One day after yesterday’s at times painfully uncomfortable first official meeting between Angela Merkel and Donald Trump, it will hardly come as a surprise that during today’s G-20 meeting in Baden Baden, Germany- the first for the Trump administration, whose delegation is led by Treasury Secretary Steven Mnuchin – where the dominant topic is trade, and specifically globalization vs protectionism, that a row would break out over how the post-Trump world will deal with trade.
At stake is the language in the official communique to be released later on Saturday and which is expected to serve as the blueprint for future trade relations, which pressured by Trump may be increasingly transformed from multi-lateral to bilateral.
As Bloomberg reports, at the heart of the disagreement are globalist (and mercantilist) powers such as Germany (and China) defending the existing rules-based system, on the other the U.S. is calling for a recognition that trade must be “fair” without however explicitly stating what that means. Chinese Finance Minister Xiao Jie said in a Saturday statement that the G-20 should be “adamantly against” protectionism. According to reports, China has been the most insistent on a commitment to the current system that the World Trade Organization represents, which is understandable: together with such exporting powerhouses as Germany and South Korea, China has the most to lose from a dramatic overhaul of the status quo.
On Friday, the US Commerce Department announced its plans to raise import tariffs for the Chinese stainless steel products from 63 percent to 190 percent citing a probe that found they were selling on US market at dumping-level price.
“China is disappointed that the United States continued to launch high taxes on Chinese steel export products and calls into question the unfair way the US conducted its investigation,” Wang said, as quoted by the South China Morning Post newspaper.
The United States did not take into the account the evidence previously submitted by the Chinese steel manufacturers and avoided cooperation with the Chinese government, violating the rules of the World Trade Organisation (WTO), the Chinese official underlined.
This is a second blow for the Chinese steel importers in the recent months. The European Commission imposed in January anti-dumping duties on Chinese stainless steel tubes and pipe butt-welding fittings to protect its industry from steel overcapacity.
According the European Commission, Chinese imports will be taxed with duties ranging from 30.7 to 64.9 as its investigation commission confirmed that Chinese stainless steel products had been sold in Europe at dumping prices.
The cross-border movement of goods, services, and capital increased markedly for the thirty years up to the Great Financial Crisis. Although the recovery has given way to a new economic expansion in the major economies, global trade and capital flows remain well below pre-crisis levels. It gives a sense globalization is ending.
The election of Donald Trump as the 45th US President has underscored these fears. His first few weeks in office clearly mark a new era not just for America, but given its central role in late-20th-century globalization, for the world as well. Trump is a bit of a Rorschach test. He did not win a plurality, let alone a majority of the popular vote, but that does not stop pundits from claiming that Trump won because of this or that issue.
There are some campaign promises which Trump has backed away such as citing China as a currency manipulator on his first day as President or pursuing legal charges against Hillary Clinton. His priorities have been repealing the national health insurance, formally withdrawing from the Trans-Pacific Partnership, and signaled an intention to re-open the North American Free Trade Agreement.
Trump and his closest advisers seem intent to unwind not just his predecessor’s initiatives, but the general thrust of America’s grand strategy since the end of WWII. His rhetoric of America First harkens back to Warren Harding, who succeeded Woodrow Wilson after the US Senate rejected the League of Nations. Some historians refer to that period as ‘isolationism, ’ but in practice it was unilateralist.
Switzerland’s Gold Exports To China Surge To 158 Tonnes In December
Switzerland’s gold bullion exports to China saw a huge jump in December, climbing to 158 tons versus a much lower 30.6 tons in November – a jump of 416%.
According to Eddie van der Walt as reported on the Bloomberg terminal this morning, total Swiss gold exports surged to 287.6 tons in December (valued at CHF 10.8b) according to data on the website of the Swiss Federal Customs Administration.
Switzerland’s gold exports had already been very robust in November coming in at 191.4 tons. This means that total Swiss gold exports rose by over 50% from November to December due to global and particularly Chinese demand. Another indication of this global gold demand is that Swiss gold imports increased to 323.6 tons vs 220.5 tons – likely due to refinery demand and investors opting to store gold in Switzerland.
There was increased demand from China ahead of the Chinese New Year and due to concerns about the continuing devaluation of the yuan. This accounts for much of the rise but uncertainty regarding the election of President Trump may also have contributed to the strong rise in Swiss gold exports.
Gold exports to China in December “were the highest since at least January 2014” according to Bloomberg. Most of the exports to China are in the form of investment grade gold bars in the one kilogramme gold bar format which is used by Chinese investors, institutions, exchange traded funds (ETF) and indeed the Shanghai Gold Exchange.
Gold “exports to India dropped to 20.6 tons vs 63.2 tons in November and shipments to Hong Kong fell to 38 tons vs 45.8 tons.”
Gold bullion imports from the U.K. jumped to 148 tons vs 48.4 tons meaning that Swiss gold imports from the U.K. “were the highest since December 2015.” The London gold market continues to see outflows as gold continues to move from the London gold market to strong hands in China via the Swiss refineries. There are also flows to retail and high net worth investors including companies and family offices choosing to store gold in Switzerland and other safer jurisdictions.
Indian households, together the world’s largest hoarders of gold, hold a record 23,000-24,000 tonnes of the prea record 23,000-24,000 tonnes of the precious metal, worth at least $800 billion, despite a sharp fall in international prices from their peaks in 2011, according to a comprehensive study of the Indian market by the London-headquartered World Gold Council (WGC). The value of the holdings is based on (conservative) international prices, which doesn’t factor in a 10% customs duty. The value would be substantially higher in the rupee term.
