Review: A Brief History of Doom [feedly]

Review: A Brief History of Doom
http://dollarsandsense.org/blog/2019/06/review-a-brief-history-of-doom.html

By Polly Cleveland

Review of A Brief History of Doom: Two Hundred Years of Financial Crises,
by Richard Vague

A Brief History of Doom is the most important economics publication to come along in years. This short, well-documented, and engrossing book wasn't written by an economist, but by a banker.

Richard Vague made a fortune as a conservative Texas banker. On retiring, he decided to investigate the cause of boom and bust cycles. His results shocked him. As he told us at a recent Institute for New Economic Thinkingpresentation, he had always assumed markets were perfectly efficient and that government incompetence or malfeasance caused the problem. Instead, here's what he found:

A necessary and sufficient explanation [his italics] for a boom and bust cycle is an episode over several years of excessive private sector lending, typically triggered by an exciting innovation. That lending inflates values of land or stocks, and sets off a vicious circle of increasingly reckless and often egregiously fraudulent behavior, with lending driving rising values and rising values justifying more lending. When the bubble eventually bursts, the damage has already been done. The only difference from one bubble to the next is the size, and the degree of competence with which the government contains the aftereffects.

Vague and his research team collected massive amounts of data on financial crises from 1819 to the present, in the US and elsewhere. He begins with the Roaring Twenties and the ensuing Great Depression. Contrary to the assertions of former Federal Reserve Chair Ben Bernanke, not to mention conventional Keynesian wisdom, the boom and bust was not a monetary phenomenon. Rather, as I have written, when the new horseless carriage appeared to open up vast tracts of suburban land to housing, banks engaged in a frenzy of reckless lending to sketchy real estate developments, such as underwater lots in Florida. Two or three years before the stock market crash of 1929, the developments began to fail, stopping interest payments, and sticking banks with worthless collateral. The banks in turn had no money to lend to legitimate businesses, causing these to fail, setting off a downward cascade of failures. Following the market crash, panicky customers began runs on all banks, crooked and sound. The brand-new inexperienced Federal Reserve dithered, allowing the damage to accumulate.

Vague continues by examining the "Decade of Greed" in the 1980s, with the exploits and crash of the Savings and Loan banks, as well as of Michael Milken, the junk bond king. Again—a story well told by Bill Black in The Best Way to Rob a Bank is to Own One—the S&L's engaged blatant self-dealing and fraudulent real estate investments at the expense of their customers. After the inevitable collapse, the US rescued the customers at the cost of some $480 billion dollars and sent over a thousand bankers to jail

From here, Vague moves to the mind-boggling Japanese real estate bubble of the 1990s, whose collapse together with Japanese mismanagement has left Japan with close to zero economic growth since then. The Chinese have handled their bubbles more effectively, though Vague wonders how long they can continue. Then he backtracks to famous historical bubbles. In the US, these include the canal boom of the 1830's and the later railroad booms of the 1840s, 1870s and 1890s, which also affected British investors in US railroad companies. Finally, he tackles the giant mortgage boom, crash in 2008, and subsequent Great Recession that we all recently lived through. In this case he retells a story of reckless lending and fraud in the mortgage industry, a story already familiar from such books as Michael Lewis's The Big Short.

Vague says it's vital and feasible to identify budding bubbles: When the private loan volume in a particular sector rises faster than GDP, there's usually a bubble. Inexplicably, the federal government does not separate data on loan volume by economic sector. Yet one has to be blind—or blinded by conventional economic theory—to miss big real estate bubbles. Without knowing anything about the crazy lending behind the last bubble, I personally saw it coming by 2005 in the exploding Case-Shiller home price index. There's an unmistakable boomlet going on right now in the flipping of single-family houses for rental.

Vague is skeptical of remedies. Should the Fed "take away the punch bowl just as the party gets going" by raising interest rates? By the time the bubble is obvious, the damage is done and the frenzied fraudsters will ignore the signal, as they did in the months before October 29, 1929. Should Congress pass more laws like Dodd-Frank to rein in egregious bank misconduct? Trouble is, when the punch bowl starts to bubble, regulators come under enormous pressure to look the other way and politicians often have accepted huge campaign contributions from malefactors. Remember the "Keating Five" –the five Senators, including John McCain, who had received favors from the notorious S&L king, Charles Keating? Moreover, innovative banksters will find ways around the rules. The mortgage lenders, like Angelo Mozila's Countrywide Financial, formed part of a "shadow banking" system not subject to bank regulation. Influential bank lobbyists prevented efforts to regulate the "securitization" innovation that powered the bubble leading to the 2008 crash.

I have one quibble with Vague: He says bubbles do their damage by creating "overcapacity." Well, not exactly. A housing bubble does create a moonscape of vacant lots and even half-built houses, mostly in locations that weren't suitable to begin with, which is how the developers got the land cheaply. That's just waste. There's a more insidious form of waste: the productive investment that didn't happen, such as the older buildings that weren't maintained while their owners waited to make a killing in a rising land market. Bubbles are man-made disasters, equivalent to the 2010 BP oil spill in the Gulf of Mexico. They call for the same remedy: first contain the damage then aid the victims and punish the corporate malefactors.

From that angle, the US response in 2008 was a travesty. Yes, bailouts of $700 billion and still counting prevented the collapse of the banking system. But the bankers responsible for the calamity proved "too big to jail," and the tens of millions of homebuyer victims were not allowed to write down their inflated mortgages to the post-bubble value of their homes. Vague says that such debt restructuring, like the Biblical debt-forgiveness "jubilee," would indeed have stimulated a rapid economic recovery.

Finally, what about preventing bubbles? I asked Vague about his native Texas, which suffered relatively little in 2008. That was possibly due, I suggested, to relatively high property taxes that kept down land values, and a well-enforced loan to value limit of 80% of equity. Yes, laughed Vague, and Texas also has a constitutional prohibition on second mortgages—we bankers lobbied furiously to get that undone, to no avail. I trust that as he and his team will further pursue the prevention possibilities of combining high property taxes with stiff regulation.

