Hello from Washington, where the streets are lined with armed soldiers and police officers and the entirety of the downtown area is soon to be shut down to prepare for the inauguration of Joe Biden.
On which note, our main piece gathers up some more thoughts from outgoing US trade chief Robert Lighthizer, who delivered quite a few zingers aimed squarely at the World Trade Organization when we spoke to him late last Friday, including the line that the broken appellate body has no effect on trade.
Our person in the news is Janet Yellen, one of the first of Biden’s incoming officials to get a Senate confirmation hearing, who warned US trading partners that she would not tolerate currency manipulation.
What Lighthizer did — and didn’t — achieve on China
“As a negotiator, it doesn’t help to be tweeting all the time,” Bob Lighthizer, Donald Trump’s top man on trade told Trade Secrets late last week. It’s a strategy that seems to have worked for him, if not his boss. Four years of avoiding the limelight have seen Lighthizer end up as one of the longest-serving officials in a White House renowned for, among other things, its revolving door.
We can’t help but imagine that Lighthizer’s aversion to Twitter might have led to some quiet resentment of the loquacious Mr Trump, who has been perhaps the most influential keyboard warrior ever, and has been known to launch new tariffs by tweet as he waged his trade wars from afar.
If it did, though, he doesn’t let on. In an interview which took place last Friday afternoon, an often spiky Lighthizer would not be drawn on whether his boss’s tirades were unhelpful when he — Lighthizer — was on the ground in Beijing, painstakingly negotiating with officials there and trying to win both valuable economic concessions and shiny things Trump would be pleased with as the president battled to keep his political base onside with his trade war.
It’s China — specifically “changing the dialogue on China” — that Lighthizer ranks among his top achievements in office. “We really changed the way we related to that state capitalist system, and I think changed the way most Americans and many other people around the world think about it,” he said.
He may have a point.
The Trump political machine has shown that there are votes to be won by tapping into rustbelt discontent when it comes to trade — and over the course of the past year plenty of educated union workers have told the Financial Times that China joining the WTO was the start of things going wrong. Jobs were quickly offshored and manufacturing employment across several industries declined.
Trump quickly got to work, advancing a protectionist agenda that early in his tenure saw a 25 per cent tariff placed on imported metals, and on billions of dollars of Chinese imports. The goal was to revive the stagnating pockets of industrial America that our globalised world had economically left for dead. Trump’s success in achieving that goal is open to debate. Yet, while the Biden administration may conduct its trade war in a different way, nobody expects it to be any less hawkish.
The consensus on the strategy on China is, of course, by no means total.
The Phase 1 deal, under which Washington and Beijing struck a limited trade accord, was supposed to be a big part of cementing the protectionist agenda. But even before Lighthizer has left office, it has come under heavy pressure. Including from Trump, whose increasingly ferocious public attacks on China on everything from human rights abuses in Xinjiang to its handling of coronavirus were accompanied by the threat of fresh tariffs of Chinese imports, even though the Phase 1 deal had been signed and sealed. In May, he threatened to “terminate the deal” if Beijing did not buy more US produce.
The deal has survived up until now, but comes under monthly scrutiny from reporters and trade wonks who point out that Beijing really does not — to put it bluntly — have much hope of actually buying as much US stuff over two years as it promised, given its current rate of imports. (China promised to buy $200bn more in US goods than it did in 2017, the baseline before the start of the trade war, over the course of two years). Lighthizer has previously grumbled about the media focusing too much on the purchasing commitments extracted from Beijing — and dodges our question on whether they were just put in place to appease Trump. While he admits that he is “disappointed” with how those commitments have performed in the first year, he points out: “It’s quite unfair for people to act like Covid didn’t happen.”
Lighthizer — who elsewhere in our conversation said that trade negotiators were never pessimists — stresses the value of the Phase 1 deal in other areas. There were “an awful lot of changes” that China had made to IP protections, he says; there are new and clear rules that China cannot force the transfer of technology from US companies to Chinese companies, and they’ve done some work towards opening up their financial services.
Divisions within Beijing allowed Lighthizer to make progress in his trade negotiations even as the Trump administration took various national security actions against China, including putting telecoms company Huawei on a government blacklist and using export controls to cut off Chinese companies from crucial US technology. Lighthizer said that while occasionally Chinese officials would register “disagreement” with those actions, he was able to appeal to officials who wanted more openness on trade.
