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Aug 9, 2019

Economics I Trump Still Has Plenty of Ways to Escalate His China Trade War

By Shawn Donnan and Jenny Leonard

Donald Trump on Aug. 9.
Donald Trump on Aug. 9.
Photographer: Sarah Silbiger/Bloomberg
The trade war’s August escalation has spooked markets -- and central banks -- around the world. The bad news, though, is that while President Donald Trump has fired two large weapons in the past week by green-lighting his biggest swathe of tariffs yet and formally branding China a currency manipulator, his arsenal is far from exhausted.
The loudest shot Trump could take may be the one that he increasingly appears focused on: weaponizing the dollar, the world’s reserve currency.
In a series of tweets on Thursday he called for the Federal Reserve to cut rates and weaken the dollar to benefit American exporters, effectively shrugging off a long-standing G-20 compact the U.S. signed again just weeks ago for the world’s major economies not to engage in competitive currency devaluations.
Donald Trump-Fed Tweet 8/8/19
Inside the White House, hawks have been pushing for a direct intervention in currency markets by the Treasury by pointing to a slowdown in U.S. manufacturing, which many economists have blamed on tariffs imposed by Trump and uncertainty surrounding his trade war with China.
Just how effective either a Fed cut or an intervention would be is unclear. The relevant Treasury fund has $92 billion in it. Even if the Fed were to join in, as it has in past interventions, and match that amount -- a $180 billion injection into a $5 trillion per day global foreign-exchange market might have a limited effect. It might also unnerve markets and have longer-term economic consequences.
The U.S. currency has been hovering close to record highs
But while the president and markets are focused on a possible currency intervention, that’s far from the last weapon he has available, according to current and former U.S. officials, advisers to the administration and analysts.

Drop in the Bucket

“He’s only dipped into the deep well of the measures that could be used against China,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics who was among the first analysts to identify the array of tariff measures Trump had available to him during the 2016 presidential campaign.
Trump could turn back to his favorite tool, tariffs, and double-down on his threat to impose import taxes on all remaining imports from China, or some $300 billion in annual trade, by raising the levies he last week vowed to impose Sept. 1 from 10% to 25%. At a time when Trump is focused on currency movements, the irony is that move would weaken the yuan, as it has before, thus undermining his efforts to talk down the dollar. Yet Trump has used currency swings as justification for tariffs before.
That’s far from the end of it.
A Commerce Department proposal that would allow companies to ask for targeted duties against imported Chinese products would benefit from this week’s Treasury designation of China as a currency manipulator and, if implemented, could see a flood of new cases seeking protection and retaliatory tariffs.

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Beyond all that, Hufbauer argues the administration could raise further barriers to Chinese investment in the U.S. or target China’s energy supply by revoking waivers that allow Beijing to continue purchasing oil from Iran and Venezuela.
Trump has said an easing of restrictions on sales to China’s Huawei Technologies Co. that was part of a now-ended truce during a meeting with Chinese leader Xi Jinping in Japan at the end of June will still go ahead. But the White House is holding off on a decision about licenses for U.S. companies to restart business with Huawei after Beijing boycotted purchases of U.S. farming goods, according to people familiar with the matter.
Former and current administration officials also caution other export restrictions and policies targeting China that were on hold, or delayed as Trump pursued a deal, could be revived.
Among those is the proposed blacklisting of Chinese companies involved in surveillance operations in China’s western Xinjiang province, where authorities have conducted mass detentions of Muslim Chinese.

Robots, AI

The Commerce Department has also been working on broader export restrictions on products from emerging industries such as robotics and artificial intelligence that would require special licenses to be exported to places like China.
The process to update the list of controlled technologies has been ongoing and likely will take until later this year to be finalized. American tech companies have been lobbying against a broad interpretation of national security or including wide categories such as semiconductor technology, arguing it could stymie U.S. research spending.
There are multiple bipartisan bills in Congress that Trump could back such as one introduced recently that would require the Fed to manage the dollar’s value to benefit American exporters and impose a tax on inbound capital as well as others that would deny Chinese firms access to U.S. equity markets. Also circulating is legislation that would shut off Huawei and fellow Chinese telecoms equipment maker ZTE Corp. entirely from U.S. suppliers.
Michael Pillsbury, an occasional adviser to the Trump administration, insists that while Trump “has more guns” he also has a more pragmatic view of China than his aides and is still eager to cut a deal. “The key is to get the message to Xi, and not with a blunderbuss,” Pillsbury said.
The pressure Trump has applied already extracted meaningful concessions from China, Pillsbury argues, pointing to Beijing’s implementation of new intellectual-property courts.
Pillsbury argued staging a deal to package up things like greater access to China for U.S. investment firms and purchases of U.S. farm products in exchange for some easing of tariffs at first would make sense for both China and Trump. That could leave difficult topics such as a U.S. push for a reduction in Chinese industrial subsidies and other economic reforms off the table for now.
But some other people close to the administration see that as risky. Such a move could draw Trump into a bad short-term deal with China, they say. A more likely scenario may be Trump pausing his assault on China once tariffs are in place on all Chinese imports and offering businesses at least certainty over the landscape rather than focusing on a deal.

