Day: June 5, 2019

The trade war between the United States and China could cut world economic growth next year, the International Monetary Fund (IMF) warned Wednesday.

IMF Managing Director Christine Lagarde said U.S. President Donald Trump’s threat to tax all trade between the two countries would shrink the global Gross Domestic Product (GDP) by one-half of one percent.

This amounts to a loss of about about $455 billion, larger than the size of South Africa’s economy,” Lagarde said in a briefing note for the Group of Twenty (G-20), a collection of the world’s largest advanced and emerging economies. “These are self-inflicted wounds that must be avoided… by removing the recently implemented traded barriers and by avoiding further barriers in whatever form,” she added.

The warning came as G-20 finance ministers and central bankers prepare to meet in Japan this weekend. They will gather just weeks after U.S.-China talks collapsed amid claims of broken promises and another round of punishing tariffs.

Lagarde urged governments to adopt policies that support economic growth to avoid a global economic decline. “Should growth substantially disappoint,” she wrote, policymakers must do more, including “making use of conventional and unconventional monetary policy and fiscal stimulus.”

The GDP is a monetary measure of the value of all goods and services produced in an economy during a specific period of time.
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Christy Lee of VOA’s Korean Service contributed to this report.

The escalating trade dispute between the United States and China could distract Beijing from dealing with nuclear North Korea and undermine its efforts to enforce international sanctions, potentially hampering the U.S. attempt to denuclearize the country, experts said.

Even as the Trump administration pursues its “maximum pressure” campaign to push North Korea to denuclearize, Washington has engaged in rounds of talks with China that have turned into a bitter tit-for-tat trade war. 

With the aim of making American-made goods competitive in the United States relative to cheaper Chinese imports, the U.S. launched an investigation into Chinese trade policies in 2017. Washington imposed tariffs on more than $250 billion out of total $539 billion worth of Chinese goods the United States imported in 2018.

Beijing retaliated by raising tariffs on $110 billion of a total $120 billion U.S. goods imported last year. 

The latest hike came earlier in May when the Trump administration raised U.S. tariffs on $200 billion in Chinese imports from 10% to 24%. Trump threatened to add a 24% tariff on the remaining $325 billion worth of imports from China.

This was followed by Beijing’s retaliatory tariff hike on American goods as high as 25% from 10%, affecting $60 billion in American imported goods starting June 1. 

China has accused the United States of starting what it called “the largest war in economic history” and an “economic terrorism.” On Sunday, China said it will “not back down’ in the escalating trade war with the United States.

Tension between Beijing and Washington over a trade deal has caused concern among North Korean watchers wondering if the dispute will affect the U.S. effort to denuclearize North Korea. 

China, as North Korea’s largest trading partner, is responsible for approximately 90% of its imports and exports. As such, Beijing could play a pivotal role in denuclearizing the nation on its southeastern border, because according to William Overholt, a senior research fellow and Asia expert at Harvard’s Kennedy School of Government, “China is very determined to eliminate North Korea’s nuclear weapons.”

The consuming battles in the U.S.-China bilateral trade agreements could distract China from the North Korean nuclear issue, said Scott Snyder, director of the U.S.-Korea policy program at the Council of Foreign Relations.

“The main impact of trade tensions between the U.S. and China is (lowering) the priority of North Korea as an issue on the agenda of U.S.-China relations,” said Snyder. “And so, it’s going to be harder to get China to cooperate as much as the United States would like because they’re focused on other issues in the relationship.”

The biggest role China could play in denuclearizing North Korea is enforcing international sanctions issued since 2016. Targeting Pyongyang’s key export commodities such as coal and seafood, the sanctions were designed to cut off foreign income that could be used to support its nuclear weapons and missile programs.

Joseph DeTrani, a former U.S. special envoy for nuclear talks with North Korea, emphasized China’s role in enforcing sanctions, saying, “Failure to work in concert (with China) in sanctions implementation would weaken our efforts to succeed with North Korea and its nuclear and missile programs.”

But a drawn-out trade war could make Beijing do less to enforce the sanctions, according to Ryan Hass, who served as the director for China, Taiwan and Mongolia at the National Security Council from 2013 to 2017. 

