Real Time Economics: Trump’s Trade Coalition of the Unwilling

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Measure Twice, Cut Once

Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to cut interest rates if inflation remains below its 2% target. “A downward policy-rate adjustment even with relatively good real economic performance may help maintain the credibility of the [Fed’s] inflation target,” Mr. Bullard said.

Ah, but what if the Fed simply started looking at a different measure of inflation?

• Chairman Jerome Powell and the New York Fed’s John Williams in recent weeks highlighted the Dallas Fed’s “trimmed mean” price gauge. Tuesday, the Boston Fed’s Eric Rosengren sad the measure suggests inflation is higher than recognized.
• While it’s unclear whether Fed leaders will stick to this line, it appears key officials are now gravitating to a new way to measure price pressures, one that’s more friendly to their policy aims.
• The Fed’s preferred inflation gauge remains the personal-consumption-expenditure price index. The Dallas Fed’s measure “trims” the most extreme price swings, leaving a more moderate core.

—Michael S. Derby

WHAT TO WATCH TODAY

Treasury Secretary Steven Mnuchin appears before the House Financial Services Committee at 9 a.m. ET.

The New York Fed’s John Williams hosts a briefing on homeownership and housing at 10:00 a.m. ET.

President Trump meets with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer to discuss a $2 trillion infrastructure plan. (11:15 a.m. ET)

The Federal Reserve releases minutes from its April 30-May 1 meeting at 2:00 p.m. ET. The WSJ’s Nick Timiraos previews what to watch here.

TOP STORIES

The Coalition of the Unwilling

President Trump ratcheted up pressure on China while calming tensions with Canada, Mexico, the European Union and Japan. But before heralding a united front, let’s remember how Mr. Trump got here: not by working with allies, but by stiff-arming them, Greg Ip writes.

• On China, the U.S. and its allies are of one mind: The country discriminates against foreign products, companies and investment and pursues their secrets via commerce, coercion and espionage.
• But Mr. Trump’s confrontation with China remains a largely unilateral affair, using American laws and leverage to address American grievances. He is dialing back tariffs on allies not out of some change of heart but because they have consumed time, energy and goodwill with paltry and arguably perverse results.
• The result is that far from leading a coalition of the willing against China, he is leading a coalition of the ambivalent, sullen and resentful. That is a fragile foundation for global economic relations.
• The lesson: Mr. Trump is not the only one who has leverage; so do Congress and foreign countries prepared to retaliate. Better they use that leverage together.

Tokyo Trade

President Trump travels to Japan this week to keep up the pressure for a trade deal that has raised hackles among Japanese companies, Alastair Gale reports.

• National security threat: Mr. Trump put off a decision on whether to impose new tariffs on autos, but still said foreign-made cars threaten U.S. national security. Japanese companies reject the finding and officials say Washington hasn’t explained what concessions it wants.
• Irony alert: The U.S. has been clearer on agriculture, where it is seeking lower tariffs. Japan has given breaks to countries in the 11-nation Trans-Pacific Partnership—but not to the U.S., which dropped out of the TPP under Mr. Trump.
• Export engine: Japanese exports declined for the fifth straight month in April as the buildup in trade tensions between its two biggest trading partners—the United States and China—weighed on the country’s key engine of growth.

Xi Flexes Trade Muscle

President Xi Jinping toured China’s hub for rare-earths production. The clear message: The world depends on China for the minerals—used in wind turbines, electric cars, jet fighters and other high-tech products. China’s state media said Mr. Xi’s trip to the southern province of Jiangxi was an opportunity to learn about the industry. Other comments were more pointed: One headline referred to the region’s rare earths as a “trade trump card,” James T. Areddy reports.

Tariffs Trouble Retail

Sales at several major chains slowed during the latest quarter, clouding the outlook for the retail sector as it braces for higher tariffs on Chinese-made goods, Suzanne Kapner and Sarah Nassauer report.

• Kohl’s, which imports about a fifth of its goods from China, lowered its guidance for the year because of tariffs.
• Home Depot finance chief Carol Tomé said the home-improvement chain will spend about $1 billion more to buy goods with the 25% tariffs in place, coming on top of the roughly $1 billion in costs added by the 10% tariff.

 

What We’re Following

Battleground Europe: Huawei Technologies denounced U.S. actions against the company as “bullying” and implored European governments to resist American pressure. Europe is one of Huawei’s most important international markets. Although the company has long faced resistance in the U.S., many European countries—including U.S. allies—have embraced Huawei telecom gear, while consumers have snapped up its smartphones.

Gold bug: Economist Judy Shelton, a potential nominee to the Federal Reserve, said her main objective at the central bank would be to scrap the way it implements its monetary policy decisions: “I would like to see more market-determined rates.” The White House hasn’t said if it would nominate Ms. Shelton, and her past views could create challenges. For example, Ms. Shelton has favored returning to a gold standard.

Housing slump: The U.S. housing market continued to soften in April, with the spring selling season so far proving a disappointment despite falling mortgage rates and a strong economy. Compared with a year earlier, sales in April declined 4.4%, the 14th straight month of annual declines. Average mortgage rates have fallen nearly a percentage point since November, the number of homes for sale has grown and home-price growth has moderated recently. But that hasn’t been enough to buoy sales.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

China produced over 60% of the world’s lithium in April. The lightweight metal is a key raw material in batteries. “China’s dominance in the electric car supply chain has triggered growing concerns in a trade-war obsessed Washington and Brussels, with both fearing that they could be squeezed out of the next generation of industry,” Henry Sanderson reports in the Financial Times.

China deserves Donald Trump. “Trump’s instinct that America needs to rebalance its trade relationship with Beijing—before China gets too big to compromise—is correct. And it took a human wrecking ball like Trump to get China’s attention. But now that we have it, both countries need to recognize just how pivotal this moment is,” Thomas Friedman writes in the New York Times.

U.S. companies in China are getting squeezed by the trade fight. “Approximately 40.7% of respondents are considering or have relocated manufacturing facilities outside China. For those that are moving manufacturing out of China, Southeast Asia (24.7%) and Mexico (10.5%) are the top destinations. Fewer than 6% of members said they have or are considering relocation of manufacturing to the U.S.,” the American Chamber of Commerce in China found in a new survey.

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from Real Time Economics https://on.wsj.com/2WkDbwi