Strategic Global Intelligence Brief for August 28, 2018
Short Items of Interest—U.S. Economy
Slump in Car Sales Has Arrived
There have been predictions for many years now that suggest the end of the vehicle purchase boom. Those headwinds would range from consumers with no credit standing, lack of desire for new cars, changing patterns of transportation and so on. These are still issues that are in play, but additional inhibitions are appearing. The steel and aluminum tariffs have added costs to the vehicle that will be hard to pass on to consumers. There are also all manner of threats to reduce the number of cars imported into the U.S. Other nations are looking at their own set of barriers as retaliation against the U.S. The auto sector is often caught in the crosshairs. It is an issue that gets more complex all the time as there are few sectors as truly global as automotive. It is very hard to determine in what nation a car originates.
Trade Deficit Widens Again
For the second month in a row, the U.S. trade deficit has widened—at least as far as goods are concerned. It seems that the fastest way to make a small crisis into a big crisis is to promise big changes and then drag the process out. The threats directed at imports from China, Europe and elsewhere prompted many companies to rush their orders through trying to avoid any restrictions down the road. The resulting avalanche of sales made the overall deficit far worse. In past years, these tariff and trade restrictions simply took place with a minimum of fanfare so that business would not have enough time to undercut the effort. The U.S. may not even notice a decline in activity with China for some months, or at least until the reactions cool down.
Student Debt Swells
Despite the fact that fewer students are seeking loans and those who do are borrowing less, the total of student debt is now at $1.5 trillion. This is a massive overhang. It is taking place due to far more failures to pay on that debt and the fact that programs designed to reduce that obligation have been a consistent failure. The cold fact is that far too many of those who acquired debt had no idea at all how they would pay it back. The jobs they would be eligible for would not come close to the pay needed. There are now millions who will not be able to enter the job market in a position to pay these loans.
Short Items of Interest—Global Economy
Playing Hardball With Canada
The deal that seems to have been worked out with Mexico puts a lot of pressure on Canada as they have lost a key ally in all this. Up until the moment Trump announced the deal with Mexico, the position had been that Mexico would not be party to an agreement that did not include Canada, but that demand seems to have been dropped—at least by the current Mexican president (Enrique Peña Nieto). Andrés Manuel López Obrador (AMLO) for his part still insists that Canada should be included; he may be able to force this to happen when he takes office. It is more than a little peculiar to see the U.S. at Canada's throat. This may yet be posturing, however. Several in the Trump team seem to think Canada will come around, but President Trump's hostility has been hard to manage or even fully understand.
U.S. Rig Count Update
I haven't given you a rig count update in a few months, it's probably time for us to get into the current trends. Baker Hughes is known as the authority in U.S. and North American rig counts. They released their latest update last Friday. Total North America land-based rig counts hit 1,273 through Aug. 24. This was up about four rigs from a week ago, but more importantly, was up 116 rigs from last year. In just the U.S. alone, rig counts were down 13 from last week, but were 104 higher than the same week last year. The U.S., by far, has the greatest amount of investment pouring into it from an oil and gas perspective. This sector is largely pushing the Texas region manufacturing sector over the top (explosive growth).
The End of NAFTA?
It seems the U.S. and Mexico have just made a deal, but at this stage the details are a little murky. It is expected that more information will be released in the days and weeks ahead. During that period, it is likely that some of the assumptions made thus far will change. The big news at this stage includes the fact a deal has been made with Mexico that will preserve much of the trade that currently takes place between the two nations. Almost obscuring that fact is the suggestion that Canada will not be part of this deal. Trump has hinted that the name of the agreement itself will be changed to the United States—Mexico Trade Agreement so as to separate it from the NAFTA pact. It also makes it clear that Canada is no longer part of the deal although the offer to join still stands should Canada adhere to the demands made by the U.S. There are provisions in this agreement that Mexico accepted, but Canada has refused.