 

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Trump and Xi Agree to Restart Trade Talks, Avoiding Escalation in Tariff War [feedly]

Trump and Xi Agree to Restart Trade Talks, Avoiding Escalation in Tariff War
https://www.nytimes.com/2019/06/29/world/asia/g20-trump-xi-trade-talks.html

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The Public Service Freedom to Negotiate Act provides public sector workers the right to join in union and collectively bargain [feedly]

The Public Service Freedom to Negotiate Act provides public sector workers the right to join in union and collectively bargain
https://www.epi.org/blog/the-public-service-freedom-to-negotiate-act-provides-public-sector-workers-the-right-to-join-in-union-and-collectively-bargain/

In February 2018, teachers went on a statewide strike in West Virginia to demand just wages and better teaching and learning conditions. For nine days, schools across the state were closed as teachers, students, and community supporters protested at the state capital against the state government's chronic underfunding of public education and the impact on the teachers and students. After a week and a half of striking, the West Virginia teachers received a pay increase, but more importantly, they sparked a movement that prompted public school teachers across the nation to strike in support for fairer pay and better working conditions.

The teachers in West Virginia and across the nation relied on the solidarity and support from their communities to win these fights, because in many states public sector workers do not have the right to collectively bargain. Under current federal law, public service workers do not have the freedom to join in union and collectively bargaining for fair pay, hours, or working conditions. There are more than two dozen states with laws that protect public services workers' right to join unions, but dozens more have lack any rights. Last year, the Supreme Court's 5-4 decision in Janus v. AFSCME Council 31 overturned 40 years of precedent by barring unions from requiring workers who benefit from union representation to pay their fair share of that representation. And states continue to perpetrate the assault on public service employees by either denying or undermining workers' ability to act collectively in addressing workplace issues.

Yesterday, Representative Matt Cartwright (D-Penn.) and Senator Maize Hirono (D–Hawaii) introduced the Public Service Freedom to Negotiate Act of 2019, which would require states to provide public service workers the freedom to join in union and collectively bargain. The bill would also address the issue of fair share fees in the Janus decision by authorizing the voluntary deduction of fees to support the union. Ultimately, the bill would provide 17.3 million public employees a national standard of bargaining rights. This includes the teachers, police officers, and sanitation workers that provide critical services to our communities every day.

Unions enable working people to come together and ensure that workers are paid fairly and treated with dignity on the job. As a result, unions improve wages and benefits for all workers, not just union members. In order to create an economy that works for all of us, not just the wealth few, it is important that workers have the freedom to join a union. The Public Service Freedom to Negotiate Act would provide that right to public sector employees nationally.

VISIT WEBSITE
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An Overview of Social Science Research on Terrorism [feedly]

I very much like Tim Taylor's (and Dan Little's in sociology) approach of summarizing the scientific lit in a field  of study BEFORE/WHILE evaluating various speculations on the meaning of accumulated data. So, I feel armed to ask a speculative question:

Terrorism attacks the stability of existing institutions and social contracts no matter its politics (or religion -- politics by another name). Or is the situation the inverse? Failing institutions and social contracts invite destruction, whether "creative", or not. Modern states, especially ones  with large armies, AND complex market economies, and which fall into a cycle of failure and collapse, do so very unevenly, and chaotically. Reactions become extreme and existential in locales long before an entire nation falls apart. Is terrorism an inevitable feature of a modern state in collapse?

An Overview of Social Science Research on Terrorism
http://conversableeconomist.blogspot.com/2019/06/an-overview-of-social-science-research.html

Since the terrorist attacks of 9/11, a number of economists and other social scientists have been studying terrorism. Khusrav Gaibulloev and Todd Sandler summarize the findings in a review article written for the Journal of Economic Literature (June 2019, pp. 275-328, not freely available online, but many readers should have access via subscriptions through their library).  Here, I'll hit some high spots of their five main themes, and I'll skip the citations, but the paper itself has vastly more detail.

"First, terrorism has altered in form after the rising dominance of religious fundamentalist terrorism in the 1990s and the augmented security measures in the West after 9/11. These considerations have changed the lethality, location, and nature of terrorism over time ..."

Examples include a shift in the nature of groups most likely to engaged in terrorist activities, along with a decline in transnational and a rise in domestic terrorism.

"Prior to the 1990s, most terrorist groups were left wing or nationalist/separatist. The rapid rise of religious fundamentalist terrorist groups started in the 1990s with al-Qaida and its Islamic extremist affiliated groups. Unlike the leftists who generally wanted to limit casualties and collateral damage, the religious fundamentalists wanted to maximize carnage, as 9/11 and the March 11, 2004 Madrid commuter bombings demonstrate. During the 1990s, the religious fundamentalists assumed a dominant influence among terrorist groups. ... [T]he number of transnational terrorist incidents have fallen by about
40 percent since the start of the 1990s; however, each incident was much more likely
to involve casualties since then."

"Second, terrorist groups respond rationally to their environment to ensure their survivability and visibility. In so doing, they adopt novel institutional forms and adjust their attack portfolios in response to counterterrorism actions."

The theme of this research is that groups considering terrorist activity often have a range of other possible actions to pursue: peaceful protest, violent protest, guerrilla attacks, even an attempt to take over territory and in effect engage in civil war. If terrorism is the choice, will it take the form of kidnapping, hostage-taking, bombing, or mass shooting? In addition, groups considering terrorism will take context into account. Strong state or weak state? Are there other terrorist groups already in action, which can make it easier for new terrorist groups to begin and less likely that new groups will be caught? Do the terrorists have a reasonably safe refuge, perhaps in another country, to which they can retreat between attacks? 

The fact that terrorist groups evolve an dmake these kinds of choices has consequences. For example, there is some evidence to support the hypothesis that as governments have made greater efforts to  protect official installation and people from terrorist attacks, one result has been a rise in terrorist attacks aimed at civilian targets. There is also evidence to support an argument that terrorist groups sometimes try attract more supporters by outbidding" each other to engage in more prominent acts of violence. 

