Friday, March 09, 2018

China may hold trump card in Trump trade war

On Thursday 8th March 2018 the US President Donald Trump signed an order which pushes forward a plan for 25% tariffs on imports of steel and a 10% tariff on aluminium.

Trump claims it is all about protecting American jobs and to stop cheap foreign steel imports being dumped in the US. But while his motives might be laudable his methods could well spark a trade war which could damage not only the US but slow the global economy which could in turn precipitate another global recession [Guardian].

There is no nation that is 100% self sufficient. Globalisation has made every country reliant on another. But some nations are more resilient than others. The more developed a nation is the greater its susceptibility to a disruption of imports of raw materials, agricultural products or energy supplies.

Fiery rhetoric

In a recent tweet Trump proclaimed that "trade wars are good, and easy to win". But he was immediately slapped down by European Council President Donald Tusk who said the very opposite was true.

"President Trump has recently said and I quote, 'trade wars are good and easy to win.' But the truth is quite the opposite. Trade wars are bad and easy to lose," Tusk told a press conference in Luxembourg [RTE / Guardian].

As the EU drew up a list of products which might have increased tariffs upon them Trump merely retorted that he would respond in kind.

After Trump announced he would impose tariffs on steel and aluminium the EU suggested it might impose tariffs on US imports such as Harley-Davidson motorbikes, Levi's jeans and Kentucky bourbon whiskey [Bloomberg]. Trump then responded saying tariffs could be extended to European cars. The EU's list then grew to include peanut butter, cranberry and orange juice [BBC].

Waking the dragon

But this tit for tat reaction will be nothing compared to the trade war that could break out between the US and China.

There has been much talk over China's dumping of steel on world markets. This is certainly an issue and China should arguably be taken to task. However, Trump's methodology could unleash a hornets nest. And at the very least could be described as using a sledgehammer to crack a nut.

China might not be able to bring the US down but it could seriously damage the US economy. That said there are many myths surrounding the economic relationship between the United States and China.

The fact that China has become the largest foreign holder of US government securities is often taken as indicating that the United States is heavily dependent on China to finance its budget deficits. Similarly, since China is a major source for US imports, US consumers are seen as dependent on cheap Chinese goods.

Dumping its US government securities could cause problems as much for China as it might for the US [CFR].

However while the average consumer may not be affected if cheap imports of clothes and toys were to dry up there are some imports that are far more vital to the US.

There is much interconnectedness between China and the US [Business Insider]. Some is economic and some has to do with manufacturing.

One particular concern for some in in the US is whether China could pull out the rug from the US technology industry.

Rare earth reliance

Apple and other tech firms have relocated to China and any disruption to this supply chain could hurt the US [Bloomberg]. But this is just the tip of the technological iceberg.

China supplies much of the world's so-called rare earths, elements such as lanthanum, cerium, praseodymium, gadolinium, yttrium, terbium, europium [BBC / Wikipedia]. Despite their name, most are abundant in nature but are hazardous to extract [BBC]. Thus many countries have significantly reduced their mining operations on environmental grounds leaving China as one of the few countries to corner the market.

But why are rare earths important? Rare earths are a big part of our modern world.  They are in clean energy technologies like wind turbines and solar cells and in many things we use everyday such as cars, cell phones, computers and televisions. Without dyprosiumif there might be no smartphones or MRI scans [].  

But the biggest concern for the US is the fact that many rare earths are necessary for high-performance guidance systems. US military technologies such as guided bombs and night vision rely heavily upon rare earth elements supplied by China, and rebuilding an independent US supply chain to wean the country off foreign dependency could take up to 15 years, according to a 2010 report published by the US Government Accountability Office [GAO report PDF] [Live Science].

No instant fix

Some 7 years after that report was published and the US is still very much reliant on China to supply these resources [Investor Intel], although another GAO report skims over US reliance on China [GAO report 2016 PDF]

In December 2017 Trump signed an executive order intended to reduce the United States' reliance on other countries for rare earth supplies. But this will be no instant fix. Even Trump's intended shift to buy from other countries such as Australia where companies like Lynas Corp have been mining for nearly two decades is unlikely to fill any gaps left should Chinese rare earth supplies dry up [Bloomberg].

Indeed it could be years before the US becomes self sufficient. In 2016, the US was reliant on imports for 23 minerals including cobalt, lithium, graphite and rare-earth elements, according to a report released this last year by the Interior Department. The country was most reliant on China, which supplied the world's biggest economy with at least 20 critical minerals, the report said.

And this is where China could bite back hard should Trump make things difficult in a trade war.

Past form

It won't be the first time China has used its mining and supply of rare earths as leverage. In late 2009 and throughout 2010, at a time when China produced 97% of the world's rare earths, China tightened its grip on exports [FT / NYT / tvnewswatch - China tightens up on rare earths Oct 2010]

China has already accused Trump of risking a global trade war and says it will retaliate [Sky News]. In a statement China described Trump's decision to levy a 25% surcharge on steel and 10% on aluminium as a "serious attack on normal international trade order".

