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Dec 6, 2018

WSJ I Real Time Economics: U.S.-China Tensions Flare

The Wall Street Journal.
Percentage logo.
U.S.-China trade tensions are heating up again with the arrest of a top Huawei executive.
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll look at the flood of foreign steel still entering the U.S., how government has become a bit player in the U.S. labor market, and India overtaking China as a top target for investors. Let us know what you think by replying to this email.
Programming noteReal Time Economics will publish a special edition following Friday's jobs report. Look for us in your inbox.

Timing Is Everything

Canadian authorities arrested Huawei Technologies Co.’s chief financial officer at the request of the U.S. for alleged violations of Iran sanctions. The move is the latest in a campaign against the telecom giant, which the U.S. views as a national-security threat. Washington has taken a series of steps to restrict Huawei’s business on American soil and, more recently, launched an extraordinary outreach campaign to persuade allies to enact similar curbs, Kate O’Keeffe and Stu Woo report.
The arrest comes at a critical juncture in U.S.-China relations: The sides just signed a trade truce and are starting talks on a range of commercial issues, including intellectual-property theft and forced technology transfers.

Not Your Typical CFO

Huawei's chief financial officer isn’t an ordinary senior executive. Sabrina Meng, 46 years old, is the daughter of the Chinese telecommunications giant’s founder and recently emerged as his potential successor. Investors reacted swiftly to her arrest: Stock markets in Asia and U.S. equity futures fell over fears of another escalation in tensions between the world’s two largest economies. The U.S. dollar bonds of privately owned Huawei touched new lows.

Top Stories

Steel Yourself

U.S. tariffs aren’t stopping foreign-made steel. Since March, foreign companies have been subjected to 25% tariffs. Instead of isolating imported steel as the most expensive in the market, domestic steel producers have raised their prices by as much or more, moves that have generated higher profits while also driving up costs for other U.S. manufacturers, Bob Tita and Alistair MacDonald report.
Flush with cash, some U.S. steelmakers are planning to expand or build new plants. But U.S. steelmakers don’t produce enough to meet domestic demand. The result: The tariffs have made steel more expensive in the U.S. than almost anywhere in the world. That makes selling steel in the U.S. appealing to companies in Europe and Asia, even after tariff and transportation costs.

Where Did All the Government Jobs Go?

Friday’s jobs report is likely to confirm a recent trend: government workers make up the smallest share of the labor force since the 1950s. There are caveats: The figures omit the increasing role of contractors doing government work. But since 2010, the broader trend has been crystal clear: Federal, state and local governments have become bit players when it comes to job creation.

It’s not just that government employment is shrinking as a share of the overall labor market. It actually shrank. Since the recession ended in mid-2009, federal and local government employment is down slightly. State employment has barely recovered.

More broadly, local government—teachers, cops, public works—was the big driver for government payrolls from the middle of the 20th century until early in the 21st. Despite massive growth in spending, federal payrolls have held within a fairly narrow range for decades. —Jeffrey Sparshott

India Trumps China

More foreign money is now pouring into India than China. Overseas companies have spent $38 billion acquiring Indian assets so far this year, compared with $32 billion in China, Carol Ryan reports. That overturns a long-term trend—the value of inbound mergers and acquisitions in China had outstripped that in India since at least 2000. 
IMF economists expect growth in India to exceed 7% over the coming years—a faster clip than China, which is slowing. Add the threat to Chinese consumer spending posed by trade tensions with the U.S. and it’s easy to see why companies are now betting on India.

Hope for the Best, Plan for the Worst

Companies are stockpiling so many goods, parts, drugs and ingredients ahead of Britain’s planned exit from the European Union next year that storage space in the U.K. is running out. The big concern: The U.K exits the EU without agreements to minimize disruption at the border, Daphne Zhang reports. Contingency planning efforts for that worst-case scenario have stepped up as politicians haggle. British lawmakers are set to vote next week on a plan that could allay these fears, but it isn’t expected to gain Parliament’s approval.

What Else We're Reading

Worldwide the suicide rate is down by 29% since 2000. In America it's up by 18%. "This is not merely a tragedy; it matters politically, too. The rise is largely among white, middle-aged, poorly educated men in areas that were left behind by booms and crushed by busts. Their deaths are a symptom of troubles to which some see President Donald Trump as the answer," The Economist writes.
What happens when U.S. government policy keeps high-skilled workers out of the country? U.S. businesses still hire those workers, just outside the U.S. "[R]estrictions on H-1B immigration caused increases in foreign affiliate activity at both the intensive (US multinationals employed more people at their foreign affiliates) and the extensive (US multinationals opened more foreign affiliates conducting R&D) margins," Carnegie Mellon's  Britta Glennon writes in a job market paper.

Up Next: Friday

U.S. nonfarm payrolls for November, out at 8:30 a.m. ET, are expected to post a net gain of 198,000, and the unemployment rate is expected to hold steady at 3.7%. Here are five things to watch in the report.
Canada's jobs report for November is out at 8:30 a.m. ET.
The University of Michigan's preliminary consumer sentiment index for December, out at 10 a.m. ET, is expected to slip to 97.0 from 97.5 at the end of November.
U.S. consumer credit for October, out at 3 p.m. ET, is expected to advance by $15.0 billion.
Fed governor Lael Brainard speaks on financial stability at 12:15 p.m. ET and the St. Louis Fed's James Bullard speaks on the U.S. economy and monetary policy at 1 p.m. ET.

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