Another finding in this literature is that the older-style political terrorist groups were more likely to break up in internal disagreements and easier to infiltrate. The newer religious-based terrorist groups 
"rely on kinship, long-term friendships, and worship for recruiting purposes. Such ties are very tight and make it extremely difficult for the authorities to infiltrate these groups. Additionally, these ties provide a aense of camaraderie among members that facilitates volunteers for dangerous and even
deadly operations ..."

"Third, counterterrorism policies have had mixed success. Targeted governments often work at cross-purposes, relying too much on attack-deflecting defensive measures and too little on proactive offensive measures, especially when the same terrorist group targets multiple countries. Frequently, well-intentioned counterterrorism policies may have unintended consequences as terrorists or governments strategically react to one another's actions. More thought needs to be given to countermeasures that offset terrorists' actions, such as service provision, that win them a constituency."

"After 9/11, the sustained War on Terror is seen to have apparently little long-term effect on global terrorism. ... Furthermore, enhanced border security since 9/11 caused transference of attacks from North America and Europe to the Middle East, Africa, and Asia, consistent with the earlier defensive game theory model." 

What are some possible steps that could be taken in addition to defensive measures? In situations where a terrorist group is providing services to a local population, opponents of the terrorists could seek to establish alternative sources of those services. On the other hand, a policy that involves sending more aid to areas that originate terrorism will send send some mixed messages! Cooperating to limit flows of money and materiel to terrorists can be helpful. "The literature also shows that
directed proactive measures—e.g., assassination of militant leaders or house demolitions—are effective ..."

"Fourth, terrorism has myriad causes. The alleged relationships between terrorism and globalization, terrorism and poverty, and terrorism and regime type are much more nuanced than believed after 9/11." 

It's difficult for most of us to get a grip on what leads a person to commit terrorist activity, and so it can be easy to make up reasons that seem at least a little plausible--and then just to assert for some people, these reasons are sufficient to drive some people to terrorism. The evidence hasn't been kind to such assertions.

For example, consider the argument that poverty leads to terrorism. One of the first research papers on this subject was published in the Fall 2003 issue of the Journal of Economic Perspectives, where I work as Managing Editor: Krueger, Alan, B., and Jitka Malečková.  "Education, Poverty and Terrorism: Is There a Causal Connection?"(17:4, 119-144). Looking at the Palestinian population and terrorism, they found that those with high levels of education (and thus presumably higher incomes) were quite likely to support terrorism, and that a sample of members of Hezbollah's military wing had higher education levels than the population average.  More broadly, the evidence suggests that very poor countries don't typically have a lot of terrorism, because physical survival is a bigger concern, and high-income countries have relatively less terrorism. The countries with higher levels of terrorism are in a middle range.

Or consider the possible connections between terrorism and regime change. One might argue that democracies are more vulnerable to terrorism, or that democracies offer other outlets for dissent. One might argue that autocracies have less room for dissent other than terrorism, or that autocracies are more likely to clamp down ferociously on terrorism. There are lots of hypotheses, and the evidence is weak for any of them "the relationship between regime type and transnational terrorism is an empirical question. Findings in the empirical literature on this relationship are mixed and generally
unconvincing." But some studies suggest that when a country is moving away from autocracy and toward a nascent democracy, the risk of terrorism may rise.

Yet another argument is that globalization may be connected to terrorism, because it allows money, people, supplies, and most of all grievances to spill across national borders. But the research doesn't show any connection that countries with more global ties are more likely to face issues with transnational terrorism.

"Fifth, as a general rule, terrorism has had little direct negative impact on the economic growth or GDP of targeted industrial countries, despite some large-scale attacks. Any impact is felt by a few terrorism-fragile sectors, and this impact is transitory and small relative to the economy. Larger macroeconomic effects may plague small terrorism-ridden countries."

Of course, this statement doesn't in any way diminish the costs of terrorism; it merely points out that in high-income countries, terrorism doesn't affect growth of GDP,

(Full disclosure, the Journal of Economic Literature is published by the American Economic Association, just like the Journal of Economic Perspectives where I labor in the fields as Managing Editor.)

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Russia-India-China will be the big G20 hit [feedly]

Yet more fallout from the trade wars: apparent acceleration, not retreat, of Eurasian economic consolidation

Russia-India-China will be the big G20 hit

https://www.asiatimes.com/2019/06/article/russia-india-china-will-be-the-big-g20-hit/

It all started with the Putin-Xi Jinping summit in Moscow on June 5. Far from a mere bilateral, this meeting upgraded the Eurasian integration process to another level. Putin and Xi discussed everything from the progressive interconnection of the New Silk Roads with the Eurasia Economic Union, especially in and around Central Asia, to their concerted strategy for the Korean peninsula.

A particular theme stood out: They discussed how the connecting role of Persia in the Ancient Silk Road is about to be replicated by Iran in the New Silk Roads, or Belt and Road Initiative. And that is non-negotiable. Especially after the Russia-China strategic partnership, less than a month before the Moscow summit, offered explicit support for Tehran signaling that regime change simply won't be accepted, diplomatic sources say.

Putin and Xi solidified the road map at the St Petersburg Economic Forum. And the Greater Eurasia interconnection continued to be woven immediately after at the Shanghai Cooperation Organization (SCO) summit in Bishkek, with two essential interlocutors: India, a fellow BRICS (Brazil, Russia, India, China, South Africa) and SCO member, and SCO observer Iran.

At the SCO summit we had Putin, Xi, Modi, Imran Khan and Iran's Rouhani sitting at the same table. Hanging over the proceedings, like concentric Damocles swords, were the US-China trade war, sanctions on Russia and the explosive situation in the Persian Gulf.

Rouhani was forceful – and played his cards masterfully – as he described the mechanism and effects of the US economic blockade on Iran, which led Modi and leaders of the Central Asian "stans" to pay closer attention to Russia-China's Eurasia road map. This occurred as Xi made clear that Chinese investments across Central Asia on myriad BRI projects will be significantly increased.