“The level of rigor that sanctions are enforced (with) depends upon the level of manpower and the level of resources that are devoted to the task,” said Hass.“It isn’t necessarily the case that China would turn its back on the sanctions, but it may just choose to allocate its resources and its manpower to other priorities.”

After all, Beijing is more concerned with achieving its chief objective of stability than it is with sanctions, said Robert Manning, a senior fellow at the Atlantic Council.

“While the sour climate and rising tensions in U.S.-China relations complicates U.S. diplomacy on North Korea, China’s cooperation was never a favor to the U.S.,” said Manning. “Beijing’s interests on the Korean Peninsula toward North Korea (have) been based on a sober assessment of China’s desire to see a non-nuclear Korea and stability on the Korean Peninsula.”

China, as one of five permanent members of the United Nations Security Council (UNSC), joined the rest of the UNSC members in issuing stronger sanctions on North Korea in response to multiple missile and nuclear tests it conducted in 2016 and 2017. 

When Washington and Pyongyang began engaging diplomatically in 2018, culminating in their first historical summit in Singapore in June 2018, Beijing suggested international sanctions on North Korea be eased. Several months after the Singapore summit, a report by the U.S.-China Economic and Security Review Commission came out indicating China has relaxed enforcing sanctions on North Korea.

Diplomatic efforts have been stalled since the breakdown of their second summit in Hanoi in February. At issue were conflicting demands and expectations: Pyongyang wanted all sanctions lifted before undertaking a step-by-step denuclearization process, while Washington wanted full denuclearization before lifting sanctions. Given that, the trade disagreements between Washington and Beijing could push China to truncate its support on sanctions, said Stapleton Roy, former U.S. ambassador to China during the George H.W. Bush and Bill Clinton administrations.

“Under those circumstances, it’s not clear whether China will be as willing as it was before to support very strong sanctions on North Korea,” said Roy.

Bruce Klingner, former CIA deputy division chief for Korea and current senior research fellow at the Heritage Foundation, said Beijing could not threaten outright to refuse to implement sanctions as a trade negotiations tactic since doing so would be defying the U.N. But “Beijing could, however, be less vigilant in implementing and enforcing U.N. sanctions,” said Klingner.

Complicating the matter, Snyder said if Beijing views Washington attempting to prevent China’s economic ascendency over the U.S. while engaged in the trade war, its interpretation of the U.S. attitude could induce it to curtail “the amount of cooperation that (it could) provide the United States on North Korea.”

 
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Vietnam is likely to make concessions to the United States so it can escape a U.S. watch list of possible currency manipulators and head off a hit to its fast-growing economy led by exchange rate-sensitive exports, analysts who follow the country say.

The Southeast Asian country, they forecast, will probably talk to the U.S. side over the next six to nine months, consider approving fewer changes in its foreign exchange rate and accept more high-value American imports.

Those measures would help Vietnam get off the U.S. Treasury’s list of nine countries that Washington will examine further for whether those states are currency “manipulators.” Manipulation implies deliberate state-driven currency rate changes that favor a country’s own exporters and make trade more costly for importers. The U.S. list released in late May added Vietnam, Malaysia and Singapore.

The policy changes might place a speed bump in the economy, which has grown around 6% every year since 2012, but a “manipulator” label could lead to tariffs on Vietnamese goods shipped to the United States and choke economic expansion.

“I think they’ll definitely (take action), because they’re extremely worried about this matter, so they’ll carry out some necessary communications and make some adjustments,” said Tai Wan-ping, Southeast Asia-specialized international business professor at Cheng Shiu University in Taiwan. “If they keep going, to be on this list is disadvantageous for Vietnam.”

Exports and the local currency

Vietnam, a growing manufacturing powerhouse that reels in factory investors from around Asia for its lost costs, posted a $39.5 billion surplus in trade with the United States last year and a $13.5 billion surplus in the first quarter this year.

The same country also adjusts its dong currency exchange rate within a band but trending toward weakness versus the U.S. dollar. That trend favors exporters, a majority of the $238 billion Vietnamese economy.