Elsewhere in Asia, Japan said the move would have a "big impact" on its close relations with the US while South Korea said it may file a complaint with the World Trade Organisation.

Beijing has not yet said how it might react, only that it would "firmly defend its legitimate rights and interests".

China has not mentioned any increased tariffs or block on exports. Indeed only commentators have even mentioned rare earths as being China's secret weapon [Reuters / CNN / ATimes].

Should a prolonged trade war break out and China block rare earth exports then the US could conceivably find itself in a very difficult position.

Recession & war

World Trade Organization Director General Roberto Azevêdo recently said that the "potential for escalation is real, as we have seen from the initial responses of others. A trade war is in no one's interests. The WTO will be watching the situation very closely."

The European Council President Donald Tusk was right to say that trade wars are bad and easy to lose. But he could also added that Trump's trade war could end with more than economic conflict.

The lesson of history is clear. Trade wars have no winners. And they are certainly not good. They can damage the economies of all countries involved, raising tensions and increasing the risk of international conflict.

Most people living today won't remember the last trade war which is blamed for worsening the pain of the Great Depression [CNN / Fortune]. That in turn helped to foster the political extremism that led to World War Two.

tvnewswatch, London, UK

Thursday, March 08, 2018

No winners for UK fishing industry post-Brexit

Both Theresa May and the Chancellor Philip Hammond have been accused of selling out the fishing industry in order to seal a Brexit deal [The NationalTelegraph].

However, the suggestions that UK fishermen might not win waters back after Brexit has been on the table for some time. Indeed a memo published in early 2017 and obtained by the Guardian says that many agreements relating to the CPA would remain in place in order to keep to commitments on sustainable fishing [Guardian]. 

Such suggestions might be difficult for many Brexiters to swallow [Channel 4 News]. Indeed Nigel Farage was screaming "betrayal" as it was suggested the UK might make concessions or apply 'reciprocal arrangements' [Express].

But there may in fact be no deal at the end of all the the wrangling given the rhetoric and and statements coming from both sides in the last few weeks.

Donald Tusk and Michel Barnier have consistently stated there will be no cherry picking or bespoke deals, whilst backed up unanimously by the EU 27. Meanwhile Theresa May [Channel 4 News], David Davis and Philip Hammond repeatedly makes speeches setting out unrealistic visions which boil down to just that; cherry picking.

The UK fishing industry and the Common Fisheries Policy became a divisive issue in the referendum campaign.

There are certainly inequalities and the CFP does need an overhaul. For example under the CFP, overseas fishing fleets can actually catch more of certain fish in areas of UK waters than British fishermen [BBC].

Whilst partially true to say the CFP has affected the British industry it is not the whole story. Indeed overfishing in general has affected the industry across the board [Full Fact].

But will Britain be any better outside the EU? 

Currently some 75% of home-caught fish is exported - and majority of fish eaten by Britons is imported, mainly from Europe [This is Money].

Britain imports big quantities of prawns and tuna from the EU, while its main fish export is mackerel which is caught primarily of the Scottish coast. But this situation could be turned upside down if tariffs were to be imposed on such trades.

As Britain heads inexorably towards a WTO Brexit the likelihood of punitive tariffs looks ever more likely.

Some 666,000 tonnes of fish was farmed and caught in the UK in 2014, of which 499,000 tonnes [75%] were exported, and 66% of those exports went to the EU. Meanwhile the UK also imported 721,000 tonnes of fish, 32% of which came from the EU.

Under WTO rules fish and crustaceans, molluscs and other aquatic invertebrates are subject to an 11% tariff, meaning the UK could lose some £92 million of the average yearly £840 million worth of exports [in 2015] sent to the EU [Source: ONS, WTO, Independent].

Figures and statistics do vary of course. The FT reported that Britain exported £921 million of fish [including £224 million salmon] to the EU in 2015, whereas total landings - the amount brought to the UK - were worth £775 million. Nonetheless, the figure is certainly substantial.

There is also an uncomfortable trend in that fish imports to the UK have increased since 2003 as exports have decreased [BBC]. In plain terms this will mean that British consumers will be paying more for their fish and chips while Britain's fishermen will be struggling to sell their fish to a market which would be put off by tariffs.

For Britain's fishermen this could prove devastating. And chances of government help are unlikely. Fishing is worth £1.3 billion to the UK economy and employs 34,600 people. However in percentage terms it is only a tiny part of the UK economy, contributing less than half a percent to annual GDP. For government any decision to help an ailing industry would be an economic rather than an emotional one. And with the noises currently coming from Westminster concerning the British car industry and financial services make clear that fishing will be last on the list of priorities.

After Brexit it was claimed Britain would be able to "take back control" of its territorial waters up to the 200 nautical miles currently allowed by the CFP.

However the English fleet traditionally catches its fish in Irish, French and Norwegian, as well as UK, waters.