Market Plunge

Then again, those people say, a lot could still depend on markets. A thousand point drop in the Dow Jones Industrial Average may not sway the president, but a 5,000-point move could.
That the U.S.-China relationship is at its lowest point since Trump took office has created a window for his hawkish advisers to push for a more aggressive approach. The only thing in their way is their own lack of coordination, according to Derek Scissors, a China expert at the American Enterprise Institute who has advised the administration.
“The president is upset with China,” he said. “The door is open for critics of China to take a whole number of actions and they’re completely disorganized and have no sense of priorities.”

News I Global Development: Schoolchildren in China work overnight to produce Amazon Alexa devices

Gethin Chamberlain

Hundreds of schoolchildren have been drafted in to make Amazon’s Alexa devices in China as part of a controversial and often illegal attempt to meet production targets, documents seen by the Guardian reveal.
Interviews with workers and leaked documents from Amazon’s supplier Foxconn show that many of the children have been required to work nights and overtime to produce the smart-speaker devices, in breach of Chinese labour laws.
According to the documents, the teenagers – drafted in from schools and technical colleges in and around the central southern city of Hengyang – are classified as “interns”, and their teachers are paid by the factory to accompany them. Teachers are asked to encourage uncooperative pupils to accept overtime work on top of regular shifts.
Some of the pupils making Amazon’s Alexa-enabled Echo and Echo Dot devices along with Kindles have been required to work for more than two months to supplement staffing levels at the factory during peak production periods, researchers found. More than 1,000 pupils are employed, aged from 16 to 18.
Chinese factories are allowed to employ students aged 16 and older, but these schoolchildren are not allowed to work nights or overtime.
Foxconn, which also makes iPhones for Apple, admitted that students had been employed illegally and said it was taking immediate action to fix the situation.
The company said in a statement: “We have doubled the oversight and monitoring of the internship program with each relevant partner school to ensure that, under no circumstances, will interns [be] allowed to work overtime or nights.
“There have been instances in the past where lax oversight on the part of the local management team has allowed this to happen and, while the impacted interns were paid the additional wages associated with these shifts, this is not acceptable and we have taken immediate steps to ensure it will not be repeated.”
The company defended its use of schoolchildren, however, claiming that “it provides students, who are all of a legal working age, with the opportunity to gain practical work experience and on-the-job training in a number of areas that will support their efforts to find employment following their graduation.”
Foxconn said it would increase the number of regular workers and review salaries immediately.
A spokesperson for Amazon, which is headed by Jeff Bezos, the richest person in the world with a furtune estimated at more than $100bn, said the company would not tolerate violations of its supplier code of conduct and regularly assessed suppliers, often using independent auditors, to monitor compliance and improvement.
“If we find violations, we take appropriate steps, including requesting immediate corrective action,” said the spokesperson.
“We are urgently investigating these allegations and addressing this with Foxconn at the most senior level. Additional teams of specialists arrived on-site yesterday to investigate, and we’ve initiated weekly audits of this issue.”
Teenagers who spoke to researchers said the factory work has no relevance to their courses and they have been pressed into working overtime.
Xiao Fang*, 17, started work at the factory on the Amazon Echo production line last month.
Fang, who is studying computing, was given the task of applying a protective film to about 3,000 Echo Dots each day. Speaking to a researcher, she said she was initially told by her teacher that she would be working eight hours a day, five days a week, but that had since changed to 10 hours a day (including two hours’ overtime) for six days a week.
“The lights in the workshop are very bright, so it gets really hot,” she said.
“In the beginning, I wasn’t very used to working at the factory, and now, after working for a month, I have reluctantly adapted to the work. But working 10 hours a day, every day, is very tiring.
“I tried telling the manager of my line that I didn’t want to work overtime. But the manager notified my teacher and the teacher said if I didn’t work overtime, I could not intern at Foxconn and that would affect my graduation and scholarship applications at the school.
“I had no choice, I could only endure this.”
According to the documents, Foxconn managers need students, who mostly stay in the factory’s dormitories, to work overtime to meet production targets; those who refuse are let go by the factory, researchers found.
A document states: “Student interns who don’t work overtime will not only affect the production goal but also affect their willingness to work. Student interns need to work overtime.”
The documents were leaked to labour rights group China Labor Watch and shared with the Guardian.
They reveal how the factory has turned to schoolchildren to fill the gaps after struggling to recruit permanent staff. One document describes how a factory needs roughly 7,000 workers to handle production from April to October, but says that it is only able to recruit an average of about 30 workers a week and needs to hire agency workers and interns to fill the gap. Interns can account for up to 15% of the workforce.
“To fulfil the shortage of the labour force and lower the cost of labour recruitment, we would like to cooperate with local schools to recruit student interns,” read one document before listing the advantages of recruiting schoolchildren.
“Low labour cost, can hire a large amount of labour at once, easier to reassign additional workers to other positions, strong ability to learn new things.”
Company documents show that Foxconn pays interns a total of 16.54 yuan an hour (£1.93) inclusive of overtime and other add-ons, with a basic salary of £1.18 an hour. Experienced agency workers, known as dispatch workers, cost the company 20.18 yuan an hour. The documents also show that Foxconn has cut the rate paid to interns since last year.
Amazon said in January that it had sold more than 100m Alexa devices which rival Google Home in the market for virtual voice assistants used to control domestic appliances and functions. They cost from around $50 in the US, £50 in the UK and A$79 in Australia, but can be three times more expensive for more sophisticated models.
The factory pays schools 500 yuan a month for each pupil they provide. One company document shows agreements with four schools to provide a total of 900 pupils to work in the factory, though other documents outline plans to recruit up to 1,800 interns this year.
Foxconn’s documents show that the company has wrestled with the issue of hiring schoolchildren as workers but decided that the benefits outweigh the risks.
Notes from a meeting to review the intern-hiring policy on 25 July this year reveal that without students the factory may not be able to hit production targets. The meeting was told that students are cheaper to hire than agency workers, which the factory also uses to cover peak production periods as an alternative to hiring regular staff.
The meeting was told that some children were refusing to work nightshifts and overtime, and there was a need for teachers to intervene.
“Nightshift line leaders should check in with student interns and teachers more often, and report back any abnormal situation so that teachers can persuade students to work nightshifts and overtime.”
If children continued to refuse to work the additional hours, the meeting was told that teachers should file a resignation letter on their behalf.
The student intern recruitment review meeting, which involved staff from the Echo production line, the production control department and the human resources department, reached an agreement to recruit student workers in large numbers. “They advised to recruit student workers to resolve the labour shortage problem during peak season,” a record of the meeting notes.
Amazon agreed a deal with Foxconn in 2017 to add 15 new production lines to the factory and hire thousands of new workers to ramp up production of its Echo and Echo Dot devices and Kindle tablets.
But last year the Observer revealed how the factory was using more agency workers than permitted by Chinese law to avoid having to recruit permanent staff to cover busy months. Many were working overtime hours far in excess of the usual legal limit of 36 hours a month.
In response, Amazon admitted that independent auditors had identified areas of concern at the factory. Foxconn promised to reduce its reliance on agency staff and said agency workers were to be offered the chance to become regular employees.
Commenting on the latest revelations, Li Qiang, executive director of China Labor Watch, called on Amazon and Foxconn to allow independent monitoring of working conditions to prevent breaches of labour law.
“It is only when the company allows independent parties to monitor the working conditions that rights violations at the factory can be effectively addressed,” he said.
“Recruiting a large number of dispatch workers and forcing student workers to work overtime and nightshifts is illegal, and Foxconn is well aware of this. However, because it increases their profits, they will continue to recruit dispatch and student workers.”
The leaked documents also reveal that Foxconn has faced problems as a result of the trade war between the US and China, with the cost of raw materials increasing and some orders lost.
* Name has been changed.

