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In today’s issue, China and U.S. walk back the trade war talk; South Korea and the U.S. agree to amend their trade pact; Fed’s leadership takes shape; oil shows the futility of targeting trade deficits; health insurance premiums set to rise ahead of midterms.
STEPPING BACK FROM TRADE WAR
After President Donald Trump’s planned punishment of Chinese predatory trade behavior rattled global markets, both sides are trying to step back from full-blown trade war . U.S. officials last week sent their Chinese counterparts a letter with their demands, Lingling Wei and Bob Davis report: lower tariffs on U.S. automobiles, more purchases of U.S. semiconductors, greater access to China’s financial sector. A sign China is avoiding escalation: its list of sectors targeted for retaliation excludes U.S.’ biggest exports, such as soybeans, sorghum and Boeing aircraft. “Market reaction … looks disproportionate relative to plausible estimates of the actual economic impact of the tariffs,” Oxford Economics writes. Asian markets rebounded from an early selloff and European markets are higher this morning.
PLEASE, NOT US
No sooner had Mr. Trump announced his China package when voices of the vulnerable piped up. “Countries that embrace openness, that embrace trade, that embrace diversity are the countries that do exceptionally,”Apple chief executive Tim Cook said at an economic forum in Beijing, the Journal’s Yoko Kubota reports. Apple of course makes many of its products in China and derives 20% of its sales there. Farmers are also on the firing line: China is their second biggest export market after Canada. China’s planned retaliation against American agriculture comes as farm incomes this year are expected to slide to their lowest level since 2006, write Jesse Newman, Jacob Bunge and Benjamin Parkin.
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WHAT TO WATCH TODAY
It’s a quiet day for indicators but a busy one for Fedspeak. The New York Fed’s William Dudley speaks in Washington, D.C. at 12:30 p.m. EDT about regulatory reform and the economy. Cleveland Fed president Loretta Mester speaks at 4:30 and Fed vice-chairman of regulation Randall Quarles speaks at 7:10 p.m.
DEAL ON KOREA PACT REACHED
Another sign trade tension is easing: the U.S. and South Korea have agreed on changes to their free trade agreement, Korean officials said Monday. Trump has repeatedly threatened to rip up the deal, casting a shadow on urgent efforts by the two to contain North Korea. The Journal’s Kwanwoo Jun reports that South Korea will double its import quota for U.S. cars that meet U.S. safety rules, to 50,000, and to limit steel exports to the U.S. to 70% of their prior average. In return, Korea gets a permanent exemption from Trump’s 25% steel tariff.
MEET THE FED’S NEW TRIUMVIRATE
The front runner as next president of the New York Fed is John Williams, currently president of the San Francisco Fed, Nick Timiraos reports. Mr. Williams is an economist steeped in the theory and practice of monetary policy. Meanwhile, Trump officials are mulling nominating Richard Clarida, a top monetary academic at Columbia University, as Fed vice-chair. The pair would complement Chairman Jerome Powell, who is not formally trained in economics. Though in the job less than two months, Mr. Powell has practised monetary policy for nearly six years as a Fed governor. The new lineup would leave the Fed’s top leadership ranks light on financial market experience – as well as women and minorities. Mr. Williams would bring a hawkish tilt; he’s viewed the U.S. as close to full employment for three years now, so would presumably be eager to keep rates rising.
AN OILY CHECK ON TRUMP’S TRADE HOPES
If ever a national strategy could be devised to tackle the trade gap by targeting an individual product or individual set of countries, you couldn’t do better than the shale oil revolution, Joshua Zumbrun reports. Since 2009, the U.S. oil deficit fell by half; yet the overall deficit widened, because the trade deficit doesn’t result from importing or exporting more of a particular good, but the overall gap between U.S. consumption and production. So if Trump succeeds in cutting the deficit in , say, steel and aluminum, in all likelihood the deficit in everything else will expand.
HEALTH CARE WILL HAUNT MIDTERMS
Last week’s massive spending bill omitted a proposal to restore subsidies for health insurance purchased on the Affordable Care Act exchanges, which will likely trigger sharp premium increases just before the midterm elections this November. Health care was the number one issue in a recent Pennsylvania special election that a Democrat narrowly won. Despite bipartisan support, the measure stumbled when Democrats balked at abortion restrictions that Republicans wanted to include, Stephanie Armour reports.
PRECIOUS METAL DETECTOR
Gold is up this year but silver is down, driving the ratio of their prices to a two-year high, what some think is a negative leading indicator of the global economy, writes Amrith Ramkumar. The rationale: gold turns popular in troubled times while silver, 55% of whose consumption is industrial, slumps when the global economy slows. Other industrial metals like copper are also under pressure because of protectionism.
QUOTE OF THE DAY
“It’s becoming like a deserted village. All that’s left is for us to fade away and die.” – Jun Fukashiro, who oversees bond investments for Sumitomo Mitsui Asset Management Co., reflects on how traders in Japan’s $9 trillion bond market have nothing to do since the central bank began buying up most new issues.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Who’s afraid of the Chinese juggernaut? In Foreign Policy Dinny McMahon visits China National Erzhong Group’s factory campus and finds a massive an overmanned, inefficient and underutilized factory. It was set up to forge massive metal parts such as crankshafts for cargo ships and the blades for hydroelectric power turbines but now sits mostly idle because of substandard quality and lack of demand. McMahon sees it as emblematic of the waste and inefficiency endemic to Chinese state capitalism and a reason to take predictions of China’s inevitable technological supremacy with a grain of salt.
I am, says this company. American Semiconductor says it was almost destroyed by its Chinese joint-venture partner, Sinovel, according to CNN. To sell wind turbines in China the Massachusetts-based company was required to enter a joint venture with a Chinese partner. American Semiconductor supplied the technology, Sinovel built the turbines. But in 2011 the two got into a payment dispute that slashed the American company’s stock price. The company says an investigation discovered that Sinovel had bribed an employee of American Semiconductor to turn over its source code for its wind turbine control software. Sinovel was found guilty of stealing trade secrets in U.S. court.
The backlash against globalization comes at the wrong time: In the New York Times, Neil Irwin writes that the backlash, epitomized by President Donald Trump’s tariffs against solar panels, washing machines, steel, aluminum and practically anything made in China, is “too late to do much to save the working-class jobs that were lost, but early enough to risk damaging the ability of rich nations to sell advanced goods and services to the rapidly expanding global middle class.”
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