Russia-China diplomatically interpreted what happened in Bishkek as "vital for the reshaping of the world order." Crucially, RIC – Russia-India-China – not only held a trilateral but also scheduled a replay at the upcoming G20 in Osaka. Diplomats swear the personal chemistry of Putin, Xi and Modi worked wonders.

The RIC format goes back to old strategic Orientalist fox Yevgeny Primakov in the late 1990s. It should be interpreted as the foundation stone of 21st century multipolarity, and there's no question how it will be interpreted in Washington.

India, an essential cog in the Indo-Pacific strategy, has been getting cozy with "existential threats" Russia-China, that "peer competitor" – dreaded since geopolitics/geostrategy founding father Halford Mackinder published his "Geographical Pivot of History" in 1904 –  finally emerging in Eurasia.

RIC was also the basis on which the BRICS were set up. Moscow and Beijing are diplomatically refraining from pronouncing that. But with Brazil's Jair Bolsonaro seen as a mere Trump administration tool, it's no wonder that Brazil has been excluded from the RIC summit in Osaka. There will be a perfunctory BRICS meeting right before the start of the G20 on Friday, but the real deal is RIC.

Pay attention to the go-between

The internal triangulation of RIC is extremely complex. For instance, at the SCO summit Modi said that India could only support connectivity projects based on "respect of sovereignty" and "regional integrity." That was code for snubbing the Belt and Roads Initiative – especially because of the flagship China-Pakistan Economic Corridor, which New Delhi insists illegally crosses Kashmir. Yet India did not block the final Bishkek declaration. 

What matters is that the Xi-Modi bilateral at the SCO was so auspicious that Foreign Secretary Vijay Gokhale was led to describe it as "the beginning of a process, after the formation of government in India, to now deal with India-China relations from both sides in a larger context of the 21st century and of our role in the Asia-Pacific region." There will be an informal Xi-Modi summit in India in October. And they meet again at the BRICS summit in Brazil in November.

Putin has excelled as a go-between. He invited Modi to be the guest of honor at the Eastern Economic Forum in Vladivostok in early September. The thrust of the relationship is to show to Modi the benefits for India to actively join the larger Eurasia integration process instead of playing a supporting role in a Made in USA production. 

That may even include a trilateral partnership to develop the Polar Silk Road in the Arctic, which represents, in a nutshell, the meeting of the Belt and Road Initiative with Russia's Northern Sea Route. China Ocean Shipping (Cosco) is already a partner of the Russian company PAO Sovcomflot, shipping natural gas both east and west from Siberia.

Xi is also beginning to get Modi's attention on the restarting possibilities for the Bangladesh-China-India-Myanmar (BCMI) corridor, another major Belt and Roads project, as well as improving connectivity from Tibet to Nepal and India. 

Impediments, of course, remain plentiful, from disputed Himalayan borders to, for instance, the slow-moving Regional Comprehensive Economic Partnership (RCEP) – the 16-nation theoretical successor of the defunct Trans-Pacific Partnership. Beijing is adamant the RCEP must go into overdrive, and is even prepared to leave New Delhi behind.

One of Modi's key decisions ahead is on whether to keep importing Iranian oil – considering there are no more US sanctions waivers. Russia is ready to helpIran and weary Asian customers such as India if the EU-3 continue to drag the implementation of their special payment vehicle.

India is a top Iran energy customer. Iran's port of Chabahar is absolutely essential if India's mini-Silk Road is to reach Central Asia via Afghanistan. With the Trump administration sanctioning New Delhi over its drive to buy the Russian S-400 air defense system and the loss of preferred trade status with the US, getting closer to Bridge and Road – featuring energy supplier Iran as a key vector – becomes a not-to-be-missed economic opportunity.

With the road map ahead for the Russia-China strategic partnership fully solidified after the summits in Moscow, St. Petersburg and Bishkek, the emphasis now for RC is to bring India on board a full-fledged RIC. Russia-India is already blossoming as a strategic partnership. And Xi-Modi seemed to be in synch. Osaka may be the geopolitical turning point consolidating RIC for good. 

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Bloomberg: Pain From Trump's China Tariffs Spreads, Reshaping Global Trade [feedly]

Pain From Trump's China Tariffs Spreads, Reshaping Global Trade
https://www.bloomberg.com/news/articles/2019-06-25/pain-from-trump-s-china-tariffs-spreads-reshaping-global-trade

resident Donald Trump often cites China's massive exports to the U.S. as a grave injustice hanging over the world economy. But lately it pays to look at Chinese imports for the pain that his tariff wars are inflicting on global growth.

The world's biggest trading nation last month saw imports from Japan, South Korea and the U.S. fall sharply from a year earlier, according to official data. The 27% fall from the U.S. is perhaps not surprising given a year of tit-for-tat tariffs, but a drop of 16% from Japan and 18% from South Korea is reason to consider the broader effects of Trump's trade battles.

Such data illustrate why trade is at the top of the agenda for this week's Group of 20 meeting of leaders who preside over more than three-quarters of the global economy. While much of the focus will be on Trump and Chinese President Xi Jinping's ability to resume talks, the other leaders in attendance have their own stakes to worry about.

Global commerce is "being hit by new trade restrictions on a historically high level," World Trade Organization Director-General Roberto Azevedo said in a report Monday that pointed to an increase in protectionist measures by G20 countries. "This will have consequences in increased uncertainty, lower investment and weaker trade growth."

Almost every day brings fresh data on the economic impact.

An analysis released on Monday by Bloomberg Economics of the more than 10,000 Chinese product categories hit by tariffs already found they had led to a 26% fall in the value of their exports to the U.S. in the first quarter of 2019.

That was before the recent breakdown of U.S.-China talks and an increase May 10 from 10% to 25% of tariffs on products worth some $200 billion in annual trade before the conflict, the largest tranche of $250 billion in imports affected. Trump has also threatened to hit a further $300 billion in imports from China.

U.S. Plays Down Expectations for Trump-Xi Meeting With Hard Line

Monthly trade data are volatile. But in numbers like China's May import data, WTO chief economist Robert Koopman sees evidence of the Trump trade wars rippling through supply chains and dragging on the world economy.

