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Jul 26, 2018

The Finance 202: Trump declares premature victory with European Union deal I The Washington Post.

washingtonpost.com

The Finance 202: Trump declares premature victory with European Union deal




THE TICKER
President Trump’s announcement on trade with the European Union completes a cycle now familiar in his presidency. The commander in chief flogs an issue repeatedly as a crisis-level threat while pursuing a fix that often creates more harm than it solves -- then beats a partial retreat that he frames as a victory.
After going so far as to call the E.U. a global foe for its trade practices, the president appears to be shelving a major escalation of his tariff fight after meeting with European Commission President Jean-Claude Juncker. 
“While we are working on this, we will not go against the spirit of this agreement unless either party terminates the negotiation,” Trump said Wednesday afternoon in a hastily-arranged Rose Garden appearance alongside Juncker.
That appears to mean the president is backing away from slapping a 25 percent duty on roughly $200 billion of imported autos, a step top administration officials feared he was on the verge of taking. Those tariffs would quadruple the value of the goods covered by Trump's levies, as my colleague Heather Long notes — and cost more than 600,000 U.S. jobs, assuming the Europeans retaliated, per a projection by the Peterson Institute for International Economics.
But Trump’s commitment to that cease-fire remains provisional. “He did not take that option entirely off the table,” The Washington Post’s Damian Paletta and Jeanne Whalen write, “preserving leverage in case the talks falter.” Indeed, Commerce Secretary Wilbur Ross, in Wednesday night interview on Fox Business Network, affirmed that “the investigation on autos will continue. It’s just we won’t impose any auto tariffs, as long as the negotiations are progressing properly.”
The other details of what he hashed out with Juncker are similarly sketchy.
The president made no specific commitment to lift the steel and aluminum tariffs he imposed back in June, nor did Juncker pledge to withdraw the retaliatory measures from the E.U. targeting American motorcycles, blue jeans and bourbon, among other products. Rather, both sides agreed to keep talking, though with no timetable.
Trump also touted an agreement by the Europeans to buy more American soybeans and liquefied natural gas. But Juncker in a speech later Wednesday indicated the gas purchases would only go forward “if the conditions were right and price is competitive.” (Anthony Gardner, a former U.S. ambassador to the E.U., said in a tweet it was “absurd” to believe liquefied gas could compete with what the continent pipes in from nearer by.) And the E.U. was already looking to import more U.S. soybeans, since China — in its own trade fight with the Trump administration — has been buying more from Brazil, driving up the price of the product there.
It’s not clear the two sides made any progress either on one of Trump’s leading bugaboos: European tariffs on U.S. autos. In their joint statement, Trump and Juncker said they would work to zero out duties on “non-auto industrial goods.” Extending that to cars will prove difficult, since the U.S. currently applies a 25 percent tariff to light truck imports, while the Europeans add 10 percent to imported autos and light trucks.
Trump speaks with Juncker during a meeting in the Oval Office on Wednesday. (Jabin Botsford/The Washington Post)
And Trump could always reverse himself, a prerogative he’s already exercised repeatedly in his trade push, as Heather and Steven Mufson point out:
“The world saw a similar playbook when Trump first unveiled the steel and aluminum tariffs in March. Early on, he exempted numerous countries, including the European Union, from the tariffs. Many experts and Wall Street trade saw this as a sign that Trump wasn’t as gung-ho about tariffs as his rhetoric would make one think. But they were later stunned when Trump went ahead and put the metals tariffs on America’s allies on June 1.
Trump has also gone hot and cold on China. Remember when Treasury Secretary Steven Mnuchin said the administration was putting the tariffs with China 'on hold' only to have Trump forge ahead a few days later? Or when Trump and Canadian Prime Minister Justin Trudeau praised each other at a news conference at the G-7 and then Trump blasted Trudeau as 'meek and mild' after they left? Trump often seems to like to lure people to the table to see what they will offer before hitting them hard again for more.”