“The reality is, it’s what we call in economics a dirty float currency. It’s not grossly manipulated — it basically reflects market rate for the dong,” said Adam McCarty, chief economist with Mekong Economics in Hanoi. 

“But it’s sort of controlled to stop big fluctuations, so that the change in the exchange rate month to month is rather small, but it’s always been slowly and steadily in the direction of depreciation of the Vietnamese dong,” McCarty said.

​Inflows of “hot money” into Vietnam, which could hurt exports eventually, sometimes require the country to adjust its foreign exchange rate, Tai said.

Measures to get off the list

Vietnam’s limiting of any further fluctuations would put the U.S. government more at ease, said Rajiv Biswas, Asia-Pacific chief economist at the market research firm IHS Markit.

“The U.S. Treasury did say that Vietnam should reduce its intervention in the exchange rate and let the currency move in line with economic fundamentals,” Biswas said. “If you’re not intervening in your currency, that automatically reduces the risk of being named a currency manipulator.”

But Vietnamese net purchases of foreign currency last year came to just 1.7% of GDP, below the 2% that Washington uses to define “persistent one-sided intervention in the foreign exchange market,” Hanoi-based SSI Research said in a note Monday. Governments can adjust exchange rates by buying or selling foreign currency.

Vietnam, where many of the top companies are state-invested, could reduce the trade balance by buying more “capital intensive equipment” and aerospace goods such as aircraft from the United States, Biswas said.

India left the U.S. list in May after easing a trade surplus, though China – in the thick of a trade dispute with Washington – was kept on it.

There are few other “policy levers” Vietnam can use to answer the U.S. Treasury concerns, said Gene Fang, an associate managing director with Moody’s Investors Service in Singapore.

Negotiations with Washington

Vietnam will probably remain on the U.S. list over at least the next half a year, when the document is due for an update, analysts believe. The two sides are likely to discuss the currency rate and the trade imbalance as Vietnam deliberates its response measures, they say.

Eventually the U.S. government could seek negotiations with Vietnam and place tariffs on Vietnamese exports if it sees fit, Fang said.

“I guess one of the things we could see as a result would be that the U.S. places higher tariffs on Vietnamese exports to the U.S., and that would be certainly negative from a growth perspective,” he said.
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The U.S. Commerce Department on Tuesday recommended urgent steps to boost domestic production of rare earths and other critical minerals, warning that a halt in Chinese or Russian exports could cause “significant shocks” in global supply chains.

The report includes 61 specific recommendations — including low-interest loans and “Buy American” requirements for defense companies — to boost domestic production of minerals essential for the manufacture of mobile phones and a host of other consumer goods, as well as fighter jets.

It also called for closer cooperation with allies such as Japan, Australia and the European Union, and directed reviews of government permitting processes to speed up domestic mining.

U.S. reliance on foreign minerals has worried U.S. officials since 2010, when China embargoed exports of so-called rare earth minerals to Japan during a diplomatic row. The issue took on new urgency in recent weeks after Chinese officials suggested rare earths and other critical minerals could be used as leverage in the trade war between the world’s largest economic powers.

“The United States is heavily dependent on foreign sources of critical minerals and on foreign supply chains resulting in the potential for strategic vulnerabilities to both our economy and military,” the Commerce Department said in a long-awaited report outlining a new federal strategy on critical minerals.

“If China or Russia were to stop exports to the United States and its allies for a prolonged period — similar to China’s rare earths embargo in 2010 — an extended supply disruption could cause significant shocks throughout U.S. and foreign critical mineral supply chains,” the report said.

Boosting trade with other countries could reduce U.S. reliance on sources of critical minerals that could be disrupted, and robust enforcement of U.S. trade laws and international agreements could also help address adverse impacts of market-distorting foreign trade measures, it said.

The report was cheered by U.S. miners, including MP Materials, which owns California’s Mountain Pass mine, the only current rare earths facility in the United States.

For now, it must pay a 25 percent tariff to ship its rare earths to China for processing, collateral damage in the U.S.-China trade war.

