Finally, Some Positive Trade News

Toward the end of a week during which global markets were pummeled by a sudden worsening in the prospects for a trade agreement between China and the US, President Trump announced two positive developments in US trade relations with our allies.

Market Commentary - Cumberland Advisors - Global Trade

The first was a decision to defer for six months a scheduled imposition of tariffs on cars and car parts from the European Union (EU), Japan and South Korea. This was clearly a “punt,” not the resolution of a very difficult trade dispute. The second development does, however, represent the settlement of an important trade dispute. The US and Canada released a joint statement which announced that the 25% US tariff on steel imports from Canada and the 10% tariff on aluminum imports are being lifted. Canada also announced it will lift its retaliatory tariffs on steel and aluminum imports from the US. A similar agreement between the US and Mexico is expected shortly. The US also announced a reduction from 50% to 25% of the tariff it imposes on steel imports from Turkey, a separate move suggesting some improvement in the stormy bilateral relations between the two countries.

These steps to ease trade relations with our North American neighbors and with the EU, Japan and South Korea will enable the US trade negotiators to focus on China in the coming months. The agreement on steel and aluminum tariffs is particularly important. Both Canada and Mexico have been unwilling to proceed with ratification of the USMCA trade agreement signed in 2018 as long as these tariffs remained in place. The USMCA is meant to replace NAFTA. Both countries are now expected to proceed with ratification. This agreement should also improve the prospect for ratification by the US, although that is still not a sure thing. Certainly, ratification by the three nations would lead to expanded trade within North America, benefiting firms, workers, and farmers in the three countries. It should be noted that after China, Canada and Mexico are the US’s largest trading partners. While we have been critical of many aspects of Trump’s trade policy, negotiating and bringing into force the USMCA would have to be considered a significant success.

The worsening US-China trade war will remain at the forefront of investor concerns in the coming months. We will continue to report on developments in this dispute and discuss the implications for investors. We will also not neglect the postponed but not resolved trade disputes with the EU and Japan. The EU countries, which have a common trade policy, are together a more important trading partner of the US than is China, and Japan is the US’s fourth most important trading partner. Trump’s focus on auto exports from the EU and Japan, on the supposed basis that they are a national security threat, looks very tenuous to this writer and is insulting to our allies. That argument, which is used as a justification for the threatened imposition of tariffs, will probably not be an important factor in the give and take of the serious trade negotiations.

With respect to South Korea, President Trump indicated in his Friday statement that the US-South Korea bilateral trade agreement which was revised last year, included auto concessions  that “ could help to address the threatened impairment of national security.” South Korea officials accordingly are hopeful that their auto producers will not be subject to any eventual tariffs, but recognize the risk remains.

While China-US trade matters will dominate the headlines, US negotiations with the EU and Japan will also continue during the next six months, likely intensifying and becoming more public as the six-month deadline approaches. We expect these negotiations to be difficult, and they may become a source of market turbulence in the closing months of this year. No doubt they, along with developments in the US-China trade disputes, will be issues in the political campaigns aimed at the 2020 elections. Positive and timely settlement of the disputes with the EU and Japan, bringing to an end the uncertainty that is hindering business and investment decisions, would be highly beneficial to the US, EU, and Japan economies.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio


Sources: Financial Times, BBC.com, International Trade Administration, reuters.com




Cumberland Advisors Market Commentary –  US-Canada Economics: An Interview with Susan Harper, Consul General

Financial Markets and the Economy – Financial Literacy Day III, the conference that Cumberland sponsored at the University of South Florida Sarasota-Manatee (USFSM) on April 11, featured a conversation between myself and Susan Harper, Canada’s Consul General in Miami.

US-Canada - An Interview with Susan Harper, Canadian Consul General, Miami

I opened the interview by expressing my personal view of the importance of the durable relationship between the US and Canada and why we must not undermine it. Then I gave Susan the floor. She shared with us some very interesting and quite eye-opening statistics on the US-Canada economic relationship.