“China is a lot of different things and people vying for different policies, and I think that there are people over there who are hardliners, and for whom the whole thing is about security and trying to get an advantage,” he said. “And then there are others who are not liberal in the sense that we use that word at all, but they think that there’s an advantage to China in having more commerce and a somewhat less regimented economy.”
Continuing the dialogue with China will be one of the top priorities for the incoming administration and its new US trade representative, Katherine Tai (of whom Lighthizer speaks highly — “a good person, smart and knows her stuff”). Lighthizer says he has no insight into whether and how quickly new talks can happen, but that he expects that Chinese officials will look to quickly begin discussions “with the objective of accomplishing nothing”. So trade negotiators can be pessimists after all, it seems.
George Steer and Valentina Romei wrote an excellent piece that delved into surging freight rates between China and Europe. Prices have more than quadrupled in the past eight weeks, on the back of a shortage in containers and unexpectedly strong manufacturing output and consumer demand. That is also having an impact on how long suppliers are having to wait for goods to be delivered.
The chart is based on the purchasing managers’ index, an influential bellwether of activity, and charts a sub-index based on delivery times. Readings of more than 50 signal purchasing managers are, on the whole, reporting an improvement in conditions, those below 50 the opposite. In all parts of the world — apart from Asia — waiting times are now at their worst level since the spring.
Person in the news
As chair of the US Federal Reserve, Janet Yellen was the world’s most powerful central banker. So the incoming Treasury Secretary knows all about markets’ capacity to pounce on the pronouncements of top financial officials — especially when those pronouncements mention the dollar.
The dollar dominates world trade and remains the global reserve currency of choice, despite the efforts of eurozone officials to convince investors otherwise (see Don’t miss below). A Wall Street Journal story earlier in the week saying that Yellen would state in a Senate Finance Committee hearing that the US would not seek a weak currency led to a rise in the greenback.
The hearing took place on Tuesday. So what did Yellen say? In line with her predecessors, she took a swipe at China’s currency manipulation and warned US trading partners against currency manipulation and touted the importance of market-based exchange rates. Yellen said that “the intentional targeting of exchange rates to gain commercial advantage is unacceptable”, and that she would “oppose any and all attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade.”
All of which is as one might expect — a weak renminbi after all would benefit Chinese exporters. But with some investors forecasting a slump in the dollar, even pronouncements as seemingly predictable as these can have the power to move markets.
Boris Johnson suffered a significant rebellion on Tuesday when 33 Conservative MPs voted against the government in an effort to outlaw trade deals with countries committing genocide. The amendment to the trade bill, (covered in yesterday’s Policy watch), would have handed UK courts the power to determine what state actions would count as genocide and force the government to pull out of any trade deals. The proposals just scraped through, 319 to 308.
Germany’s carmakers have turned to Angela Merkel’s government in an effort to help ease a massive shortage in semiconductors that threatens to cripple production in one of the country’s biggest industries.
Brussels has long been keen on challenging the dollar’s supremacy as the global reserve currency of choice. But its efforts boost the international role of the euro as part of its quest to strengthen the EU’s self-reliance have left investors and analysts unconvinced.
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Investments in Thailand’s rubber glove industry are expected to exceed $800m over the next few years as it seeks to compete with Malaysia, the world’s largest producer.
Taiwan’s most valuable AI chip start-up secured a strategic investment from Apple supplier Foxconn, as tech giants race to develop consumer electronics with AI capabilities.
Hong Kong dropped from economic freedom index after crackdown
Hong Kong has been dropped from a prominent index of the world’s freest economies, underlining growing concerns over Beijing’s tightening grip on the Asian financial centre after it introduced a national security law last year.
The announcement from the Heritage Foundation, a conservative US think-tank, came as the majority of a group of 47 pro-democracy politicians were refused bail in a case that critics say shows the rapid decline of civic freedoms in the city.
The Heritage Foundation also dropped the Chinese special autonomous region of Macau, a casino hub and former Portuguese colony, from the rankings.
The foundation in recent years has been aligned with the administration of former US president Donald Trump.
“No doubt both Hong Kong and Macau . . . enjoy economic policies that in many respects offer their citizens more economic freedom than is available to the average citizen of China,” the Heritage Foundation said. “But developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing.”
Beijing imposed the national security law on Hong Kong last year in response to anti-government protests that engulfed the city in 2019.
The measures are part of a clampdown on civil and political freedoms guaranteed to the city for 50 years following its handover from the UK to China in 1997. Authorities are targeting anyone viewed as disloyal to the Chinese government in politics, education and the media.