In the immediate term, Trump is reveling in a victory:
Great to be back on track with the European Union. This was a big day for free and fair trade!
— Donald J. Trump (@realDonaldTrump) July 26, 2018
European Union representatives told me that they would start buying soybeans from our great farmers immediately. Also, they will be buying vast amounts of LNG!
— Donald J. Trump (@realDonaldTrump) July 26, 2018
Though as with his family separation policy or his nuclear brinksmanship with North Korean dictator Kim Jong Un, there's no evidence yet that the president achieved anything more than beginning to dismantle a problem he helped create. 
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TRUMP TRACKER
TRADE FLY-AROUND:
President Trump at the White House in Washington on July 25. (Evan Vucci/AP)
Still no China talks. Bloomberg: "More than a month since the last official talks on the China-U.S. trade war, there are no talks at the moment to restart stalled negotiations between the two nations, according to a Chinese official. 'As far as I know, the two sides don’t have contact to renew talks,' Ministry of Commerce spokesman Gao Feng said at a regular press conference on Thursday in Beijing... While the two nations seemed close to a deal in May, the collapse of that left Chinese officials embarrassed and they’re worried that they might get played again."
— Carmakers take a hit. The New York Times's Neal E. Boudette: “The economy may be humming, but for American car companies, the year is looking less bright. All of Detroit’s Big 3 automakers issued downward revisions on Wednesday in their financial forecasts for the year, with each highlighting rising commodities costs that stem in part from the steel and aluminum tariffs imposed by the Trump administration... Ford Motor recorded the worst showing of the three, as net income fell by nearly half to $1.1 billion from the same period ago. Aside from higher materials costs, Ford is struggling in Europe, South America and especially China, where it has spent heavily in recent years to expand but made just $3 million in the quarter and has watched its sales fall.”
Some context, via CNBC's Carl Quintanilla:
Higher input costs from steel/aluminum tariffs now outpace Q1 tax-cut benefits for Ford/GM/Fiat Chrysler
(via @lisaabramowicz1)https://t.co/0sYosf8nNk pic.twitter.com/auF9mSsp8Z

— Carl Quintanilla (@carlquintanilla) July 25, 2018
Euro carmaker shares surge on ceasefire news. Bloomberg: "Shares of BMW AG, Volkswagen AG, Fiat Chrysler Automobiles NV and Daimler AG jumped on Thursday following a pledge from the two leaders to 'hold off on other tariffs' while they negotiate a deal to expand European imports of U.S. liquefied natural gas and soybeans and lower industrial levies. Germany’s VDA auto industry association called the meeting “a big step forward” and “good news for industry and consumers on both sides of the Atlantic.”
Other top U.S. brands warn on profitsThe Post's Rachel Siegel and Hamza Shaban: “Some of the largest companies in America are reporting that they are suffering the sting of the Trump administration’s trade war, sounding alarm in an otherwise prosperous economy. Midway through the corporate earnings season, companies across a broad array of industries are citing tariffs, particularly those imposed on aluminum and steel, as the culprit for lower profits, higher prices for consumers and even sweeping changes in their planning and operations, such as moving production out of China. Products as varied as whiskey and My Little Pony, washing machines and Maseratis are caught in the crossfire of a trade war that has brewed for months... Companies including... Coca-Cola, Harley-Davidson and Brown-Forman have warned that the tariffs could push them to raise prices for customers.”
Hill Republicans divided. Politico's Rachael Bade and Burgess Everett: "Senate Republicans eager to take a harder line against [Trump]’s escalating trade war are running smack into an unlikely obstacle: their House GOP colleagues. With Trump threatening $500 billion in additional tariffs on China and new levies on foreign cars, Senate Republicans are increasingly focused on writing legislation to tie his hands. And it’s not just usual Trump critics like Jeff Flake and Bob Corker: Trump ally Senate Finance Chairman Orrin Hatch is working on a bill limiting the president from imposing new national security tariffs.
