as was the case with the Bertholf while it paraded down the Taiwan Strait. In 2012, the cutter even participated in the U.S.-led Rim of the Pacific exercises – the world’s largest annual multinational naval drills – helping track missile threats and providing gunfire support for onshore troops.

U.S. warships aren’t particularly well suited for maritime policing tasks like sanctions enforcement; they’re designed to wage war, not to board smuggling vessels or break up squabbles between foreign anglers. And in the shadow of potentially hostile countries like China and North Korea, the last thing the U.S. Navy wants is its already overstretched crews confronting Chinese fishermen – especially if they’re armed and taking orders from the PLA. Doing so could force China to respond in kind, risking a conflict the U.S. would rather avoid. And since the U.S. generally doesn’t take an official position on which parts of the disputed waters belong to which country, intervening on behalf of one claimant or another would undermine its core goal of upholding the so-called “rules-based order.”

This is why some argue for a U.S. Coast Guard role in the region. If (and this is a big if) the U.S. were keen to intervene on behalf of a regional claimant – at least in scenarios where it could do so in compliance with international law – Coast Guard cutters would be more adept than U.S. warships for doing so without dragging the PLA-Navy into the fray or bolstering Chinese claims that the U.S. Navy is the true aggressor in the region. The Coast Guard, in other words, lends itself better to U.S. messaging that it’d merely be helping other claimants enforce the U.N. Convention on the Law of the Sea (which China ratified) with forces proportional to those of the Chinese. The Coast Guard would be in position to document and make public harassment by China’s maritime forces, puncturing the veneer of plausible deniability that the little blue men give Beijing and stiffening international pressure. This wouldn’t be enough to convince Beijing to fully scale back, but it would arguably pose a bigger deterrent to China than anything else the U.S. has tried.

Moreover, to regional states like Vietnam and the Philippines that have refrained from provoking Beijing by conducting joint patrols with the U.S. Navy or giving U.S. warships extensive base access, embracing the U.S. Coast Guard may be more feasible. Indeed, since the U.S. is keen to offload regional security responsibilities to friends and allies across the globe, and since few Southeast Asian states have much hope of building up robust naval capabilities anytime soon, focusing on coast guard training and assistance instead makes sense for the U.S. This was a core goal of the Pentagon’s 2015 Southeast Asia Maritime Security Initiative, which has languished under the Trump administration. It’s also an area where the elite Japanese coast guard has been increasingly pitching in. Beijing evidently has the same idea, with joint Chinese coast guard training with Southeast Asian states becoming more common.

But while an increase in coast guard training, and perhaps limited multinational patrols, is certainly possible, that’s likely to be the extent of any expanded presence of U.S. white hulls anytime soon. For one, the risk of a clash between a U.S. Coast Guard cutter and a Chinese counterpart escalating can’t be ignored. The U.S. cutter could be quickly overwhelmed and overmatched, even by Chinese paramilitaries, requiring the U.S. Navy to step in. In that sense, their very presence in hostile waters is a potential liability. The Bertholf wouldn’t have been in the Taiwan Strait if the Navy thought there was any chance of a hostile Chinese response.

For another, the U.S. Coast Guard presently isn’t big enough to make much of a difference in the waters, anyway. As noted, it currently has just a single cutter in the Western Pacific. It’s already overstretched at home, and its budget – just $9.3 billion requested for 2020, $1 billion less than it was allotted this year – doesn’t exactly suggest that the U.S. is gearing up for a substantial overseas force. (Nor has the U.S. been ramping up security assistance to regional partners, as often pledged.) It has just eight Legend-class cutters and more than 3,000 square miles of the world’s largest exclusive economic zone to patrol.