The US and Canada are each other’s largest trading partners, but what is somewhat surprising is the extent and significance of the Canadian economic presence in Florida and in the Florida West Coast. Some 500 Canadian companies are present in Florida, at nearly 3500 locations.

Exports

When we think about the impact of a foreign country on our economy, we tend to think first in terms of exports – how much do we sell to them? Well, the US exports more goods to Canada than it does to China, the UK, and Japan combined (Source: Susan-Harper-Canada-Conversation-Slidedeck).

US-Canada - An Interview with Susan Harper, Canadian Consul General, Miami Trade Chart

Among all nations, Canada ranks second in exports from Florida and third in services exports. Canada is also third in imports to Florida, first in visitors to Florida, and second in investment in Florida (figures from the Florida Chamber of Commerce).

Thirteen percent of Florida’s exports go to Canada, an amount totaling $51.6 billion in 2018. For Hillsborough Co. (Tampa), those figures were 25% and $5.7 billion. The value of exports to Canada from other West Coast counties is as follows:

Pinellas (St. Pete, Clearwater) $381 million
Manatee $72 million
Sarasota $99 million
Charlotte $29 million
Lee $72 million
Collier $100 million

Source: Susan-Harper-Canada-Conversation-Slidedeck

Jobs

Susan told us that if trade with Canada ceased, 600,000 (plus or minus 20,000) jobs would be lost in Florida. She had figures on potential West Coast county job losses, too:

Hillsborough (Tampa) 77,420
Pinellas (St. Pete, Clearwater) 25,507
Manatee 5,951
Sarasota 8,062
Charlotte 2,111
Lee 8,286
Collier 9,594

Source: Susan-Harper-Canada-Conversation-Slidedeck

Tourism

Canadians are by far the largest source of international tourism to Florida. (The UK is second, with about half Canada’s total.) In 2018, some 3.5 million Canadians visited Florida (out of a total Canadian population of 35 million)! Of that number, 26% visited Tampa and 12% visited Sarasota (Source: Susan-Harper-Canada-Conversation-Slidedeck).

Real estate

Canada’s residential real estate portfolio in Florida totals $53 billion, with about $4 billion (net) purchased annually. Thus Canadians contribute over $500 million a year in property taxes.

Note residential real estate portfolio figures for the West Coast counties:

Hillsborough (Tampa) $35 million
Pinellas (St. Pete, Clearwater) $142 million
Manatee $121 million
Sarasota $194 million
Charlotte $50 million
Lee $471 million
Collier $630 million

Source: Susan-Harper-Canada-Conversation-Slidedeck

Issues

Pondering this data, I remarked to Susan, “When you think about the conversation about tariffs, trade, and all the flow of news, there is a different perspective when this kind of information is in front of you.” We then tackled some of the issues that are disrupting the US’s relationship with its most important economic partner.

The perverse notion that Canada is a security and defense threat to the US was invoked by the Trump administration in order to levy steel and aluminum tariffs. Ironically, the administration has subsequently granted far more waivers of these tariffs to Chinese firms than to Canadian ones. According to Susan, for the 25% steel tariffs, 40% of waiver applications from China have been granted, but only 2% of those from Canada. For the 10% aluminum tariff the ratio is even worse: 85% of Chinese waivers have been approved, but only 0.2% of Canadian ones.

The irony is heightened by the fact, as Susan noted, that the Canadian armed forces and Mounties have a substantial presence right in Florida itself (as well in many other states), through joint US-Canada defense and security arrangements. For instance, Americans and Canadians work together at the major NORAD (North American Aerospace Defense Command) facility at Tyndall Air Force Base in the Florida Panhandle. Susan mentioned that a Canadian was actually in charge there when the 9/11 attacks struck, and so he was responsible for the defense of US air space.

