ONE year ago, a member of President Donald Trump’s administration drafted a short executive order to withdraw America from the North American Free-Trade Agreement (NAFTA), a trade deal with Canada and Mexico. The obvious interpretation was that Mr Trump was irresponsibly bullying the Mexicans and Canadians into giving America better terms. A kinder view held that he was aiming at a domestic audience. Congress was dragging its feet at the time over the confirmation of Robert Lighthizer, the president’s chosen trade negotiator. Mr Trump’s threats were a way to kick it into action.
One year on, with Mr Lighthizer long since in place, America’s attitude to NAFTA seems no less hostile. Its threat of withdrawal still hangs over the talks, and in March Mr Trump waved the stick of tariffs on steel and aluminium in case a deal to revise NAFTA could not be reached by May 1st. This tough talk may yield an agreement within the next few weeks. Negotiators are working intensively in Washington, DC, with instructions to be available until May 4th. (Even after an agreement in principle is reached, it could take a little while longer to finalise all the details.)
The details of any deal would bear the scars of hard negotiations. Mr Lighthizer has demanded that a new NAFTA expire automatically after five years and wants to weaken a clause that allows members to dispute emergency tariffs imposed by their partners. If his team prevails, the revised pact would be a step away from the integrated North American economy that the original deal was supposed to foster.
Mr Lighthizer’s team has also demanded that NAFTA be stripped of provisions that allow investors to sue governments if they are denied “fair and equitable treatment”. He reckons that claims against the American government should be tried in American courts, and that offering legal protection for American firms abroad underwrites the outsourcing of jobs. The Canadians and Mexicans, not to mention some senior Republicans, all disagree.
These proposals could yet be dropped. It seems more certain that a new deal will contain tighter “rules of origin” for cars, which specify how much North American content a car must have for it to qualify for zero tariffs. The Americans’ latest proposal is to raise the requirement from 62.5% to 75%. Although this is lower than their original demand of 85%, it could still cause disruption as car companies either reconfigure their supply chains or suck up non-NAFTA tariffs.
A related idea, to give carmakers credit towards the content requirement if they use parts made by workers earning more than a specified wage, would find support among those who worry that free-trade deals typically encourage a race to the bottom. But it would find opponents too, mostly from Mexicans who might see it as a way of favouring American and Canadian workers at their expense, and from the car companies forced to comply.
Yet the true costs of the Trump administration’s aggressive approach may show up as the three members try to move from a deal in principle to a deal in practice. Each member must have the agreement approved by its legislature. That will be more difficult if Mr Trump continues to treat NAFTA as a zero-sum pact (even if Mr Lighthizer recognises publicly that all three sides must gain).
That said, in Canada winning a vote should be fairly straightforward, given the governing party’s parliamentary majority. And although some have worried that Andrés Manuel López Obrador, the left-leaning front-runner in Mexico’s presidential race, will try to renegotiate if he wins, his pick for economy minister said on April 18th that Mr López Obrador would respect a deal struck before the election.
Oddly, America’s Congress may prove trickier. There is precious little chance of putting a deal before legislators before the mid-term elections on November 6th, and none of forcing them to vote on a deal in their final session if they are reluctant to do so. Securing votes in a lame-duck session after the election might require enticing members of Congress with special provisions to their liking, perhaps on intellectual property or agricultural markets. But those are precisely the sorts of provisions that could be ditched by negotiators in the interest of concluding a quick deal. Republicans will not like a deal that strips out the investor-state dispute-settlement rules, or has an expiry date.
Rather than courting centrist Democrats or Republicans of the sort who might have voted for the Trans-Pacific Partnership, a trade agreement from which Mr Trump withdrew as soon as he took office, Mr Lighthizer has been engaging more with left-wing Democrats and trade unions. This is a risky strategy, as these groups may still be unsatisfied by whatever labour standards Mr Lighthizer can negotiate and be wary of the political costs of associating with Mr Trump.
Mr Trump could revisit his threat of a year ago to withdraw from NAFTA, a step Mr Lighthizer reportedly favours. Presented with an alternative of no deal, that could force Congress to approve the new version. But Congress could also fight back, either by reversing any American tariff increases or by inserting “riders” in other bits of legislation to strip Mr Lighthizer’s department of funding to implement the NAFTA withdrawal. Whatever happens, agreement in principle is only the first part of the fight.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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