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Strategic Global Intelligence Brief for June 15, 2018

Short Items of Interest—U.S. Economy
U.S. Growth Outpaces World
Last year, the global economies were experiencing a rare period of unity. The U.S. was growing and so were Europe, Japan, China and pretty much everybody else. The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) were both gushing over the fact that recession impact had finally started to fade. Now that golden moment seems to have vanished as Europe is back to struggling to get past 1% growth and Japan is starting to sag again. The U.S. has maintained its growth pace, but even here, the days of 3% GDP expansion seem to be in the past. These numbers were last seen in the second and third quarters of 2017. Since then, the pace has been closer to the norm over the last decade—2.5%.
Any Method to This Madness?
It is more than confusing that President Trump is singing the praises of a vicious dictator who has been known to execute rivals while denigrating the leader of the most consistent ally the U.S. has. What is behind the Trump attacks on his allies at the G-7? Is there something other than personal antipathy? Perhaps this is preparatory to looking for concessions and working out new deals, but this seems a very unhelpful technique with allies. In fact, U.S. presidents have long had awkward relations with European leaders. Chancellor Merkel disliked Obama as much as she dislikes Trump and there have been deeply antagonistic relations with France over the years. Europe likes to lecture the U.S. That is something that Trump has never tolerated from anyone. This appears to be more an issue of a thin-skinned U.S. president and global leaders who are trying to flex their independent muscles.
Immigration and Business
There is a looming but still somewhat distant issue as far as immigration is concerned. In the future, the U.S. will need a major influx of immigrants to fill the holes in its labor force. The need is not for illegal migrants with limited skills, but for people who can fill those jobs in manufacturing, transportation, construction, health care and others. The tone of the U.S. effort on immigration will matter immensely if the U.S. plans to be successful in recruiting the needed people. Right now, the U.S. is not a first choice for many as the perception is that Americans now hate immigrants regardless of legality or background.
Short Items of Interest—Global Economy
Argentina Gets a New Central Bank Head
The Argentine peso has been crashing. Much of the blame has been assigned to the head of the central bank and his erratic policies. One minute the rates are scheduled to go up to combat inflation and the next minute they are scheduled to go down as the economy needs a boost. He has been accused of being too politicized and has now resigned so that the finance minister can take control. Luis Caputo is widely respected in the global financial community and is thought to be close to President Mauricio Macri. This has already calmed markets, which has meant some rebound in the peso.
Colombia Chooses Hard Right Over Hard Left
As in many countries, the middle of the road voter is the largest block, but they are traditionally hard to motivate. These are not the rabid supporters that can be motivated by the right and left and seem to wait to see which will be the lesser of two evils. The campaign in Colombia has come down to a representative of the Farc guerilla group on the left [Gustavo Petro] and a close ally of former President Álvaro Uribe on the right. The polls are favoring Iván Duque who echoes the hard line taken by Uribe. This suggests that middle of the road voters fear the left more.
Greek Opposition to Macedonia Arrangement
There will be a vote of no confidence in the Greek parliament over the decision by Prime Minister Alexis Tsipras to recognize the name of his northern neighbor as North Macedonia. The conservatives are outraged at this affront to Greek history and sovereignty and threaten to bring the government down. This is because Greece has no other problems worth mentioning.
Will Any of This North Korean Activity Affect Business?
As with any high level diplomatic activity, there is the issue of atmospherics. If the talks between the U.S. and North Korea result in somewhat calmer attitudes in that part of Asia, it can't but help the business community. Look at how nervous the global markets were last year when these same two men were hurling insults and threatening each other with annihilation. Beyond this bigger picture impact, the business implications will be limited—especially for the U.S.
Analysis: Much of the economic significance will revolve around the lifting of sanctions. At the moment, there is considerable confusion as to what has been decided and even offered. The North Koreans claim that Trump has already agreed to lift the sanctions, but statements from Secretary of State Mike Pompeo contradict this assertion. He indicates that sanctions will remain in place until there has been complete denuclearization, but at this point nobody knows what will be offered to prove that this has taken place. If the sanctions are lifted, there is certainly a need for economic development help and emergency aid.