“We welcome this report and hope that the Commerce Department’s ‘Call to Action’ results in some real action from Washington,” said James Litinsky, co-chairman of MP Materials.

Recommendations

The report called for a combination of short-term measures, such as stockpiling, and longer-term moves to catalyze exploration, design and construction of new mines, as well as re-establishing domestic downstream manufacturing supply chains.

It recommended several measures for the Interior Department and its subagencies, including the Bureau of Land Management and the Forest Service, to remove obstacles to critical mineral development and make it easier to get permits.

It said the BLM and Forest Service should review all areas that are currently “withdrawn” — or protected — from development and assess whether those restrictions should be lifted or reduced to allow for critical mineral development.

Commerce also proposed altering how the Interior Department and its agencies review mining projects under the bedrock National Environmental Policy Act, urging expedited environmental studies and identifying minerals which can be excluded from environmental reviews.

The report drew immediate fire from Democrats who said the new strategy would harm the environment and amounted to fresh concessions to multinational corporations.

“This administration has set shameful new records for industry giveaways, and this is one of the worst,” said Raul Grijalva, Democratic chairman of the House of Representatives Natural Resources Committee.

The industry applauded the report, however.

“The steps outlined in this report will go a long way in unlocking the value of all our domestic mineral resources while continuing strict environmental protections,” said Hal Quinn, president of the National Mining Association.

The Buy American recommendation, which would require defense weapons and related products be built with domestically-sourced rare earths, could make it easier to secure financing if investors knew there would be a guaranteed revenue source for new projects, prospective U.S. rare earth miners said.

“I would encourage the federal government to move as quickly as possible, and ‘buy American’ is one way to do that,” said Anthony Marchese, chairman of Texas Mineral Resources Corp, which is seeking $300 million to develop the Round Top rare earth deposit in Texas.
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The U.S. Internal Revenue Service is auditing Uber Technologies’s taxes for 2013 and 2014 and the ride-hailing company expects unrecognized tax benefits to be reduced within the next year by at least $141 million.

In its full quarterly report on Tuesday, Uber said various state and foreign tax authorities were also looking into its taxes and that it was currently unable to put a definite timeline or estimate on the overall adjustments that might result.

The $141 million amount related only to its transfer pricing positions, which refers to the common multinational practice of charging for services between wholly-owned businesses in different countries or jurisdictions to reduce the tax it pays.

Earlier this year, the company had said in a regulatory filing that it expected unrecognized tax benefits related to the audit to be reduced within the next year by at least $127 million.

Industry experts characterize transfer pricing as a relatively risky strategy, which typically is among multinationals’ top tax concerns and has been used by authorities in the past to go after Apple and Amazon.

“Although the timing of the resolution and/or closure of the audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months,” the company said.

The announcement came on a day when at least 11 of the brokerages, whose underwriting arms backed Uber’s Wall Street debut last month, weighed in with “buy” recommendations on the company’s shares as a statutory embargo lifted. Citi, however, initiated coverage with a “neutral” rating.

Uber shares gained 2.8% in afternoon trading as the technology sector bounced back from a sell-off on Monday.

The company’s stock has struggled since its market debut on May 10 and is trading below its IPO price of $45.

Still, the shares have outperformed rival Lyft, which have fallen by a third in value since its own debut in March, and analysts from Deutsche Bank said Uber’s stock remained the best internet IPO for investors since Facebook’s launch in 2012.

“Uber should trade at a premium to LYFT given Uber’s larger global scale and reach, cross product growth opportunity and larger ability for long-term leverage,” said analysts at Morgan Stanley. “It is still in the early innings in its core and emerging opportunities.”

In its first quarterly report as a public company last week, Uber reported a $1 billion loss as it spent heavily to build up its food delivery and freight businesses.

But many of the analysts covering the stock on Tuesday said they believed Uber had the scale and time to develop into another powerful U.S. global tech player.

RBC analysts believe the market under-appreciates Uber’s profit potential while analysts at Mizuho Securities expect the intense competition to rationalize over the next few years due to continued consolidation and listings of private peers.

“…Uber has ample room to gain operating leverage from economies of scale,” analysts at Mizuho said.
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