Big economies such as the European Union, China and the U.S. are slowing for reasons ranging from Brexit to faltering manufacturing in China to the disappearing fiscal stimulus from tax cuts in the U.S.

Adding to the malaise is rising uncertainty over the direction of the global economy and trade that is dampening investment, Koopman says. Then there's the direct cost of tariffs and counter-tariffs for businesses. Each feeds into the other and a global economy changing in response, he says.

Trade Balance

Trump and his aides insist his push to take on China and go beyond that by threatening allies such as the EU and Japan with auto tariffs among other things is aimed at rebalancing America's economic relationships.

Those actions have nothing to do with the slowdown underway in the world economy, they argue, though institutions like the International Monetary Fund have called escalating trade tensions the largest risk out there.

"I don't believe for a second that what we're doing is having a largely negative effect on economic growth," Robert Lighthizer, Trump's chief trade negotiator, told a congressional committee this month, pointing to a U.S. economy growing faster than G-7 peers. "The economy in a lot of other countries is slowing down and it doesn't have anything to do, in my judgment, with what we're doing."

What Our Economists Say

"The U.S. economy is already suffering as China's tariffs hit sales of agricultural products. Inability -- in the short term -- to fill the gap left by Chinese products means a second blow as U.S. manufacturing firms miss crucial inputs into the production process. As the economic iron curtain falls, it's not just those on the Chinese side that are suffering."
-- Tom Orlik and Maeva Cousin
Click here for the full note on the tariffs

Robin Brooks, chief economist at the Institute of International Finance, says it is too early in the trade wars to blame them for any broad economic trends. Nations such as Germany, which has been hit by Brexit and a slowdown in Turkey, have faced idiosyncratic forces, he argues. Data like those showing a slowdown in exports from Japan or South Korea to China represent "just the normal ups and downs of global manufacturing.''

While economists such as Koopman say it's hard to say how much Trump's actions are to blame for a slowdown there's no doubt they are changing trade flows. Put another way: Trump is causing globalization to adapt rather than go into reverse as he intended.

Production is shifting to other countries rather than coming home. Bloomberg's new analysis found that in the first quarter of 2019, Taiwan saw sales to the U.S. of products hit by Trump's China tariffs rise about 30% from a year earlier, while South Korea's jumped 17%. Vietnam saw sales of China-tariffed products to the U.S. increase 27%.

The World Economy in the Second Half - What You Need to Know: Economics

"Globalization going into reverse would mean a lot of the production coming back to the domestic market,'' Koopman says. "That's not what we are seeing.''

China also hasn't let Trump's penalties go unanswered. Peterson Institute analysts point out that even as it has retaliated and raised import taxes on U.S. products, China has lowered duties on goods from the rest of the world. Still, China's data last month showed it's not clear that strategy has resulted in a broad surge in non-U.S. trade just yet.

So whatever the outcome of the Trump-Xi talks at G-20 later this week, the early disruptions may leave lasting scars. "Even if we get some agreement at the G-20 meeting, we may underestimate the damage already done to capex planning and corporate sentiment by the trade war," Torsten Slok, Deutsche Bank's chief economist, said in a note to clients on Sunday.

— With assistance by Malcolm Scott

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Bloomberg: US-China Trade War: The Technologies Hit The Hardest [feedly]

US-China Trade War: The Technologies Hit The Hardest
https://www.bloomberg.com/graphics/2019-trade-war-us-china-technology/? 

By Ian King, Mira Rojanasakul and Adrian Leung

A trade war between the world's two largest economies erupted this year, and technology is at the center of the skirmish. President Donald Trump blocked networking giant Huawei Technologies Co. from buying U.S. components, and put tariffs on many Chinese products. China responded by threatening to blacklist U.S. companies. The rising tension is testing a complex relationship, especially in tech where the U.S. and China are tightly intertwined through global supply chains and software that can zip across borders with the tap of a computer key. So which country has the most to lose? Who needs the other nation more?

Computer Chips

China's greatest reliance on the U.S. is arguably in semiconductors.

China's semiconductor imports surge

$300B

200

100

0

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

U.S. companies Intel Corp. and Nvidia Corp. dominate the market for processors, the key component of all laptops, desktop and server computers. The only viable alternative is another American firm: Advanced Micro Devices Inc.

Global computer chips market share, 2017

Samsung

SK Hynix

NVIDIA

Micron

Other

AMD

Intel

36%

18%

9%

12%

The three companies are based a short walk from each other in Silicon Valley, where they design their products.

Huawei Technologies

Intel Corporation

AMD Inc.

A few Huawei U.S. locations situated near other chip-making companies

NVIDIA Corporation

1 mi

1 km

The processors are manufactured mostly in Taiwan. Intel has one plant in China, but it makes memory chips—a commodity component. Huawei unveiled its first home-grown server chip this year, based on designs from ARM Holdings Inc., which is headquartered in the U.K. ARM has operations in the U.S., too, and the company recently said its products fall under the U.S. export controls. Without the latest ARM designs, Huawei may struggle to make its own chips.

CRUCIAL NEEDS

Mobile Chips

In smartphones, Huawei is more independent, supplying at least two-thirds of its own processors and modems, according to analysts' estimates.

Percentage of Huawei's phones

using its own chips, 2018

68%

But other Chinese smartphone makers, such as Xiaomi, Vivo, Oppo and Lenovo, rely much more on San Diego, California-based Qualcomm Inc., the world's largest mobile chip maker.

Dependency on Qualcomm

Xiaomi

14.3%

Samsung

3.0

China Unicom

2.8

Quanta

2.3

Inventec

2.2

Asustek

2.0

WPG

1.5

Chinese

companies

Huawei

1.1

Avnet

1.1

Arrow Electronics

1.0

Midea

1.0

CRUCIAL NEEDS

Switch Chips

Switch chips run machines that direct the flow of information across computer networks including the internet. This is another area of technology where China relies on the U.S. Broadcom Inc., headquartered in San Jose, California, is the largest maker of switch chips.