Washington evidently just doesn’t see enough strategic rationale to devote more resources to maritime policing in the disputed waters. Regional states may chafe at the lack of U.S. interest in going to bat on their behalf, and this may help Beijing make important political inroads. But Chinese bases in the Spratlys and Chinese oil rigs across the South China Sea pose little threat to the U.S. position in the big picture. So long as the U.S. can control the chokepoints, it has the upper hand in the Western Pacific. And it thinks this reality, along with public anger about Chinese aggression in claimant states plus growing support from allies like Japan, India and Australia, will be enough to keep regional states from throwing their lot in fully with the Chinese – whether or not the U.S. white hulls are there to challenge China at its own game.


What’s Driving Automakers Out of Europe?

Blame has been cast on events like Brexit, but there are other changes that are reshaping the industry globally.

By Amie Tsang


The factory in Sunderland, England, where Nissan was going to produce its next X-Trail sport utility vehicle -- until it decided to do the work in Japan instead.CreditCreditOli Scarff/Agence France-Presse — Getty Images



Automakers, in quick succession, have moved in recent weeks to end parts of their operations in Europe. Nissan is the latest: On Tuesday, it confirmed that it would cease assembling Infiniti cars at its plant in northeast England.

The moves, during Britain’s wrenching debate over its departure from the European Union, known as Brexit, have raised the question: Is Brexit forcing the carmaking industry out of Britain?

It’s not quite so simple. Traditional car manufacturers, in Britain and in Europe over all, have been buffeted by forces around the world, and they assess where they want to make the next model of a car every few years or so.

As automakers allocate resources, they have been balancing the need to respond to these changes with the justifications for producing cars in places like Britain.

Here are some of the forces reshaping the industry.
 
Who is moving?


Takahiro Hachigo, the president of Honda, which has said it will shut down its factory in Swindon, England, by 2021.CreditTomohiro Ohsumi/Getty Images



•Honda said it would close its plant in Swindon, England, by 2021 and stop making one of its sedans in Turkey. The Swindon plant employs 3,500 and the Turkish plant about 1,100.

•Nissan reversed an earlier decision by deciding to produce the next generation of its X-Trail sport utility vehicle in Japan instead of Sunderland, England. Its luxury brand, Infiniti, is withdrawing from Western Europe altogether.

•Ford said in January that it would cut thousands of jobs across Europe.

•Jaguar Land Rover announced in January that it would be cutting 4,500 people from its global work force; most of the cuts are expected to be in Britain.

•Dyson, which is developing an electric car, moved its headquarters from Britain to Singapore the same month.

•General Motors pulled out of Europe in 2017, selling the Opel and Vauxhall brands.


Regulation of fossil fuels has tightened

An information board inside a free charging garage for electric cars in Oslo. By 2025, only electric cars will be sold in Norway, according to a national plan.CreditThomas Haugersveen for The New York Times


In the wake of Volkswagen’s diesel-cheating scandal in 2015, when it used software to trick emissions tests, awareness of the harmful effects of fossil fuels has prompted stricter regulation throughout the Continent.

Some German cities are banning older diesel engines in an effort to reduce pollution in urban areas. London has initiated a levy on drivers of older diesel vehicles. Britain and France plan to phase out sales of new diesel and gasoline-powered cars by 2040.



In the meantime, more governments, drivers and carmakers are pivoting to electric vehicles. Cars running on alternative fuels made up 6 percent of new car registrations last year in Europe, up from 4.8 percent in 2017, according to JATO, an auto industry research firm.

Norway is aiming to sell only electric cars by 2025, while India is aiming to be all electric by 2030.

Carmakers are racing to respond. Volkswagen said Tuesday that it intended to sell 22 million electric cars over the next 10 years, compared with its previous goal of 15 million, and that the company would aim to be carbon neutral by 2050.

The investments necessary for building electric cars have added to cost pressures for automakers that, in some cases, have struggled to turn a profit in Europe.

In justifying the closing of its Swindon factory, Honda said it wanted to focus on electrification. “The significant challenges of electrification will see Honda revise its global manufacturing operations, and focus activity in regions where it expects to have high production volumes,” the company said.

China is speeding ahead on electric cars

As carmakers channel billions of dollars into grabbing a portion of the electric car market, many are looking to China, which is the world’s largest maker and seller of electric cars.