The vast majority of the economic engagement that will take place in North Korea will come from China and to a lesser extent from South Korea. Japan will play a more limited role and the U.S. will be more limited still. At this juncture, the only economic priority that has been identified for the Kim regime has been food aid for the starving population and some help in terms of infrastructure development as the country lacks everything from sufficient power to decent transportation corridors. The U.S. is expected to have some role to play as far as food aid is concerned, but there will be very limited opportunity to do much with infrastructure—that will be the Chinese. Up to this point, almost half of the North Korean budget is devoted to the military, and it remains massive. There has been no discussion at all regarding the size of the armed forces, so it can be assumed it will continue taking the lion's share of the national budget. That creates some concern on the part of the U.S., Japan and South Korea as these conventional weapons still have the ability to inflict serious damage.
Global Trade War Is Imminent
There are certainly more questions than answers at this point. As has become obvious by this time, the world is now in very unfamiliar territory as the U.S. under Trump is radically different than the U.S. under any other previous president. For better or worse, the Trump approach has essentially thrown seven decades of traditional patterns into total disarray. It is equally obvious that this change will be bad news for some and good news for others. It would perhaps be easier to utterly condemn the Trump decisions if one could point to a roaring success for the old system. The fact is that many aspects of the previous trading system worked to the detriment of the U.S. To be fair and accurate, much of that system has been to the distinct advantage of the U.S. As with any trade-related issue, there are winners and losers. Very rarely is there a situation where everybody benefits equally.
Analysis: The motivation behind much of the Trump strategy can be discerned in the writings of Peter Navarro who is White House National Trade Council director. He is now the leading trade expert in the Trump team along with U.S. Trade Representative Robert Lighthizer, an economist considered by most as well outside the mainstream of current economic thought. His views have been labeled "mercantilist" (promoting governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers). He takes a very adversarial approach to trade. Most see trade as something of mutual benefit although those that gain in a country are not the same as those that stand to lose. He asserts that every other country treats trade as an instrument of war to one degree or another—China especially. He has been a very strong advocate for protectionism and makes the point that the countries aggressively targeting the U.S. market are very protective of their own. China has an extremely complex set of tariff and non-tariff barriers that make it hard for U.S. companies to sell there. Those that do enter the Chinese market struggle to protect their intellectual property. China has been caught engaging in industrial espionage for years. Europe also sports an intricate web of barriers and direct subsidies that give their domestic operations an advantage. To be honest, the U.S. employs the same set of restrictions although arguably less than those in China, Europe and elsewhere.
Navarro has been the architect of the Trump trade policy. He makes several assumptions that put him at odds with other economists and asserts that manufacturing has been destroyed in the U.S. by imports. The reality is that manufacturing output is higher now than at any time in the last 20 years and the U.S. has regained a great deal of its market clout. That said, the number of people employed by manufacturing has plummeted by more than 20 million in the last 15 years. Thousands of plants and factories have been forced out of business by factors such as foreign competition and the use of technology by their domestic competitors. Navarro is convinced that blocking imports will get U.S. companies back in the business of supplying consumer goods to the U.S., but few agree with him. Domestic production of these goods will result in much higher prices and consumers will resist this. The most likely outcome from reducing imports from China is that imports from other low-production-cost nations will increase. Already, there is evidence that countries like India, Vietnam, Indonesia, Bangladesh and others are gearing up to fill the gap.
It is assumed that President Trump is motivated by the "deal." His threats to impose tariffs and other barriers are designed to get these nations to offer something in return. This may work, but it can also backfire as China and Europe may elect to do business with somebody else. The U.S. leverage is based on its orientation towards consumption. But other parts of the world can consume as well. It all depends on who needs who the most.
Canadian Unity
In the weeks and months prior to the G-7 meeting, Justin Trudeau was watching his popularity sag after a series of miscues. A trip to India did not pan out as expected, the finance minister had been caught up in scandal and the majority seemed to oppose the government acquisition of the Trans Mountain Pipeline. All of a sudden there is unity as every political party rallied to the defense of their prime minister. The anger towards President Trump is as intense as any seen anywhere in the world with thousands of Canadians canceling trips to the U.S. and boycotting U.S. products. The U.S. has long been seen as overbearing, but now it is described as a bully.
Analysis: The anger will likely ebb a little in the weeks and months to come, but most assume that Trump just ensured that Trudeau will win reelection. The fear in Canada is that this split will hurt the Canadian economy as the U.S. is the No. 1 trade partner for the country. The antipathy towards Trump is very real and will have an impact on the conservatives in Canada as they will have to be very careful to avoid anything that seems supportive of Trump or the U.S.—at least for a while.