"But across the Capitol, Speaker Paul Ryan and GOP leaders have all but rejected that approach. House Republicans, who rarely push back on the president, say it’s more productive to try to convince Trump privately or through letters or committee hearings than to force his hand legislatively... Hatch’s legislative effort is part of a growing number of bills aimed at reining in the president... Sens. Lamar Alexander (R-Tenn.) and Doug Jones (D-Ala.) unveiled a proposal intended to prevent tariffs on cars."
— Kudlow defends farm plan. Bloomberg News's Terrence Dopp: “White House economic adviser Larry Kudlow said a plan by the Trump administration to pay as much as $12 billion in relief to U.S. farmers hurt by a burgeoning trade dispute is a stop-gap proposal and doesn’t signal a willingness to make a habit of aid programs. 'What we’ve put on the board is what I think is a temporary assistance measure, I don’t think it’s going to get near to $12 billion,' Kudlow said during an interview on 'CBS This Morning' on Wednesday. 'Nobody’s really thrilled about this. We’re just trying to protect American agriculture from some of the unfair trading practices.'”
Hensarling slams it. CNBC's Thomas Franck: “The White House plan to provide aid to farmers hit by tariffs — as well as the president's ability to pit the U.S. in an international trade war — is evidence that the president has too much power, Rep. Jeb Hensarling said Wednesday... 'A tariff is a tax. We have a policy now that is taxing the American consumer and then bailing out U.S. farmers with welfare. I don't get it, I don't agree with it,' Hensarling [said].”
(Farm groups, meanwhile, say the $12 billion isn't enough to mitigate the damage — and argue it's more important for the administration to reverse course on tariffs.)
— Rooting for NAFTA. The Wall Street Journal's Anthony Harrup: “Mexican and Canadian officials reaffirmed Wednesday their commitment to a trilateral North American Free Trade Agreement, explaining that bilateral meetings between the different members are part of the negotiating process. 'Canada very much believes in Nafta as a trilateral agreement, and that is simply a statement of the reality,' Canadian Foreign Minister Chrystia Freeland said at a press conference in Mexico City after a meeting with Mexican Foreign Minister Luis Videgaray and Economy Minister Ildefonso Guajardo. 'We are very much committed to modernizing Nafta as a trilateral agreement,' she added.”
— Qualcomm gives up. WSJ's Eliot Brown and Bob Davis: “Qualcomm Inc. plans to scrap its $44 billion purchase of Dutch chip maker NXP Semiconductors after failing to secure approval in China, making the deal one of the most prominent victims of spiraling U.S.-China trade tensions and derailing a central part of the U.S. chip giant’s strategy. China was the last of nine markets that needed to approve the deal, which would have been among the biggest ever between technology companies. The acquisition was announced in October 2016 and extended in April as the chip makers sought approval from China’s competition regulators. Instead, the deal became mired in Beijing’s trade fight with Washington. Qualcomm said Wednesday it won’t again extend the agreement, which was set to expire just shy of midnight ET, though it said its decision was pending any new material developments.”
MELTDOWN WATCH:
President Trump at the White House in Washington on July 25. (Jabin Botsford/The Washington Post)
— Emoluments case to proceed. The Post's Ann E. Marimow, Jonathan O'Connell and David A. Fahrenthold: “A federal judge on Wednesday rejected [Trump’s] latest effort to stop a lawsuit that alleges Trump is violating the Constitution by continuing to do business with foreign governments. The ruling, from U.S. District Judge Peter J. Messitte in Greenbelt, Md., will allow the plaintiffs — the attorneys general of Maryland and the District of Columbia — to proceed with their case, which says Trump has violated little-used anti-corruption clauses in the Constitution known as emoluments clauses. This ruling appeared to mark the first time a federal judge had interpreted those constitutional provisions and applied their restrictions to a sitting president. If the ruling stands, it could bring unprecedented scrutiny to Trump’s businesses — which have sought to keep their transactions with foreign states private, even as their owner sits in the Oval Office.”