China wants one in every five cars sold to run on an alternative fuel by 2025, and officials have said the country will get rid of internal combustion engines in new cars altogether. The country’s rules also require carmakers to sell more alternative-energy cars if they want to continue selling regular models.

This has prompted car companies to realign where they make and develop cars.

Tesla has opened a factory there. Volkswagen signed an agreement with the Anhui Jianghuai Automobile Group last year to develop an electric vehicle. General Motors has made China the hub of its electric car research and development, while both Renault-Nissan and Ford have joint electric-car ventures in China.


The industry is getting more crowded




In their efforts to grab a share of the growing market for electric cars, traditional car companies are competing not just with each other but also against technology companies.

Uber, Alphabet and Tesla are channeling money into electric cars and autonomous cars, while reshaping the way people travel with ride-hailing services.

This has prompted rivals to team up, or to work with the technology companies, so that they are not left behind.

•Ford and Volkswagen formed an alliance in January to share technology for electric and self-driving vehicles, and save money.


•BMW and Daimler announced in February that they would collectively invest 1 billion euros in a joint venture focused on offering services like car-sharing and electric charging points.


•Audi, BMW and Daimler have joined forces to buy a digital mapping company. Daimler has teamed up with Uber on autonomous vehicles.


•BMW is working with the chip maker Intel and Mobileye, an Israeli tech company, to develop a self-driving car. It is also in a partnership with IBM to use artificial intelligence to adapt vehicles to owners’ preferences.


•Fiat Chrysler is working with Google on self-driving cars, General Motors invested $500 million into Lyft, and Volvo provided the chassis for Uber’s driverless car tests.


This shift has accelerated change and added to costs, said Peter Wells, a professor at the Center for Automotive Industry Research at the Cardiff Business School in Wales. And that has prompted companies to scrutinize whether they should maintain operations in markets that are not expected to grow and could become more difficult to serve.

“Companies around the world are having to re-evaluate their positions,” Mr. Wells said.

European markets are sluggish

The growing popularity of other modes of transportation, like this electric scooter in London, hasn't helped the car market in Europe, where car sales peaked 12 years ago.CreditDan Kitwood/Getty Images


The European car market is not growing. Annual car sales there peaked in 2007 at about 16 million. They’re at about 15 million now, according to JATO.

It is also a saturated market, dominated by European marques, and favors smaller cars. Carmakers hungry for profits generated by pickup trucks and S.U.V.s are looking elsewhere for growth. Sales of S.U.V.s in Europe are still far behind those in China and the United States.

The Italian-American company Fiat Chrysler said in February that it planned to expand its capacity in the United States by updating several plants. They will produce large Jeep models.

Certainly, even promising regions face challenges. In the United States, many believe that car sales have peaked, forcing the idling of some factories. And the economic slowdown in China has sent car sales plummeting.

But in announcing its withdrawal from Western Europe, Infiniti said it intended to focus on its S.U.V. in North America and its new models in China.

Brexit makes planning harder

A Jaguar Land Rover factory in Halewood, England. Britain’s pending exit from the European Union has made it difficult for carmakers to plan ahead.CreditPeter Byrne/Press Association, via Associated Press


Against this backdrop, the uncertainty surrounding Britain’s departure from the European Union has made it difficult for companies to plan ahead. Several car companies have said they will close their factories temporarily after the country leaves the bloc in order to adjust to the disruptions that could arise.

The fear is that Brexit could cause havoc with the carefully choreographed just-in-time production processes at assembly plants. In Britain, more than half of the components in cars come from the European Union, entering seamlessly on trucks from the Continent and arriving within minutes of being fitted in the final product.

After Brexit, those trucks could face substantial delays if they must go through customs checkpoints. Without a clear sense of the terms of Britain’s scheduled departure in a couple of weeks, making plans for production a few years down the line is more difficult. Investment into Britain’s auto industry fell by half last year.