Susan was vehement in expressing her feelings about the steel and aluminum tariffs:

“Canadians find it insulting to be considered a national security risk to Americans, given our history and our current situation. You know, we’re people; we’re hurt by this. Secondly, we consider it an illegal application of tariffs; it’s an illegal tax. Canada has had to retaliate in an equal amount. This has been very bad for US business, and obviously it’s bad for Canadian business. But it’s bad for US business, and now we’re seeing some of the implications.”

She added: “The Manufacturing Association of Florida has come out very vocally against these tariffs.”

She summarized the economic argument by saying, “We build things together”; and she gave us an amusing but instructive example: The Canada-Florida Burger, comprising a baked bun and ketchup from Ontario and beef from Alberta, married with onions, mushrooms, tomatoes, and lettuce from Florida.

You can view my full interview with Susan Harper at this link or embedded below: https://youtu.be/_jwOOIUmSV4. Her presentation slidedeck is available here as a PDF: https://www.cumber.com/pdf/Susan-Harper-Canada-Conversation.pdf.


 

Thank you, Susan, for making the trip and for your presentation of facts critical to our understanding of our vitally important relationship with Canada.

We again thank the cosponsors and many supporters of our annual Financial Markets and the Economy – Financial Literacy Day. Our partners for the event were USFSM, the Financial Planning Association of Florida (FPA), and the Global Interdependence Center (GIC). You can learn about upcoming activities of GIC here: https://www.interdependence.org/events/.


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International Stocks Off to a Strong Start in Q2 Despite a Heavy Fog of Uncertainty

Global stock markets are continuing to advance following one of the best first-quarter performances in years, with the global iShares MSCI ACWI ETF, ACWI, gaining 14.9% year-to-date April 5th.

Cumberland Advisors Market Commentary

That increase includes strong advances in US stocks. Excluding the US market, the gains in international stock markets have also been impressive. The iShares MSCI ACWI ex US ETF, ACWX, is up 12.9% on a total-return basis. This continued equity market strength is occurring in the face of the heavy uncertainty clouding the outlook for the second quarter and beyond. Important issues for investors include the outcome of the convoluted Brexit drama, the US-China trade talks and other trade disputes, and the dimensions of the moderation underway in global economic growth, in particular growth prospects for China, the US, and Germany. Positive outcomes for these issues would validate recent market gains and provide a tailwind to stocks. Downside risks, however, are significant. Until the fog clears, we can expect volatile markets.

We, of course, do not know how these matters will develop, but recently we have noted some favorable signs. The White House and Chinese sources are signaling that a trade agreement between the two countries may result during the coming weeks, with a signing event involving Presidents Trump and Xi looking increasingly likely. Both parties appear to want a deal. This agreement, which President Trump suggests will be “very monumental,” will most likely have to leave some of the more difficult issues to further negotiations. There are other trade disputes that create uncertainties for investors. The administration’s agreement with Mexico and Canada on revisions to NAFTA is under challenge in Congress, and the US and Europe have yet to resolve their trade disputes.

With respect to the economic outlook, concerns about the slowdown in China have been eased by some positive data. The Chinese government’s efforts to stimulate the economy appear to be having productive effects. If the Chinese economy, the globe’s second largest, does manage to advance at a still-robust 6%-plus pace, this momentum will deliver an important boost to the global economy. It would certainly help the largest economy in Europe, Germany, where the recent slowdown is due in part to weakness in exports to China. Concerns about the strength of the US economy, including some predictions for a recession, also appear to be overdone. Recent data suggest continued strength. Another reason for cautious optimism is the accommodative stance of US monetary policy, which is being followed by the world’s other major central banks.

No one knows how the three years of uncertainty since the June 2016 “Brexit” referendum in the UK will be resolved. The situation changes daily, and it now appears that this uncertainty will likely continue for months and maybe longer. The inability of United Kingdom’s politicians to agree how to leave the European Union has already seriously harmed the British economy. Investment decisions have been deferred or redirected. Britain’s reputation as a desirable host for foreign investment has been damaged, and financial institutions are moving staff and operations to other EU countries.