Ethernet switch chips market share, 2018

Broadcom

Others

80%

20%

Huawei, a top networking gear provider, has been a huge buyer of these components. If the Chinese company wanted to develop its own switch chips, it would still need other U.S. technology. Synopsys Inc. and Cadence Design Systems Inc. are the main suppliers of software that's used to design chips—and they both cut Huawei off recently.

Internet Switches Market share

by shipments, 2018 Q4

Juniper

Huawei

Others

Cisco

H3C

HP

26%

13%

12%

38%

TAKE IT OR LEAVE IT

Microsoft

Microsoft's Windows operating system still runs most personal computers, including almost all the PCs China buys. Windows is still used by the Chinese government and government-owned entities. Microsoft's Office productivity software is also popular in the country.

Desktop operating system market share, May 2019

Windows

Mac OS

88%

9%

Microsoft hasn't said whether it can keep supplying Windows and Office to Huawei and other Chinese technology companies.

Worldwide PC shipments market share, Q1 2019

Lenovo

Other

Apple

Acer

Dell

HP

23%

23%

18%

23%

A prolonged ban on the supply of Windows and Office to Chinese computer makers would force them to build alternatives that don't exist yet. Lenovo, the world's biggest PC manufacturer, is Microsoft's biggest customer, according to Bloomberg supply-chain analysis.

TAKE IT OR LEAVE IT

Apple

Chinese consumers are increasingly embracing alternatives to the iPhone as Apple's devices have become more expensive and local smartphones have improved.

Handset shipments by phone type

Samsung

300M

Apple

200

Huawei

100

0

2013

2018

Huawei has gone from a small smartphone player to overtaking Apple, mainly on the strength of demand in China—a surge also felt by other local phone makers Xiaomi, Oppo and Vivo.

China smartphone market share by shipments

Q4 2017

Q4 2018

21.3%

Huawei

29%

17.5

Oppo

19.6

16.5

Vivo

18.8

12.9

Apple

11.5

13.9

Xiaomi

10

In China, Apple offers some services like Apple Music, but newer products—the forthcoming Apple credit card, Apple News+, and Apple TV+—either won't launch in China or won't be immediately available there. Chinese consumers have already embraced local alternatives. Tencent Music's monthly user count easily exceeds the total population of the U.S.

Mobile active users for Tencent Music

654 million

The main reason China needs Apple is jobs. The U.S. tech giant has most of its devices made in China, supporting about 3 million workers there.

Apple supplier facilities by country, 2019

China

380

Japan

127

United States

58

Taiwan

55

Korea

40

Philippines

19

Vietnam

18

Malaysia

17

Thailand

16

Singapore

12

TAKE IT OR LEAVE IT

Mobile Software

Google's Android smartphone operating system is ubiquitous in the country, running on phones from Huawei, Oppo, Vivo and Lenovo. But for Chinese consumers, these manufacturers use a skeletal version of the software that has no Google services.

Global smartphone shipments using

Android operating system, by company

1.2

B

Samsung

0.9

Huawei

0.6

Other Chinese

companies

0.3

Other

0

'12

'13

'14

'15

'16

'17

'18

Outside China, they still need Google's support, though. When the U.S. internet giant recently said it would cut off Huawei's access to the full Android software, that was a major setback.

Smartphone shipments by OS, 2018

Android

Other

iOS

1.2B

0.2B

TAKE IT OR LEAVE IT

Artificial Intelligence

China is betting heavily on AI. Money is pouring in from China's investors, big internet companies and its government, driven by a belief that the technology can remake entire sectors of the economy, as well as national security. A similar effort is underway in the U.S., but in this new global arms race, China has three advantages: A vast pool of engineers to write the software, a massive base of 751 million internet users to test it on, and most importantly staunch government support that includes handing over gobs of citizens' data—something that makes Western officials squirm.

AI startups by most equity funding raised,

as of June 21, 2019

Bytedance

$3.11B

SenseTime

1.63

Face++

1.36

Nuro

1.03

UiPath

1.02

Zoox

0.79

Chinese

companies

Tanium

0.77

Horizon Robotics

0.70

Aurora

0.69

Avant

0.66

WHO NEEDS IT?

Cloud Services

Amazon.com Inc., Microsoft Corp. and Google are the biggest U.S. providers of computing power and services over the internet.

Amazon cloud revenue projection

$120B

80

40

0

'18

'19

'20

'21

'22

'23

'24

'25

But in China, the companies don't even make the top six. Alibaba Group Holding Ltd., Tencent Holdings Ltd. and their compatriots dominate the domestic market, and they're on the rise in other parts of the Asia Pacific region, according to Synergy Research Group.

Chinese companies' share of

cloud market in APAC, Q1 2019

40%

WHO NEEDS IT?

Online Search

Baidu runs the largest search engine in China. Google pulled out of the country in 2010 and recent efforts to return have failed so far.

Top search engines, unique visitors

Baidu

464.7M

Qihoo 360

328.5

Sogou

249.4

Etao

33.9

YouDao

31.8

Bing

28.6

Soku

5.3

WHO NEEDS IT?

Online Shopping

Chinese consumers don't need U.S. companies for their online shopping needs. Amazon plans to shut down its Chinese marketplace business in July, and will only sell goods to mainland customers seeking products from other countries.

Amazon revenue breakdown, by geography

Germany

Japan

Other

U.K.

U.S.

69%

9%

6%

6%

11%

Alibaba and JD.com dominate the market, and Amazon never reached more than 1% market share, according to iResearch.

Top 10 e-commerce retailers in China by sales share,

June 2018

Alibaba

58.2%

JD.com

16.3

Pinduoduo

5.2

Suning

1.9

Vip.com

1.8

Gome

0.7

Amazon China

0.7

Yihaodian

0.7

Dangdang

0.2

Jumei

0.1

WHO NEEDS IT?

Social Networks

American social networks also aren't a part of daily life in China. Facebook Inc. and Twitter Inc. don't operate there—and that's not likely to change any time soon.