Slowdown Ahead for U.S. Economy?
The term applied to the tax cut developed at the start of the year was a stimulus—an apt description. Essentially, tax cuts and additional government spending plays the same role as adrenalin plays in the body. It stimulates, but generally on a very temporary basis unless there is something else included in the "treatment." Just as with adrenalin, there is a period when the impact wears off and there is a subsequent crash. Is there a reversal of economic growth in the future for the U.S.? Several assessments by groups like the IMF, World Bank and OECD assert that growth in the U.S. will start to slip pretty dramatically in 2019 and 2020. Some have gone so far as to predict a recession during this period. The assertion is that most of the current growth is being provided by that temporary stimulus of tax cuts, but there has not been anything done to capitalize on this growth. It is also very unlikely there will be another such shot in the arm as the government doesn't have the money to do another big tax cut and lacks the wherewithal to launch a series of big spending efforts.
Analysis: There is significant disagreement on what growth will look like in the next few years. The White House estimate has been the most optimistic with assertions of 3% growth or faster for the next three to five years. This is based on an assumption that less regulation will prove to be highly motivating. It also seems to assume that significant reduction of imports will mean that U.S. companies will start to produce these items. There is also an expectation that consumers will react with strong levels of purchasing, but thus far this has not proven to be the case. The White House assessment is not concerned with the impact of higher debts and deficits, and asserts that growth alone will solve the problem. Although growth would have an impact on reducing debt and deficit burdens, the challenge is that growth would have to average around 5% to 6% a quarter for several years before it could make a dent in either the national debt (over 110% of GDP) or deficit (over 4.2% of GDP).
The latest IMF analysis holds that growth will be less than half what the Trump White House assumes. Their prediction is that annual growth will be around 1.4% at best as they see the impact from the tax cut stimulus fading sooner than later. The IMF has pointed out several times in the past that a government stimulus generally has two parts—the tax cut and additional government spending. There has been very little additional spending over the course of the recession and that has inhibited the recovery. It is obvious why Congress has been unwilling to do that kind of spending as the deficit and debt have been overly large and few wanted to do anything to make it worse. The spending that has taken place has been routine and has contributed little to economic recovery. There has also been an assumption that this spending will continue and there will not be much additional room in the budget for the kind of programs that might boost overall growth.
The IMF estimate is one of the least enthusiastic, but it is far closer to the other assessments than the White House version. The Federal Reserve estimates growth at 1.8% by 2023 and the Congressional Budget Office is expecting 1.6%. All three of these assessments expect growth to be around 2% by 2020. That is half a point less than the average seen over the past decade. The White House version still holds that 3% will be the norm. The primary difference in these estimates lies in the expected impact of the debt and deficit. The majority of analysts believe this will be a far greater drain on the economy than the White House does. They have not accepted the optimistic analysis that has characterized the White House studies.
Musings on the Vagaries of Travel
I spend a lot of time in the throes of travel and thus find myself occupied with some road warrior observations. The last few weeks have seen plans ripped to shreds by weather. I detailed the saga of trying to get to Louisville last Friday [June 8]. Now this week, I have been thwarted once again as I tried to get to Columbus, Ohio. This time, I was arranging to arrive the night before, so I had taken some precautions. I was in Wichita and was set to fly to Columbus via St. Louis. A massive storm blew up just as we were supposed to land and our plane was forced to divert to Kansas City. By this time, all hope of getting to Columbus in time was gone, so I just got off the plane and went home!
This got me to thinking about travel at certain times of year. It is assumed that winter travel is the least reliable with all those massive snow events that shut things down, but the difference is that one can see these things coming for days ahead of time. I have had a chance to change plans and arrive earlier than planned so that I could beat the snow. Summer storms give no warning. One minute all is well and the next minute you are facing cancellation and massive delay. I think I like the winter option better.
I am also somewhat amazed by the actions of my fellow flyers—they appear to be very tightly wound at times. Last night, three young ladies returning from some kind of bachelorette party were losing it. They were hysterical and had to be calmed by the pilot who informed them that any further outburst would get them booted in Kansas City. There were lots of angry words throughout the plane as if that was going to move storm clouds any faster. I get as annoyed as anyone by maintenance and human error, but try to remain philosophical about weather.

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