Overseas Headlines- April 16, 2019

United States:

Global Trade Talks Consume Plans of Four Biggest Growth Engines

Diplomatic efforts to end a global trade war are expanding to multiple fronts as the European Union and Japan begin talks soon with President Donald Trump’s administration just as the U.S. looks to seal a deal with China. As negotiations between Beijing and Washington press ahead, Japan this week steps into a fight it had managed to dodge for more than two years: bilateral trade talks with Trump. On Monday, EU ministers gave the green light to start negotiations with the U.S. as both sides seek to mend frayed relations a week after threatening each other with billions of dollars in new tariffs over a 14-year-old aviation dispute. With the world’s four biggest economies haggling over the rules of cross-border commerce, the stakes for growth are high. At its spring meeting in Washington last week, the International Monetary Fund cut its outlook for the global expansion to the weakest since a worldwide recession in 2009. The wild card in all the talks is Trump’s looming threat to impose tariffs on imports of automobiles and parts. For Japan, the world’s third-largest economy, there’s a lot at stake in the talks that take place this week in Washington. Prime Minister Shinzo Abe is desperate to avoid tariffs or quotas on auto exports, as Trump wants to crack open Japan’s agricultural market and reduce a $60 billion trade deficit. Abe has poured energy into courting Trump to maintain a strategic relationship that secures his country against potential threats from North Korea and China. But that doesn’t mean Japan will roll over on trade: Abe’s government is determined to avoid giving the U.S. a better two-way deal than the multilateral pacts he’s negotiated with Europe and Pacific Rim nations. By several accounts, the world’s two biggest economies are getting close to resolving their differences and announcing a deal. The latest wrinkle that Bloomberg News is reporting on Monday: China is considering a U.S. request to shift some tariffs on key agricultural goods to other products. That would help Trump sell any eventual deal as a win for farmers ahead of his 2020 re-election bid, people familiar with the situation said.



ECB Officials Lack Enthusiasm for Sub-Zero Tiering

European Central Bank officials lack enthusiasm for any revamp of their negative-interest rate tool and some doubt it will actually happen when an analysis of the policy is completed, according to people with knowledge of the matter. ECB policy makers aren’t opposed to President Mario Draghi’s move to examine the impact of the measure but many don’t yet see merit in a switch to so-called tiering to exempt some bank excess reserves from the deposit rate, said the people. They didn’t want to be identified because such discussions are confidential. The euro pared its decline on the news. It was little changed at $1.1298 as of 12:36 p.m. Frankfurt time, having earlier been as low as $1.1280. Among various motivations for keeping the status quo are a reluctance to damp the effect of the existing tool, worries about the possibility of signaling future rate cuts, and concerns that the ECB is becoming held responsible for the profitability of lenders, the people said. The combination of inertia and hardening opposition to change in the ECB’s sub-zero monetary policy is emerging in the aftermath of an inconclusive meeting last week. Policy makers committed only to analyze the matter as a follow-through from Draghi’s surprise call to “reflect” on a potential revamp. The ECB’s deposit rate, currently at minus 0.4 percent, has been below zero for nearly half a decade. Draghi didn’t consult the Governing Council before his remarks last month. While he didn’t mention tiering by name, the comments prompted speculation that the ECB could introduce versions of it which are already used in Japan, Switzerland and Denmark. When the ECB last cut its rate, in March 2016, it rejected such an approach as too complex. Some governors have already publicly expressed personal skepticism about any softening of the negative-rate tool. Lithuania’s Vitas Vasiliauskas said in an interview that he isn’t keen on tiering, and Dutch central bank chief Klaas Knot said the policy has stimulated credit growth, and other considerations are “a little bit outside the realm of monetary objectives.”



Five Clues on Whether China’s Economic Upturn Has Staying Power

The Chinese economy likely stabilized in the first quarter of this year, but a closer look under the hood will be needed to tell whether that’s just a temporary improvement or if the economy has hit bottom and is rebounding. There’s been plenty of positive news in the world’s second largest economy in recent weeks, with an export rebound, a surge in credit, and improved business sentiment coming in March. The gross domestic product data, along with figures for retail sales, investment, industrial production and unemployment due for release Wednesday are forecast to continue that trend. The government’s stimulus efforts have been having an effect — infrastructure investment stabilized and started recovering since late last year, while property spending ticked up in 2019. However, the sharp deceleration in manufacturing investment is raising concerns, as it had been a pillar of growth last year. A continued slowdown would mean factories are more reluctant to expand production and upgrade equipment, and would also raise questions about the sustainability of the forecast rebound in output growth. One reason for factories’ reluctance to expand is probably the trade tensions with the U.S. While the two nations are closing in on a deal, the U.S. hasn’t disclosed whether it’ll remove existing tariffs on Chinese products. Poor Chinese sales of iPhones and weak global demand for phones and computers are also a factor, with the slump in semiconductor sales in China since September a sign of the industry’s outlook. It’s also worthwhile paying attention to the deceleration in the growth of electronic equipment delivered for export, which is a forward indicator for shipments and eventual overseas sales. Chinese consumers already started tightening their purse strings last year. Auto sales fell in 2018 for the first time in almost three decades, and retail sales had the weakest start this year since 2002. How much that spending picked up in March, if it did, will be closely watched, with a special focus on sales of phones, cars, appliances and other big-ticket items.



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