The Hong Kong government has long taken pride in studies showing its economy to be one of the most liberal in the world, with the city marketing itself as an international business haven given its low tax rates and open port.
The Heritage Foundation last year replaced Hong Kong at the top of its “Index of Economic Freedom” with Singapore, toppling it from a position it had held for 25 years, but still included the territory in the rankings in second place.
The Hong Kong government said it was ‘dismayed’ by the Heritage Foundation’s decision and said it was “politically biased”.
The case against the 47 pro-democracy lawmakers and activists has been seen as a test of whether the city’s legal system can withstand pressure from Beijing.
Authorities charged the group with subversion, alleging they aimed to topple the government by staging an unofficial primary vote to select candidates to run for election to the city’s legislature. Subversion is punishable with up to life imprisonment under the national security law.
The bail hearings, presided over by a judge appointed to oversee national security cases, entered their fourth day on Thursday.
Victor So, the judge overseeing the case, only granted bail to 15 out of 47 defendants under harsh conditions, but the prosecution immediately appealed the ruling, returning them to custody until the appeal hearing takes place.
On top of the usual bail conditions, the court ordered the defendants to not participate in elections or make any public political statements.
Sessions have often stretched late into the evening, including one that continued until 3am before the defendants were hauled back before the court the next day. At least one defendant collapsed inside the courtroom and six others were sent to hospital for treatment.
As they exited the court, some defendants shouted: “Political criminals are not guilty, Hong Kongers will not die!”
Simon Young, a law professor at the University of Hong Kong, said the treatment of the defendants was “most unsatisfactory”. Jerome Cohen, a Chinese law expert at New York University, said the way the hearing was conducted “makes a farce of procedural fairness”.
Some of the defendants have faced multiple trials simultaneously and were forced to shuffle between courtrooms.
The defendants’ lawyers said on Tuesday their clients had not bathed in three days, forcing the judge to delay the hearing to allow them to wash.
Hong Kong has tight restrictions on reporting the substance of bail hearings.
Hundreds of supporters have queued each day in an attempt to watch the proceedings in person. Many held placards and chanted banned political slogans, risking prosecution under the security law.
Pakistan’s finance minister ousted in surprise defeat for Imran Khan
Pakistan’s prime minister Imran Khan suffered a major political setback on Wednesday, when his finance minister was defeated in a contest for a seat in the country’s senate.
Khan must now appoint a successor to the cabinet post by June 11 under Pakistani law. The surprise defeat of finance minister Abdul Hafeez Shaikh, a respected economist and former world bank official who led the country’s negotiations with the IMF for a $6bn loan, comes amid an escalating campaign by main opposition parties to have the prime minister removed from office.
Elected officials vote to fill vacated seats in the senate every three years. Following the result, the government announced it would “take a vote of confidence in parliament” to prove that the prime minister retained a majority of support.
Business leaders have warned that Shaikh’s departure creates uncertainty over the future of Pakistan’s fiscal policies as the country battles the pandemic’s fallout on the economy.
“Right now, it was essential to give a message of confidence to a range of stake holders within and outside Pakistan on the state of our economy. Now, people will be left asking questions,” the president of a private Pakistani bank told the Financial Times.
An 11-party opposition alliance, the Pakistan Democratic Movement (PDM), has accused Khan of using the powerful military to tip the 2018 election result in his favour — which leaders from the prime minister’s party have denied — and for failing to revive the moribund economy.
The PDM has announced a March 26 deadline for Khan to step down or face widespread opposition protests.
Though some opposition leaders have said they plan to follow up Wednesday’s defeat with a vote of no confidence against Khan, analysts said it was too early to predict his downfall ahead of the end of his five-year term in 2023.
“It’s a major upset for Imran Khan and his PTI (Pakistan Justice Party),” said Huma Baqai, a political commentator at the University of Karachi. “The government from hereon will face further pressure as the opposition continues to step up its campaign.”
The vote count suggested a break in Khan’s PTI party, with as many as 16 party members either voting for the finance minister’s opponent, former prime minister Yusuf Raza Gilani, or spoiling their ballots.
Shaikh’s defeat “will not automatically lead to the prime minister’s downfall. Some PTI members clearly changed sides [for this vote]. But it will be much harder for them to agree to removing the prime minister,” an opposition leader told the FT.
Faisal Javed, a PTI leader, claimed some representatives had been bribed by the opposition. “There has been a major corruption. There has been horse-trading. People have been sold,” he told the local ARY news channel on Wednesday. Opposition leaders have denied this.