WeChat, the messaging service owned by Tencent, is China's leading hub for communication and other everyday tasks, like making mobile payments.

WeChat users, 2019

That's about 673M

more than the 2018

U.S. population

1 billion

QQ, another messaging service also owned by Tencent and popular with younger internet users, has 823 million monthly users.

QQ monthly active users, March 2019

That's about

1/10th of the

global population

823 million

Weibo, a Chinese social network similar to Twitter, has more than 203 million daily active users—almost 70 million more than Twitter has.

Weibo and Twitter monthly active users

500M

Weibo

400

Twitter

300

200

Q1

2016

Q1

2019

Sources: 
- Computer chips: General Administration of Customs, PRC, IDC, Google Earth, Huawei Technologies Co.
- Mobile chips: Stifel Nicolaus, Bloomberg
- Switch chips: The Linley Group, IDC
- Microsoft: NetApplications.com, IDC, Imaginechina via AP Images
- Apple: IDC, Tencent Music Entertainment Group, Apple Company Filings
- Online search: iResearch, Bloomberg
- Mobile Software: IDC
- Artificial Intelligence: Pitchbook
- Cloud services: Bloomberg Intelligence, Synergy Research
- Online shopping: Amazon/company filings, eMarketer
- Social network: VCG/VCG via Getty Images, WeChat, U.S. Census Bureau, Tencent, Company Filings, Bloomberg

Additional work by: Lulu Chen, Edwin Chan and Matt Turner 

Editor: Alistair BarrBy Ian King, Mira Rojanasakul and Adrian Leung

June 23, 2019

A trade war between the world's two largest economies erupted this year, and technology is at the center of the skirmish. President Donald Trump blocked networking giant Huawei Technologies Co. from buying U.S. components, and put tariffs on many Chinese products. China responded by threatening to blacklist U.S. companies. The rising tension is testing a complex relationship, especially in tech where the U.S. and China are tightly intertwined through global supply chains and software that can zip across borders with the tap of a computer key. So which country has the most to lose? Who needs the other nation more?

CLICK TO JUMP TO SECTION:

CRUCIAL NEEDS: COMPUTER CHIPS MOBILE CHIPS SWITCH CHIPS TAKE IT OR LEAVE IT: MICROSOFT APPLE MOBILE SOFTWAREARTIFICIAL INTELLIGENCE WHO NEEDS IT?: CLOUD SERVICES ONLINE SEARCH ONLINE SHOPPING SOCIAL NETWORKS

CRUCIAL NEEDS

Computer Chips

China's greatest reliance on the U.S. is arguably in semiconductors.

China's semiconductor imports surge

$300B

200

100

0

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

U.S. companies Intel Corp. and Nvidia Corp. dominate the market for processors, the key component of all laptops, desktop and server computers. The only viable alternative is another American firm: Advanced Micro Devices Inc.

Global computer chips market share, 2017

Samsung

SK Hynix

NVIDIA

Micron

Other

AMD

Intel

36%

18%

9%

12%

The three companies are based a short walk from each other in Silicon Valley, where they design their products.

Huawei Technologies

Intel Corporation

AMD Inc.

A few Huawei U.S. locations situated near other chip-making companies

NVIDIA Corporation

1 mi

1 km

The processors are manufactured mostly in Taiwan. Intel has one plant in China, but it makes memory chips—a commodity component. Huawei unveiled its first home-grown server chip this year, based on designs from ARM Holdings Inc., which is headquartered in the U.K. ARM has operations in the U.S., too, and the company recently said its products fall under the U.S. export controls. Without the latest ARM designs, Huawei may struggle to make its own chips.

CRUCIAL NEEDS

Mobile Chips

In smartphones, Huawei is more independent, supplying at least two-thirds of its own processors and modems, according to analysts' estimates.

Percentage of Huawei's phones

using its own chips, 2018

68%

But other Chinese smartphone makers, such as Xiaomi, Vivo, Oppo and Lenovo, rely much more on San Diego, California-based Qualcomm Inc., the world's largest mobile chip maker.

Dependency on Qualcomm

Xiaomi

14.3%

Samsung

3.0

China Unicom

2.8

Quanta

2.3

Inventec

2.2

Asustek

2.0

WPG

1.5

Chinese

companies

Huawei

1.1

Avnet

1.1

Arrow Electronics

1.0

Midea

1.0

CRUCIAL NEEDS

Switch Chips

Switch chips run machines that direct the flow of information across computer networks including the internet. This is another area of technology where China relies on the U.S. Broadcom Inc., headquartered in San Jose, California, is the largest maker of switch chips.

Ethernet switch chips market share, 2018

Broadcom

Others

80%

20%

Huawei, a top networking gear provider, has been a huge buyer of these components. If the Chinese company wanted to develop its own switch chips, it would still need other U.S. technology. Synopsys Inc. and Cadence Design Systems Inc. are the main suppliers of software that's used to design chips—and they both cut Huawei off recently.

Internet Switches Market share

by shipments, 2018 Q4

Juniper

Huawei

Others

Cisco

H3C

HP

26%

13%

12%

38%

TAKE IT OR LEAVE IT

Microsoft

Microsoft's Windows operating system still runs most personal computers, including almost all the PCs China buys. Windows is still used by the Chinese government and government-owned entities. Microsoft's Office productivity software is also popular in the country.

Desktop operating system market share, May 2019

Windows

Mac OS

88%

9%

Microsoft hasn't said whether it can keep supplying Windows and Office to Huawei and other Chinese technology companies.

Worldwide PC shipments market share, Q1 2019

Lenovo

Other

Apple

Acer

Dell

HP

23%

23%

18%

23%

A prolonged ban on the supply of Windows and Office to Chinese computer makers would force them to build alternatives that don't exist yet. Lenovo, the world's biggest PC manufacturer, is Microsoft's biggest customer, according to Bloomberg supply-chain analysis.

TAKE IT OR LEAVE IT

Apple

Chinese consumers are increasingly embracing alternatives to the iPhone as Apple's devices have become more expensive and local smartphones have improved.