Analysis: Throughout the negotiations over NAFTA, there have been several sticking points and areas of intense disagreement. These have not always been issues for both Mexico and Canada. The new plan seeks to separate these issues and address them bilaterally, although that also defeats the original purpose of the NAFTA pact in the first place. If one glances at the history of the pact, it is obvious there has been significant change in terms of global trade strategy. Two issues have faded since the origination of the agreement. The first and perhaps most important is oil. Part of the original pact was designed to insure that neither Canada nor Mexico would withhold oil from the U.S. or join OPEC. The U.S. was afraid of not having the oil needed and was willing to offer both Canada and Mexico the concessions they wanted in exchange for that access. Today, the U.S. is the world's largest oil producer and needs their contributions far less. At the time NAFTA was created, the U.S. was deeply concerned about the creation of the European Union and the threat it posed. It was assumed that Europe would thrive through connecting the low-wage nations of the south with the advanced nations of the north. NAFTA was to be the U.S. answer to that creation. Decades later, it doesn't seem to be such an advantage to have linked states like Greece, Spain, Italy and Portugal to the Germans, the Dutch and the Scandinavians.
The plan as outlined by President Trump will leave the farm sector alone and will not add any further barriers. Those that had been imposed are removed. The big change will revolve around the automotive sector. The new rule will require that 75% of the content of a vehicle will have to come from North America in order to get tariff-free trade movement. This is to keep carmakers from importing parts from around the world to assemble in Mexico or the U.S. It also calls for between 40% and 45% of the vehicle to be made by people making at least $16 an hour. That is supposed to keep U.S. companies from moving to Mexico to get access to cheap labor. The unions in the U.S. have remained skeptical regarding this provision as they anticipate the reaction by automakers will be to increase the use of robots. This will mean a handful of higher-paid workers will operate and control the automation and leave the low-paid workers to do the other 60% of car assembly and manufacturing.
The part of NAFTA that has generated the most attention over the years has been dispute settlement. There will always be issues that need resolution. Much of the pact was devoted to how this would be done. The Canadians are balking at the current deal as they do not want to reduce their ability to challenge trade penalties imposed by the U.S. Mexico agreed to it, but Canada knows it has battles ahead that would challenge its subsidies in dairy production as well as lumbering. Another change that isn't popular with U.S. companies is the provision that alters the way that multinationals invest. The current pact allows for these disputes to be handled in U.S. courts, but the new pact removes that provision and leaves the disputes in the local court system. U.S. companies are quite sure they will not get the benefit of the doubt in Mexican courts.
If This Deal Is so Flawed—What Should Happen to NAFTA?
The critics are out in force as there is finally something to actually examine and critique. It is obvious that few of those who have been engaged with NAFTA are fans of the new pact so the question is what they would be happy with. To answer this, one has to make a couple of assumptions. The first is that everybody sees NAFTA as deeply flawed. The reality is that most do not. After decades, there have been lots of adjustments to the rules of NAFTA. Many companies in Mexico, the U.S. and Canada are doing just fine with the pact the way it is and see no reason to change it.
Analysis: A bigger issue is whether the rather ambitious goal set for NAFTA at the start is still viable. The plan was to essentially create a single North American economy ready to take on the world. It was assumed that Europe would be more united than ever. It was further assumed that pacts like this would appear all over the world, and for a while they did. The idea was that North America would be one seamless market and find ways for each nation to complement the other. Mexico would bring basic manufacturing back to North America from Asia while Canada's natural resources would be made available to the whole of the region. The U.S. would remain the service sector hub for the three and would be the source of innovation and entrepreneurial activity. In time, the three nations would even see their borders open up and their cultures merge. The rise of nationalism has stymied this plan. Today, there is outright hostility between these nations. The pact that Trump has proposed will face some major hurdles as he has done a deal with the outgoing President of Mexico. AMLO, the man who will replace Enrique Peña Nieto has not expressed much support for this plan and could easily decide to kill it.
Europe Without a Deal—How Bad Could It Get?
There has been scarcely an analyst who has anything positive to offer if there is no organized British exit from the EU. The litany of the crisis issues is long and complex. Even if one gives some room for hyperbole, it is clear that the absence of a deal will be a disaster for the British and Europe as well. There would be acres of red tape that business would be forced to reckon with, while at the same time there would be no authority to work out what any of it meant. Business relationships would be shattered, the borders of Northern Ireland would become almost a war zone and the financial community would reel. Given that nobody can think of a good reason to avoid making a formal deal, it is astounding that so many seem willing to let things drift in that direction.