The electoral college for the senate consists of members from legislatures of Pakistan’s four provinces as well as the lower house of parliament in Islamabad known as the national assembly.
Australia’s treasurer warns global stimulus threatens financial stability
Australia has warned that unprecedented global stimulus efforts during the coronavirus pandemic are creating financial stability risks that will only intensify when interest rates inevitably rise.
Canberra has also defended tough new foreign investment rules that have led to a collapse in Chinese investment, arguing the number of proposed deals motivated by strategic, rather than purely commercial gain, was increasing.
Josh Frydenberg, Australia’s treasurer, said the Pacific nation was in a strong economic position as its net debt to gross domestic product was about half that of other advanced economies, even as it begins unwinding fiscal stimulus.
“There is no doubt elevated debt levels will create challenges for many countries. While global interest rates are low those debt levels can be serviceable — but there will be a time when the monetary policy settings change,” he told the Financial Times.
Australia will be among the first advanced economies to taper off Covid-19 fiscal stimulus with the closure of its A$90bn (US$70bn) JobKeeper wage subsidy scheme this month.
Canberra has argued that the recovery is already under way, citing a fall in unemployment to 6.4 per cent in January and a 3.3 per cent economic expansion in the three months to September last year.
Frydenberg, who counts Margaret Thatcher and Ronald Reagan among his role models, said the government’s A$250bn stimulus was required to stabilise the economy during the pandemic. But he said JobKeeper, which supported 3.6m workers at its peak, was no longer needed as the recovery could be supported by tax cuts, which were announced last year.
Asked if he thought the economic policies of Thatcher and Reagan were still relevant, he said: “[Reagan and Thatcher] achieved a lot when they were in office and they were committed to lower taxes. They were committed to cutting regulation and that’s certainly what I’ve been committed to as well.”
But trade unions and businesses that are still suffering as a result of border closures and restrictions, particularly in the tourism and entertainment sectors, have warned that the scheme’s closure will dent the economy.
“JobKeeper should be extended for those businesses that are still affected by coronavirus. [Through] no fault of their own, they are suffering that downturn,” said Sally McManus, secretary of the Australian Council of Trade Unions, last week. “And we say that because that will save jobs.”
Frydenberg, who was the architect of foreign investment rules aimed at countering rising Chinese influence, said he made no apologies for putting “national interest” at the heart of Australia’s investment policies.
Chinese investment fell 61 per cent last year to A$1bn, down from A$2.6bn in 2019 and a peak in 2016 of A$16.5bn, data showed. Frydenberg was instrumental in blocking two potential deals: China Mengniu’s A$600m bid for Japan-owned Lion Dairy and China State Construction Engineering Corp’s A$300m bid for Probuild, a South Africa-owned construction company.
“We absolutely reserve the right to make decisions around foreign investment based on national interest and having put in place an explicit national security test allows us to do that,” he said.
“Increasingly we’ve seen foreign investment proposals that have been motivated not by purely commercial gains but more strategic ones. When those foreign investment proposals potentially compromise the national interest, then we reserve the right to say no.”
Frydenberg said Australia was not alone in tightening its rules, noting that other countries shared Canberra’s views on national sovereignty and foreign investment.
“Obviously we have had some challenges with China,” he said when asked about Beijing’s imposition of trade sanctions on a range of Australia’s exports following Canberra’s call last year for an inquiry into the origins of Covid-19 in Wuhan.
Frydenberg insisted that Australian ministers were prepared to sit down with their Chinese counterparts to discuss the bilateral relationship but only on a “no conditions attached” basis.
“It is a mutually beneficial trading relationship — we supply the bulk of their iron ore and that iron ore has helped underpin their economic growth,” he said.
Frydenberg is a rising star in Australia’s conservative government and is tipped as a future prime minister.
Last week, he shot to global attention following several days of negotiation with Facebook’s Mark Zuckerberg over the social media company’s decision to block news on its platforms in Australia in response to a law forcing it to pay news publishers.
On Friday, Facebook “refriended Australia” and returned news to its Australian platform following amendments that may make it easier for the company to avoid the toughest elements of the law.
“Trying to negotiate with these guys is a bit like playing chess against a chess master,” said Frydenberg, who joked that he spoke to Zuckerberg more than his own wife last week.
“The reality is they are massive companies with huge balance sheets and global reach. If this was easy other countries would have done it [made Big Tech pay for news] long ago.”
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