Should no deal be made UK fishing boats will be hemmed in and unable to fish some of its traditional fishing grounds. Meanwhile British authorities will once again face the issue of policing Britain's waters [BBC].

As in many other aspects of the EU negotiation, Britain could refuse to do a deal and go its own way.

But the British government would need to consider the consequences of such a move. The breakdown of any agreement would probably lead to overfishing and the depletion of stocks. It would result in the imposition of tariff barriers. Above all, the British would have to ask themselves whether they could effectively patrol and defend UK waters against fishing boats from EU states. Given these constraints, Britain has little room for manoeuvre in negotiations over post-CFP arrangements. The UK fishing community may emerge from Brexit in a weaker position than it expects.

tvnewswatch, London, UK

Friday, March 02, 2018

Is Brexit killing off Britain's high streets?

This week both Maplin and Toys R Us went into administration putting more than 5,000 jobs in jeopardy [BBC / BBC]. It wasn't the only bad news for February. On the same day Prezzo, the Italian restaurant chain, announced it was to close 100 of its 300 branches risking a third of its 4,500 employees [BBC]. And earlier in the month the bed maker Warren Evans became another victim as it too went into administration putting 300 jobs at risk [City AM].   

Supermarket chains have also made cutbacks. In early February Morrisons announced it was to axe 1,500 jobs in middle management [BBC]. Meanwhile January saw Sainsbury announcing it was to shed thousands of shop floor jobs as part of a major shake-up at the firm [BBC]. Tesco too said it was cutting some 1,400 staff [BBC / Guardian].

January also saw Marks & Spencer put some 500 jobs at risk as it announced the closure of 14 outlets [Guardian].

All these major chains said some jobs would be reabsorbed in other roles, but there would undoubtedly be some redundancies given the continuing trend to make cutbacks.

Statistically the rate of retail store closures less than seen in 2010 according to Consultancy website.  

Since the global financial crisis, British high streets have taken a consistent battering – with retailers Woolworths, media stores Zaavi and HMV, and electrical goods provider Comet among the formerly high-profile casualties of the economic turbulence that began with 2007's infamous credit crunch. Major brands have been vacating bricks-and-mortar presences for years since, a process accelerated by the boom in disruptive ecommerce platforms over the past decade. However, according to the latest analysis from PwC and The Local Data Company (LDC), the number of stores closing in the UK has fallen to 14 a day – the lowest level since before 2010

However, while closures may not be occurring at the same rate there is a growing trend to make cutbacks. And there are still some worrying signs that Brexit is having a marked effect on the high street.

There is growing uncertainty in the retail sector and some firms have specifically cited Brexit as a having a causal link to their cutbacks and closures. Maplin's CEO blamed "sterling devaluation post-Brexit, a weak consumer environment and the withdrawal of credit insurance" for the firm's demise [Retail-Week].

It is nearly a year after Theresa May invoked article 50 and some 20 months after the EU referendum. And the weak pound and the general uncertainty concerning Britain's future trading position is affecting investment and future planning.

After a grim December, many retailers had been hoping for a bounceback, but the figures have showed that consumers were not as hardy as they once were and the retail sector is facing a long-term, continuing slowdown.

Shoppers are being hit by declining real wages, record levels of consumer debt and the prospect of higher borrowing costs [City AM].

Meanwhile a weak pound has resulted in higher costs for importers and retailers. Indeed, rising cost of imports such as food and fuel since Brexit vote is pushing prices to rise at faster rate than anywhere in G7 according to the OECD [Guardian].

With inflation running at 3.1%, Brexit is squeezing living standards. Bread is 5.3% more expensive than this time last year, whilst the price of butter is up by over 21%. Fresh fish is up over 11%, whilst coffee is over 10% more expensive. Overall, on average, food and non-alcoholic drink prices have risen by 4.2% over the last 12 months.

And with job uncertainty and wage stagnation, consumer confidence is dropping. In turn this leads to retailers rethinking their future. Some are making cutbacks and shedding jobs. But others have been forced out of business.

It is easy to point to the advent of the Internet and the effects of online shopping as having causal a causal link to the closure of the likes of Toys R Us or Maplin. But there are other factors that have created problems for physical stores.

In a healthy economy where consumers have the spare cash to buy, real world outlets have fewer issues. A small markup on price is not such a big deal for consumers who like to browse bookstores, record stores, fashion retailers and toy shops. But in a cash-strapped society consumers will be far more savvy.

Physical stores face bigger overheads than online retailers. Employee numbers are often higher, and may often be higher paid than online retailers. Bricks and mortar stores also face higher business rates especially in town where they also face further issues concerning increased problems of parking. Consumers often complain at the ability to park easily in town centres as well as the cost of parking and over-zealous parking wardens.

Brexit may not be the cause of the demise of Britain's high streets. However it may well be the straw that breaks the camel's back.

tvnewswatch, London, UK