MARKET MOVERS
A home under construction in Raymond, N.H., on June 20. (Charles Krupa/AP)
— Another red flag from real estate. Reuters's Lucia Mutikani: “Sales of new U.S. single-family homes fell to an eight-month low in June and data for the prior month was revised sharply lower, the latest indications that the housing market was slowing down. The moderation in housing is largely driven by supply constraints, but there are concerns that persistent weakness could eventually spill over to the broader economy, which appeared to have grown robustly in the second quarter. Housing has been plagued by rising building material costs and shortages of land and labor, which have put a squeeze on the supply of homes available for sale and kept prices elevated. ... The Commerce Department said on Wednesday new home sales decreased 5.3 percent to a seasonally adjusted annual rate of 631,000 units last month, the lowest since October 2017.”
— Stocks rally but investors are wary. Bloomberg News's Elena Popina and Lu Wang: “One by one, the milestones are falling, as stocks claw back from their nightmare winter. One thing that isn’t recovering as fast: the euphoria that foreshadowed the horrors of February and March. Three days of gains pushed the S&P 500 Index to the brink of recouping its losses since Jan. 30, the initial lurch of what became the first correction in two years. Against the rally is a higher wall of worry -- interest rates, slowing growth, the trade war. 'In January, the markets just kept going up and up, and it didn’t feel like it’s supported by anything,' Myles VanderWeele, a principal who helps oversee about $4.5 billion at San Francisco-based BOS, said by phone. 'Now we’re in place where people are keeping an eye on the shop.'”
— Suspicion tamps Chinese investment. WSJ's Kate O’Keeffe: “Some states and cities in the U.S. are growing wary of Chinese investment after a deal boom that raised national-security concerns and failed to deliver promised jobs. ... Critics have singled out Chinese deals as national-security risks on the grounds the companies may be directed and subsidized by the government of China, an economic and military rival. The Committee on Foreign Investment in the U.S., a secretive, interagency committee that reviews foreign deals for national-security concerns, has stepped up its scrutiny of Chinese deals in recent years, and Congress is about to further strengthen its mandate. Beijing, for its part, has also sought to curb outbound investment to establish firmer control over companies whose international shopping sprees have rattled the country’s currency and foreign-exchange reserves.”
POCKET CHANGE
— Facebook disappoints. The Post's Elizabeth Dwoskin and Hayley Tsukayama: “After more than a year’s worth of controversies, Facebook is no longer invincible. Shares in the social network fell as much as 24 percent in after-hours trading Wednesday after sales growth did not meet expectations — and the social media giant said it would slow down even further in the months ahead. The numbers suggest that the political and social backlash against Facebook, and its costly response to it, is starting to affect the business. Revenue totaled $13.23 billion, up 42 percent from a year ago but shy of the $13.36 billion analysts expected. The company beat the bottom-line forecast, with $5.1 billion in profit. 'We run the company for the long term, not just for this quarter,' said Mark Zuckerberg, Facebook’s founder and CEO, referring to the losses on a call with investors. The stock slide Wednesday afternoon wiped out as much as $150 billion of Facebook’s value.”
Zuckerberg himself lost $16.8 billion, dropping him from third to sixth on the Bloomberg Billionaires Index and wiping out the $13.7 billion he'd gained this year.
China quashes Facebook's hopes. NYT's Paul Mozur: “For Facebook, success in China was brief. Very brief. For several hours, a Chinese government database showed that Facebook had gained approval to open a subsidiary in the eastern province of Zhejiang. Facebook said it would use the company to set up an innovation hub there. Then the registration disappeared, and references to the subsidiary were partly censored in Chinese media. Now the approval has been withdrawn ... While the about-face does not definitively end Facebook’s chances of establishing the company, it makes success very unlikely.”