There are the hard liners that drove the Brexit campaign from the start and have very strong opinions regarding the "betrayal" of Britain by the current deal. They have an almost visceral hate for all things European and insist that the U.K. will be just fine with a clean and total break. The other group that seems to trend toward no deal is the one that opposed the break in the first place. They are convinced that people will become so fearful of what might occur, they would be willing to abandon the whole idea and would come back to the EU. This is not going to happen as the Europeans do not want to allow the British back in. The Europeans are the third group of no-deal advocates as they have convinced themselves there is nothing at stake for the EU if they turn their backs on the British altogether.
Analysis: The impact of Brexit continues to be fought over as there is no hard and fast way to determine what will and will not happen. The worst-case scenarios see Britain falling into real recession and massive shortages as the country will lose the ability to pay for these needed imports. The unemployment rate will soar and the British economy ends up looking worse off than that of Greece or Portugal. Or it doesn't. There are other nations to trade with, but they have not seemed eager to rush into the fray as it isn't clear whether doing a deal with the U.K. means that the EU will turn its back on you. The future is not clear. A case can be made for real disaster or nothing but minor interruption.
The EU is not willing to bend on some critical policies suggested by the British as this opens the door to other nations that chafe under EU rules on occasion. The cement that was supposed to hold the EU together has cracked badly. Many nations are unsure whether they would be better off staying or leaving. This means the EU is unwilling to alter the rules to accommodate Britain as it may very well mean a host of such demands from others. The EU wants the adoption of a system similar to what was created for Norway and Canada, but this has been balked at by the U.K.
The issues that divide are serious. It is going to require a lot of compromise on the part of both the EU and U.K. Right now, both sides are convinced they have the leverage and demand capitulation from their rival. Given the domestic politics in the U.K., that is not going to happen there. It is hard seeing a pullback by the EU in the face of its problems with immigration and budget.
Rouhani Defends Record
It is not common to see the president of Iran answering to the parliament. This is a routine exercise in most systems, but only happens at times of national crisis. The subject this time is the economy. Rouhani is being taken to task for the collapse of the economy since the re-imposition of sanctions by the U.S. The value of the currency has fallen by over 60% since the U.S. pulled out of the nuclear deal. That has plunged much of Iran into crisis. The young have been hit especially hard as there have been no jobs. The rate of unemployment for those under 30 is high. Rouhani is in the awkward position of having to defend a plan that was ripped apart by the Trump decision to withdraw despite the fact Iran had been cooperating with all the provisions.
Analysis: The criticism was coming from both the hard liners and moderates as many have accused Rouhani of riding the fence too diligently. He has run the risk of alienating those who want him to move faster and be more aggressive and those who support the hard liners and want an excuse to dump him from office. He staked a lot on getting this deal. Now the plan has blown up in his face. He can only appeal to the Europeans to stay connected to the deal and then find a way to avoid the sanctions. The Europeans are having enough issues with the U.S. and are reluctant to open up another front. Iran may well have to rely on Russia for its survival. That is awkward in at least a dozen ways.
This should be something that is pretty easy. I think it used to be pretty common. One was not expected to embrace and appreciate all that a friend embraced and appreciated. You found some common ground and left it at that. I had friends who really shared very little with me when it came to politics or even basic beliefs. We shared support for the Green Bay Packers or were Dr. Who devotees. It really didn't matter what our other interests were. Have we lost the ability to do this? I run into people who now shun others on the basis of politics or positions on some social issue. There is no "agree to disagree" anymore. It's just "my way or the highway." I don't have much hope for a democratic society that can't separate—there will never be an opportunity to seek common ground when all we do is dismiss people as the enemy while reducing them to one idea or position.
I have been shocked at the vitriol that has been heaped on John McCain by some. There have been attempts to defame him with overt lies and distortions and there have been deliberate slights and insults. Why? Is it impossible to respect a person for the things they have done while disagreeing with them on other issues? McCain was indeed a maverick and I thought that some of his ideas were nutty and unworkable. In no way does that diminish him in my eyes—I still respect the man for the life he led and his accomplishments. When did so many of us become so spiteful and hate-filled that we can't recognize the fact we all disagree with each other at some juncture. This is what makes life rich to me—I don't want to be surrounded by only those that mimic me.