Coupled with 557.7 tonnes of the central bank’s holdings, gold stocks at most of the known sources in the world’s second-largest consumer would represent around a half of its gross domestic product. This means the gold monetisation scheme can be a success if the government makes it lucrative. The country’s gold demand has been shaken a tad after demonetisation, as some customers feared a crackdown on gold holding as well, but long-term prospects remain bright with demand expected to average at 850-950 per annum by 2020, the WGC said. The country’s gold demand is expected to have fallen to a seven-year low of 650-750 tonnes in 2016, although a recovery is expected as early as 2017.
A reversal in U.S. trade policy could make 2017 the year that efforts to build multinational trade zones crumble, returning the focus to tough, bilateral dealmaking.
In October 2015, officials from 12 nations including the U.S. and Japan gathered in the American city of Atlanta to ink the historic Trans-Pacific Partnership, confident of the dawning of a new age of trade governed by such high-level, multilateral agreements. Yet that dream lies all but dead just over a year later, not least due to Donald Trump’s presidential victory and his pledge to pull the U.S. from the agreement upon taking office Jan. 20.
Many bilateral free trade agreements, which reduce or abolish tariffs and set rules for trade in goods and services between two nations, have been struck over the years. Multilateral agreements extend this notion to the regional level and improve security in the areas they cover, further greasing the wheels of commerce.
Yet Trump prefers his trade pacts one on one — the better to drive hard bargains, leveraging U.S. economic and diplomatic might to secure the most advantageous terms. Multilateral pacts involve far more careful compromise and require each nation to give and take small concessions rather than pushing for an unambiguous win.
As the FT first reported yesetrday, in a dramatic development for Sino-US relations, Trump picked Peter Navarro, a Harvard-trained economist and one-time daytrader, to head the National Trade Council, an organization within the White House to oversee industrial policy and promote manufacturing. Navarro, a hardcore China hawk, is the author of books such as “Death by China” and “Crouching Tiger: What China’s Militarism Means for the World” has for years warned that the US is engaged in an economic war with China and should adopt a more aggressive stance, a message that the president-elect sold to voters across the US during his campaign.
In the aftermath of Navarro’s appointment, many were curious to see what China’s reaction would be, and according to the FT, Beijin’s response has been nothing short of “shocked.” To wit:
The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office.
“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”
On Monday China followed through a warning to “take further measures” against WTO members which continue to impose tariffs on its goods 15 years after Beijing’s accession to the organization.
On Monday the Commerce Ministry said that China has launched a dispute resolution case at the WTO, demanding that all WTO members, particularly the US and EU, stop using the “surrogate country approach” to impose higher tariffs against Chinese goods, which they claim to be exported at artificially low prices. “Regretfully, the US and EU have yet to fulfil this obligation,” the ministry wrote on its website. Sunday December 11 marked the 15th anniversary of China’s WTO accession, and China expects governments which have not already done so, to lift anti-dumping tariffs against its exports and treat Beijing like a fully-fledged member of the organization. The WTO and China agreed an accession protocol when Beijing joined the organization in 2001. Article 15 of this protocol dictates the terms which importing WTO members can use to compare their prices with those of Chinese producers, to determine if that producer is competing fairly with the domestic producers in the importing country. Some WTO members including the US and EU want to reserve the right to restrict Chinese imports with higher tariffs, in order to protect their manufacturers against “dumping,” the process by which a manufacturer exports a product to another country at a price below that charged in its home market, or at a price lower than the cost of production.
In order to investigate whether China is dumping goods, for the first 15 years of WTO membership Beijing was subject to the “surrogate country approach,” as laid out in Article 15.
One week after JPM made the exact same forecast, warning that the recent surge in the USDJPY will fade dramatically as Dollar euphoria shifts to concerns about protectionism, overnight UBS Group’s $2 trillion wealth-management arm said yen traders have got the Donald Trump “trade” all wrong, and the yen will strengthen to 98 per dollar by this time next year.
Cited by Bloomberg, the firm’s Tokyo-based head of Japanese equity research Toru Ibayashi echoed warnings first voiced on this website two weeks ago, and says expectations for fiscal expansion have become overblown, and protectionist policies will come first in the new U.S. administration.
“The market has latched on to only the juicy bits of Trump’s policies, and wrapped them up with unreasonable euphoria, which we think is pretty much a misinterpretation,” Ibayashi said in a phone interview Monday. “A market that’s been overbought on hope will quickly fall apart.”
There were two developments before the weekend that will likely spur a response in the week ahead.
First, while most were looking out for DBRS credit review of Portugal, Fitch surprised by cutting Italy’s credit outlook to negative from stable. At the heart of the decision was concern about the repeated delays and back loading of fiscal consolidation. The disappointing growth, the non-performing loan burden, and the political climate pose downside risks.
Italian bonds which had been underperforming Spain bonds had begun holding their own. Last week, the benchmark 10-year bond yield fell 2.5% in Italy but rose slightly in Spain. The divergence was sufficient to change the month-over-month back into Italy’s favor (+18.5 bp vs. Spain’s +19.7 bp). Fitch noted that even if Renzi does not resign if the referendum fails, the government may be weaker, and parliamentary elections are scheduled for May 2018, and Euro-skeptic political forces are on the rise (5-Star Movement won Rome and Turin in elections earlier this year).
The surprise action by Fitch, coupled with EU demands that Renzi alters the draft budget may weigh on Italian bonds. Italian bank shares rallied for three consecutive weeks, including a sharp 7.3% advance last week. They may also be vulnerable if yields continue to rise. Recall that DBRS put Italy on credit review with negative implications in August. DBRS is the only one of the top four rating agencies that put Italy in the “A” band. A cut would increase the haircut the ECB imposes on Italian bonds used as collateral for loans. The underperformance of Italian bonds relative to Spanish bond may resume if Spain is able to avoid a new election before the end of the year.