The date of April 12, when the UK could be forced by legal default into a no-deal departure, is getting perilously close. The effects of such a break would likely push the UK economy into recession, and European Union economies would also suffer. Realizing this danger, both sides are seeking to kick the can down the road. Prime Minister May has written to the EU requesting a delay until June 30. She indicates that this postponement will mean the UK will have to prepare to participate in the EU elections on May 23–26 with the provision that the UK could withdraw from the elections if a deal can be finalized earlier.

The European Council president, Donald Tusk, is proposing a much longer extension that would be “flexible” in that the UK could leave earlier if the UK Parliament reaches an agreement on a deal. Any such extension would have to be agreed by all 27 remaining EU members at their emergency summit meeting next Wednesday, April 10th. The EU has said they would need to see some real progress in the UK’s development of a separation deal to be willing to grant an extension. It is looking likely that an extension will be agreed. If indeed significant progress on reaching a deal can be demonstrated, the EU may be willing to agree to the shorter extension requested by the UK. Otherwise, the EU may insist on a longer delay. The possibility of a disagreement on this point presents an additional risk of an unintended no-deal Brexit.

It is difficult to follow the daily developments in the disarray in Britain’s Parliament over Brexit. This is particularly the case for most US readers who are unfamiliar with the UK’s parliamentary system, which is very unlike the US system, even though the inability to reach decisions may sound familiar. The European Union’s political system is also quite different from that of the US. The deadlock in the UK Parliament reflects sharp divisions within both major parties, the ruling Conservative Party and the opposition Labour Party. The lawmakers of both parties in the House of Commons include both strong proponents of leaving the EU (some of whom are willing even to suffer crashing out with no arrangements for what follows) and strong proponents of a “soft” Brexit that involves maintaining a close trade relation with the EU, perhaps in the form of a customs union. Some of the latter would like to cancel the decision to leave. Many would like to see a second referendum held to check the current preferences of the public. Efforts to find a plan that could gain a majority vote have failed, including the plan of Prime Minister Theresa May, which she had negotiated with the EU.

In desperation and against the wishes of some fellow Conservative Party cabinet members, May last week entered into discussions with the leader of the Labour Party, Jeremy Corbyn, attempting to find a compromise withdrawal deal that the House of Commons could support. Following an initial meeting between the party leaders, Conservative and Labour teams are engaged in intensive negotiations aimed at developing a compromise withdrawal agreement that will include a political declaration. It is the latter, nonbinding declaration that might contain the idea of a customs union or a Norway-model option. It may well also contain the idea of a second referendum. If these talks succeed, the plan would be presented to the EU at the Union’s emergency summit Wednesday, April 10th. If there is no progress before the April 10 summit, May will likely be forced to accept a lengthy delay to avoid a no-deal crash-out. Investors and businesses would then face an extended period of continued uncertainty about the UK’s future relations with the EU countries.

Despite the continued uncertainties about the eventual outcome of Brexit, which involves far more complexity than we could summarize above, investors appear to be increasingly optimistic. The iShares MSCI United Kingdom ETF, EWU, is up 2.4% over the past five market days and 15.1% year-to-date April 5th. This performance is better than the Eurozone’s, as the iShares Eurozone ETF, EZU, has gained 13.4%. We are more hesitant with respect to UK stocks at this time. The possibility of a no-deal exit still remains. In addition, the harm already done to the UK economy does not appear to be fully appreciated. The New York Times reports that economists estimate that the British economy is 1.0–2.5% smaller than it would have been without the referendum vote. One can question this analysis, but the 1% decline in business investment expected this year will be evident to all. The financial jobs already lost to Europe will not likely return. The longer Brexit uncertainty persists, the more damage will be done to the UK economy and its reputation. Certainly, a smooth separation process followed by continued strong trade relations would be an important plus for the UK and EU markets, but this outcome is not yet assured.