A Coca-Cola delivery van in downtown Pittsburgh on April 24, 2017. (Keith Srakocic/AP)
— Coke hikes prices. WSJ's Jennifer Maloney: “Coca-Cola Co. ... reported rising drink volumes in its latest quarter, boosted by demand for diet sodas in the U.S. and experiments abroad, and said it is raising prices on its carbonated sodas in North America. The company said it would take the unusual step of raising prices on its carbonated sodas in the middle of the year. Chief Executive James Quincey said the move was in response to rising costs, including higher freight rates and metal prices after the U.S. placed tariffs on Chinese imports earlier this year. 'There is some broad-based push on input costs that have kind of come in and affected ours and many other industries as well,' Mr. Quincey said. He expects the company’s bottlers and retailers to pass along the higher prices to consumers.”
— Waymo to partner with Walmart. The Post's Hamza Shaban: “Alphabet’s Waymo announced Wednesday that it will begin a pilot program with Walmart to shuttle customers to and from stores to pick up their groceries. The new initiative is part of a series of partnerships with companies to offer customers self-driving cars to run errands and shop. Customers in Phoenix who order groceries on Walmart.com, will receive savings on their goods, and as their orders are put together at the store, autonomous Waymo vehicles will take customers to and from Walmart. Waymo will also partner with AutoNation, Avis, DDR Corp. and Element Hotel, offering their self-driving cars to customers who do business with those companies.”
MONEY ON THE HILL
Tax cuts push the deficit to $1 trillion. NYT's Jim Tankersley: "The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted. The reason is [Trump’s] tax cuts... As companies operate with lower taxes and a greater ability to reduce what they owe, the federal government is receiving far less than it would have before the overhaul... From January to June this year, according to data from the Treasury Department, corporate tax payments fell by a third from the same period a year ago. The drop nearly reached a 75-year low as a share of the economy, according to federal data."
From the story:
It's not just the U.S. The Post's Jeff Stein: "Taxes on corporations are plummeting across the globe as countries struggle to keep up with multinational firms shifting their profits to foreign tax havens, economists say in a new paper. The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found. 'Corporate taxes are going to die in 10 to 20 years at this rate,' Ludvig Wier, an economist at the University of Copenhagen and a co-author of the study, said in an interview."
Senate liberals seek Puerto Rican debt relief. Reuters's Richard Cowan: "A group of U.S. Senate liberals on Wednesday introduced legislation providing debt relief to Puerto Rico as the island territory struggles to recover from a devastating 2017 hurricane that worsened conditions in an already-suffering economy. Independent Senator Bernie Sanders and Democratic Senator Elizabeth Warren have joined up with three other liberal Democratic senators in seeking broad debt relief for Puerto Rico and other U.S. territories... Their initiative is not expected to gain traction in the Republican-controlled Congress, but it could provide hints about what Democrats might pursue if they manage to win majorities in either the Senate or House of Representatives in November’s congressional elections."
Waters says GSEs would be a focus. Bloomberg's Elizabeth Dexheimer: "Representative Maxine Waters said fixing Fannie Mae and Freddie Macwould top her list of priorities if Democrats take control of the House in this year’s mid-term elections and she becomes leader of the Financial Services Committee next year. Housing-finance reform is 'very important to me,' the California lawmaker said in response to a question Wednesday at a CNBC Capital Exchange event in Washington... Waters has criticized [Hensarling] for failing to move away from his proposal to severely limit the government’s role in the mortgage market. She didn’t offer details about how she’d address housing-finance reform."
The House on Wednesday passed legislation to extend flood insurance funding through the end of November.
The Hill
DAYBOOK
Today
THE FUNNIES
A 2014 New Yorker cartoon from Leo Cullum:
BULL SESSION
Trump's many denials about knowledge of Michael Cohen's payments:
Trump’s “Keep America Great!” flags might be hit by tariffs:
London's zoo animals stay cool with frozen treats: