By Michael Every of Rabobank
Trade War and Peace
I was tempted to title today’s Daily “Alles Clarida?” when it was announced last week that Fed Vice-Chair Clarida has been accused of de facto front-running/insider-trading, following Kaplan and Rosengren, and with similar allegations swirling around yet-to-be-reconfirmed Fed Chair Powell. Is this revelation new to key folks in DC? If it isn’t, why is it news now? Wouldn’t it be handy to have a Fed aligned with White House stimulus economics? I’m not saying, I’m asking: because speculating on what the Fed is going to do involves knowing who the Fed will be.
I was also tempted to title the Daily “Pandora’s Box” given the Guardian’s release of the Pandora Papers, which lay out the extreme levels of wealth and tax evasion of our global elite. Yet even if there may be recriminations in some countries, isn’t the overall public reaction going to be a resigned “We knew that already”? And is *this* release tied to any underlying political battle?
Another title I could have gone with was “A Bridge Too Far”, given Congress failed to vote on the US debt ceiling, the infrastructure bill, or the $3.5trn reconciliation bill. House Speaker Pelosi now says it’s the end of October that get the bills done. Except the Democrats’ Progressive caucus perhaps didn’t realise their threat of no infrastructure or reconciliation bill sits fine with Senators Manchin and, more so, Sinema. As such, the $3.5trn bill is now down to “$1.5 to $3.5trn”, by making some spending last 5 years not 10. The problem is not just that Manchin and Sinema may not budge: it is that the green provisions in the bill may prove unpalatable to them regardless of cost, and that is the one element the Progressives reportedly won’t drop. So what could a loosey-goosey Fed buy in bulk if there were no extra supply of Treasuries? Or would a de facto fiscal contraction mean a US downturn that sees higher public borrowing anyway?
I was then thinking of the title “The Tais that bind”, because at 10:00EST US Trade Representative Tai will make a key announcement about her review of the US-China trade relationship. Last week, the rumor was flying round that this will see Trump-era tariffs cut by 1/3; yet there was another rumor that Tai will announce a Section 301 investigation into Chinese SOE subsidies. One move implies a shift towards trade peace, or at least détente. The other implies a new front in the trade war, which while nobody in the financial press is talking about anymore, is still arguably raging, sight unseen.
After all, we have “Build Back Better” promises of jobs and on-shoring across the West: what is that but a promise of protectionism? And as far back as November 2020, Xi Jinping stated: “We should increase the dependence of international supply chains on China and establish powerful retaliatory and menacing capabilities against foreign powers that would try to cut supplies.” Now we also have a supply-chain breakdown that forces all involved to make a strategic decision to either change economic geography towards greater resilience; or, not wanting to face the pain (and reduced ‘Pandora Papers’ opportunities), to sign up to yet more “Too Big to Sail”.
The US seems divided on this. Commerce Secretary Raimondo recently pledged to take US CEOs to China, as if recent history didn’t happen: yet she also just stated that “protecting US steel is a national security issue.” National-security figures point out that historically, all economic production and supply chains are such issues. What use is steel in isolation, for example?
Europe is far more deeply confused. The talk is of strategic autonomy, as challenges to that grow exponentially day to day externally: even Algeria and Mali appear to perhaps be slipping out of France’s sphere of geopolitical influence, for example. Yet the challenge is also internal. EU Council President Charles Michel, citing recent geopolitical events, has just declared that “2022 will be the year of European defence.” I am sure the EU’s enemies are trembling. At the same time, and despite the actions of, and against, Lithuania and the request for pan-EU solidarity from Slovenia, Michel “seeks face time with President Xi Jinping to help soothe ailing ties”. Perhaps to try to push through the CAI investment deal the partially-sanctioned EU parliament has frozen? Perhaps Michel could first work out how to count sofas before getting into deeper waters?
The UK is now talking the talk but has yet to prove it can actually walk the walk, let alone run. There is AUKUS. Trade Secretary Truss is also talking about trade deals with India and Japan linked to security pacts to protect tech and supply chains. (As the Sunday Times puts it, she “Seeks a world of new allies to take on the baddies”!) Yet Truss refuses to be drawn on whether the UK will be able to sign a US trade deal before 2030. On the latter, PM BoJo states the UK needs to adapt post-Brexit rather than relying on cheap EU labour to plug gaps – yet this involves sustained investment, and new supply chains. The left-wing Guardian decries the lack of said European labour, even in an article that points out that as a result some restaurants in Manchester have had to put up hourly rates from GBP9 to 14 an hour; the right-wing Daily Mail is even arguing for higher wages (“Give Britain a Pay Rise!”). The BOE’s inflation fan chart may need to spread much wider than usual given these shifting sands.
While all of this is playing out, we now have the first signs of a possible leveling off in insane shipping prices from Asia – but only because the power-cuts being seen in China have led to a shortage of goods. As such, Western importers pay less for shipping…but only because the imports are not available at any price! Recall my zhetons anecdote from 1994 Moscow? Recall what modern economics was all about at the very beginning, with the argument over the relative value of water and diamonds? Guess what has made things that should be common so scarce? Long supply chains, which don’t make sense if energy and shipping costs are high. Also recall that for far longer than modern economics has been with us, the world was all about *mercantilism*, because people understood that if you don’t control trade and money, they control you.
Meanwhile, as China flew dozens of jets through Taiwan’s air defense zone, the editor of the Global Times tweeted: “China moved its National Day military parade from Tiananmen Square to the Taiwan Straits. The PLA did an excellent job. It is only a matter of time before Taiwan’s separatist authorities fall.” In response, the US military urged China to halt “provocative” flybys, which could lead to “miscalculations”. To put what this could mean in a shipping context, see ‘What’s At Stake In The Indo-Pacific’, and note the conclusion that Western “political leaders will demand options other than capitulation or catastrophic escalation. Maritime blockade will be high on the list of possibilities.” Imagine what that would do to global supply chains!
And so back to Tai and either a US signal of détente and can-kicking, or of disengagement and ‘Yes, we can’ kicking. Politico suggests we should buckle up, with Tai telling them: “I would say that the 301 tariffs are a tool for creating the kind of effective policies, and [are] something for us to build on and to use in terms of defending to the hilt the interests of the American economy, the American worker and American businesses and our farmers, too.” She also challenges the notion that tariffs are ultimately paid by American consumers, saying it’s a more complicated calculation than many suggest. Now *there* is a kick to the guts of the neoclassical trade consensus!
So, in the end I went with “Trade war and peace”, or perhaps “Trade, war and peace”, for this Daily.