Bill Witherell, Ph.D.
Chief Global Economist
Email | Bio

Sources: Financial Times, New York Times, Action Economics, cnn.com, BBC News, CNBC.com


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Mexico and Trade

The state of US trade with Mexico is on the front page as policy makers attempt to stem the outflow of firms, jobs, and goods production from the United States. To put the issues in perspective, it is first helpful to have some facts on US trade in general and trade with Mexico in particular. By comparison with many countries, the US economy is still dominated by domestic production and consumption. In the euro area, for example, trade amounts to about 69% of GDP, and in the UK it is about 38%. In the US economy, by contrast, exports amounts to less than 16% of GDP, and imports are only about 12.5% as of yearend 2015. Figure 1 shows the evolution of US trade since 1983. Our trade deficit in goods and services is slightly less than 3% of GDP in total, down from a peak in 2005 of slightly more than 5%.

Against this background, Mexico is the US’s third-largest trading partner (the other two are China and Canada), but trade with Mexico still accounts for only a small and steadily declining share of total US trade. In terms of jobs, in 2014 (the latest year for which estimates are currently available), the US Trade Representative estimated that goods traded accounted for about 953K US jobs and services for about 193K jobs. Figure 2 shows the sharp and continuing drop in US trade with Mexico; and, interestingly, there was no noticeable impact on that trend from NAFTA.

The chart also highlights the falloff in our trade deficit with Mexico, both as a percentage of GDP and as a percentage of our total trade. Figure 3 shows that our deficit with Mexico declined from a peak of slightly over 1.2% of GDP in 1986 to less than 0.2% in 2015. Again, there is no noticeable impact of NAFTA on either the size of the deficit or its downward trend.

While the quantitative importance of trade with Mexico may be small relative to the size of the US economy, it is clearly more significant to Mexico. Its trade with the US account for half of its GDP, and its surplus with us accounts for about 5% of GDP.

Attempts to change the flow of goods and services across the US–Mexican border could have significant sectoral implications. The Office of the United States Trade Representative reports that most of the two-way trade between the US and Mexico is in goods. Table 1 shows a breakdown of the key goods and services that flow between the US and Mexico. The largest dollar volume of trade between the US and Mexico takes place in three key two-way trades – in vehicles, machinery, and electrical machinery. The main one-way US export to Mexico is in beef and beef-related products, while the main one-way imports from Mexico are in mineral fuels, optical and medical instruments, and agricultural products; and in the aggregate, these one-way trade flows are relatively small.

As mentioned earlier, Mexico is one of the three main US trading partners in addition to Canada and China. As Figure 4 shows, China has recently eclipsed Canada as the US’s largest trading partner; and together the three largest partners accounted in 2015 for 46% of US total trade (exports plus imports).

Surprisingly, in the case of China, while the US does have a trade deficit of $366 billion, that deficit was only 2% of US GDP in 2015. Interestingly, our next largest dollar trade deficits, shown in Figure 5, are not with either Canada or Mexico but with Germany and Japan. Even these deficits are less than 0.5% of US GDP.

The US also runs surpluses, which totaled about $153 billion in 2015, with many other countries. As shown in Figure 6, our largest trade surpluses are not geographically concentrated, and are often with countries that are small in terms of GDP.

So what does all this mean for the current policy focus on trade, particularly with regard to NAFTA? First, in the data it is hard to see any direct effect on trade flows and deficits that can be attributed to passage and implementation of NAFTA. From a policy perspective, then, fixating on NAFTA may be tilting at windmills. Second, looking at specific trade flows between the US and our important trading partners, we see that our trade is country-specific rather than regional in nature. Moreover, we tend to run continual deficits with some countries and surpluses with others. The theory of comparative advantage suggests that we should not aim to have a zero trade deficit with each country. Finally, comparative advantage also implies that, in promoting US trade, efforts should be made to identify where the US has a comparative advantage in production of goods and services and to pursue policies that enable that trade. For example, the US has a clear comparative advantage in the production of certain agricultural products, yet protectionist policies are often pursued by other countries intent on keeping our products out. An effective policy towards agricultural trade would go a long way towards reducing the US’s trade deficit both with Mexico and the rest of the world.