A China-US trade deal won’t end protectionism
* Last week US equities hit new highs on hopes that China and the US would reach an agreement in their 18-month trade dispute. Financial markets think a deal would reduce uncertainty, boosting investment and growth.
* But a trade deal will not remove all tensions. Crucially, it is unlikely to address longstanding US complaints about intellectual property and China’s interventionist industrial policy. And whatever the US and China agree, we are not going to return to the heyday of globalisation in the early 2000s.
* This is partly because the global financial crisis had already dealt a major blow to globalisation. Trade was in the doldrums before the US-China trade dispute. Between 2012 and 2016 the volume of global trade grew by around 3% a year, less than half the average rate in the previous three decades.
* Since the financial crisis a growing share of global trade has been subject to protectionist measures, creating new distortions in trade, many of them in the form of state subsidies for exports.
* Cross-border flows of capital, direct investment and lending have also slowed over the past decade.
* Factors unrelated to protectionism have also weighed on trade. Companies increasingly need to control regulatory, reputational and political risk in their supply chains; this encourages companies to keep supply chains short and production close to market. Rising wages in emerging markets, notably China, have eroded the savings from outsourcing. Such factors help explain why, after decades of job losses in US manufacturing, the sector has created a net 1.4m new jobs since 2009, the fastest growth since the 1960s.
* Protectionism isn’t just about tariffs and export subsidies. Nations have at their disposal a long list of tools to reduce imports, from restricting market access to foreign companies, blacklisting firms over security concerns and requiring local partners or ownership of foreign ventures.
* Policymakers in China, the EU and the US routinely use these tools to prevent the offshoring of key sectors and to ensure security in areas such as telecoms and IT. (The US, for instance, has banned the Chinese technology company Huawei from providing core equipment for America’s 5G network and encouraged its allies to follow suit.)
* US president Donald Trump’s hawkish approach to China appears to command broad public and political support in the US. Two of the leading contenders for the Democratic presidential nomination, Bernie Sanders and Elizabeth Warren, are no less protectionist in their outlook than Mr Trump.
* As protectionism creeps from trade to technology to intellectual property it becomes more complex and harder to resolve.
* Governments are increasingly scrutinising digital networks, tech company profits and cross-border data flows. Digital technology is a major area of disagreement not just between the US and China but between the US and the EU.
* Geopolitics and regulation are increasingly impinging on trade. Globalisation is getting more complex.
UK General Election: opinion polls and betting odds
Note: Probabilities derived from betting odds from bookmaker Smarkets at 17.00 on Friday.
* The average of the last five opinion polls show the Conservative Party with a 12 percentage point lead over Labour. This is slightly increased from an 11 point lead from the five previous polls.
* Betting odds imply an 86% probability of the Conservative Party winning the most seats in the general election.
* However, betting markets see the most likely outcome, with an implied probability of 44%, as a hung parliament. Betting markets assign a probability of 43% to a Conservative majority and 4% to a Labour majority.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.8% at 7,360.
Economics and business
* The Bank of England kept interest rates on hold. However, two members of the rate-setting committee voted for an immediate cut
* The Bank noted that unless economic conditions improve “monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation”
* Delhi suffered an episode of extreme air pollution. The severity was such that pollution monitors did not have sufficient digits to measure pollution levels
* Higher pork prices caused by swine flu sent Chinese consumer inflation to an eight-year high
* The US notified the UN of its intention to withdraw from the Paris climate accord
* German industrial output fell by 0.6% in September. However, factory orders, imports and exports for the same month showed an unexpected rebound
* US productivity unexpectedly fell by the most in almost four years in the third quarter
* The Organization of the Petroleum Exporting Companies has forecast falling demand for their oil over the next five years as the US continues to raise its production
* US shale producer Chesapeake Energy warned it was in danger of failing if current low gas prices continue
* UK chancellor Sajid Javid has dropped the government’s current fiscal rules proposing instead new less restrictive rules on borrowing
* Shadow chancellor John McDonnell has also proposed a set of fiscal rules that would allow for more borrowing in the next parliament
* Rating agency Moody’s has lowered the UK’s credit outlook to negative, saying Brexit “paralysis” has made policymaking less predictable
* Bristol is to ban all diesel cars from its city centre during peak hours in a bid to tackle high levels of air pollution
* An official at the New York Federal Reserve said that the US economy has suffered more than $500bn in direct losses over the last five years due to climate and weather-related events
* The Wall Street Journal reports that several apps in Hong Kong use coloured dots to distinguish between shops, restaurants and businesses that are thought to be in favour of the protests (yellow) or of the government (blue)
* Iran injected uranium gas into centrifuges in breach of the multilateral nuclear deal as it urged Europe to relieve the pain of US sanctions
* Two financial industry associations are calling for trading venues such as stock exchanges to shorten their hours to improve liquidity and work-life balance
* The OECD has proposed a global minimum rate of corporation tax to prevent tax avoidance and tax competition between different countries
* UK retailer Mothercare has entered administration, the latest of a number of retailers to do so this year
Brexit and European politics
* The UK parliament was dissolved last week. This was followed by official launches of election campaigns as the five-week election season begins
* UK prime minister Boris Johnson would not allow MPs to vote on extending the transition period claiming a free-trade deal would be negotiated by the end of 2020
* The Liberal Democrats, Plaid Cymru and the Green Party announced a pact to stand down some candidates to boost the chances of one member electing a pro-remain MP
* German finance minister Olaf Scholz proposed creating a euro-area-wide banking union to guarantee stability and enhance growth
And finally… a dissatisfied tenant in London sparked discussion online and in the media after posting a photo of the thermostat in his home. The thermostat had been locked in a glass ‘cage’ by the landlady to prevent tenants changing the settings – cold war