Handset shipments by phone type

Samsung

300M

Apple

200

Huawei

100

0

2013

2018

Huawei has gone from a small smartphone player to overtaking Apple, mainly on the strength of demand in China—a surge also felt by other local phone makers Xiaomi, Oppo and Vivo.

China smartphone market share by shipments

Q4 2017

Q4 2018

21.3%

Huawei

29%

17.5

Oppo

19.6

16.5

Vivo

18.8

12.9

Apple

11.5

13.9

Xiaomi

10

In China, Apple offers some services like Apple Music, but newer products—the forthcoming Apple credit card, Apple News+, and Apple TV+—either won't launch in China or won't be immediately available there. Chinese consumers have already embraced local alternatives. Tencent Music's monthly user count easily exceeds the total population of the U.S.

Mobile active users for Tencent Music

654 million

The main reason China needs Apple is jobs. The U.S. tech giant has most of its devices made in China, supporting about 3 million workers there.

Apple supplier facilities by country, 2019

China

380

Japan

127

United States

58

Taiwan

55

Korea

40

Philippines

19

Vietnam

18

Malaysia

17

Thailand

16

Singapore

12

TAKE IT OR LEAVE IT

Mobile Software

Google's Android smartphone operating system is ubiquitous in the country, running on phones from Huawei, Oppo, Vivo and Lenovo. But for Chinese consumers, these manufacturers use a skeletal version of the software that has no Google services.

Global smartphone shipments using

Android operating system, by company

1.2

B

Samsung

0.9

Huawei

0.6

Other Chinese

companies

0.3

Other

0

'12

'13

'14

'15

'16

'17

'18

Outside China, they still need Google's support, though. When the U.S. internet giant recently said it would cut off Huawei's access to the full Android software, that was a major setback.

Smartphone shipments by OS, 2018

Android

Other

iOS

1.2B

0.2B

TAKE IT OR LEAVE IT

Artificial Intelligence

China is betting heavily on AI. Money is pouring in from China's investors, big internet companies and its government, driven by a belief that the technology can remake entire sectors of the economy, as well as national security. A similar effort is underway in the U.S., but in this new global arms race, China has three advantages: A vast pool of engineers to write the software, a massive base of 751 million internet users to test it on, and most importantly staunch government support that includes handing over gobs of citizens' data—something that makes Western officials squirm.

AI startups by most equity funding raised,

as of June 21, 2019

Bytedance

$3.11B

SenseTime

1.63

Face++

1.36

Nuro

1.03

UiPath

1.02

Zoox

0.79

Chinese

companies

Tanium

0.77

Horizon Robotics

0.70

Aurora

0.69

Avant

0.66

WHO NEEDS IT?

Cloud Services

Amazon.com Inc., Microsoft Corp. and Google are the biggest U.S. providers of computing power and services over the internet.

Amazon cloud revenue projection

$120B

80

40

0

'18

'19

'20

'21

'22

'23

'24

'25

But in China, the companies don't even make the top six. Alibaba Group Holding Ltd., Tencent Holdings Ltd. and their compatriots dominate the domestic market, and they're on the rise in other parts of the Asia Pacific region, according to Synergy Research Group.

Chinese companies' share of

cloud market in APAC, Q1 2019

40%

WHO NEEDS IT?

Online Search

Baidu runs the largest search engine in China. Google pulled out of the country in 2010 and recent efforts to return have failed so far.

Top search engines, unique visitors

Baidu

464.7M

Qihoo 360

328.5

Sogou

249.4

Etao

33.9

YouDao

31.8

Bing

28.6

Soku

5.3

WHO NEEDS IT?

Online Shopping

Chinese consumers don't need U.S. companies for their online shopping needs. Amazon plans to shut down its Chinese marketplace business in July, and will only sell goods to mainland customers seeking products from other countries.

Amazon revenue breakdown, by geography

Germany

Japan

Other

U.K.

U.S.

69%

9%

6%

6%

11%

Alibaba and JD.com dominate the market, and Amazon never reached more than 1% market share, according to iResearch.

Top 10 e-commerce retailers in China by sales share,

June 2018

Alibaba

58.2%

JD.com

16.3

Pinduoduo

5.2

Suning

1.9

Vip.com

1.8

Gome

0.7

Amazon China

0.7

Yihaodian

0.7

Dangdang

0.2

Jumei

0.1

WHO NEEDS IT?

Social Networks

American social networks also aren't a part of daily life in China. Facebook Inc. and Twitter Inc. don't operate there—and that's not likely to change any time soon.

WeChat, the messaging service owned by Tencent, is China's leading hub for communication and other everyday tasks, like making mobile payments.

WeChat users, 2019

That's about 673M

more than the 2018

U.S. population

1 billion

QQ, another messaging service also owned by Tencent and popular with younger internet users, has 823 million monthly users.

QQ monthly active users, March 2019

That's about

1/10th of the

global population

823 million

Weibo, a Chinese social network similar to Twitter, has more than 203 million daily active users—almost 70 million more than Twitter has.

Weibo and Twitter monthly active users

500M

Weibo

400

Twitter

300

200

Q1

2016

Q1

2019

Sources: 
- Computer chips: General Administration of Customs, PRC, IDC, Google Earth, Huawei Technologies Co.
- Mobile chips: Stifel Nicolaus, Bloomberg
- Switch chips: The Linley Group, IDC
- Microsoft: NetApplications.com, IDC, Imaginechina via AP Images
- Apple: IDC, Tencent Music Entertainment Group, Apple Company Filings
- Online search: iResearch, Bloomberg
- Mobile Software: IDC
- Artificial Intelligence: Pitchbook
- Cloud services: Bloomberg Intelligence, Synergy Research
- Online shopping: Amazon/company filings, eMarketer
- Social network: VCG/VCG via Getty Images, WeChat, U.S. Census Bureau, Tencent, Company Filings, Bloomberg

Additional work by: Lulu Chen, Edwin Chan and Matt Turner 

Editor: Alistair Barr

 -- via my feedly newsfeed