Dow I U.S. Index Futures: US stock markets set for a lower open as trade optimism fades

Silvia Amaro

U.S. stock index futures were lower Friday morning as investors continued to monitor U.S.-China trade relations and movements in the bond markets.
At around 04:30 a.m. ET, Dow futures fell 104 points, indicating a negative open of more than 84 points. Futures on the S&P 500 and Nasdaq were also slightly lower.
Wall Street ended Thursday on a more positive note, erasing most of the steep losses seen earlier in the week. Overnight, Bloomberg reported that the U.S. is holding off on giving permission to U.S. companies to use Huawei products, citing people familiar with the matter. This comes after China decided to stop buying American crops and after the U.S. officially declared China a currency manipulator earlier this week.
Traders are also keeping a close eye on the bond market, where the recent appetite for U.S. debt has pushed a bond market recession indicator close to a warning zone. If investors trigger a recession warning in the bond market that tends to be negative for stocks.
In Europe, bank stocks led markets lower Friday morning as Italian lenders tumbled on political uncertainty in the country. Italy’s coalition government imploded on Thursday evening, as deputy prime minister and leader of Italy’s ruling Lega party, Matteo Salvini, declared the arrangement unworkable and called for fresh general elections.
On the data front, there will be new PPI (producer price index) and core PPI numbers out at 08:30 a.m. ET. In corporate news, Novo Nordisk, WPP and Tribune Media are reporting Friday.

Asia I Asia Markets Closing Report on August 9, 2019: Asia shares mixed as Chinese food inflation soars, Japan GDP beats expectations

Eustance Huang

Stocks in Asia Pacific traded mixed on Friday, as Chinese data showed food inflation soared in July while Japan’s economy grew at a greater pace than expected.
Mainland Chinese stocks closed lower, retracing earlier gains. The Shanghai composite slipped 0.71% to about 2,774.75 and the Shenzhen component declined 1.39% to 8,795.18. The Shenzhen composite fell 1.274% to approximately 1,479.86.
Hong Kong’s Hang Seng index slipped 0.4%, as of its final hour of trading.
In other parts of the region, markets advanced. Japan’s Nikkei 225 gained 0.44% to close at 20,684.82 while the Topix index rose 0.35% to 1,503.84.
South Korea’s Kospi advanced 0.89% to close at 1,937.75 and Australia’s S&P/ASX 200 rose 0.25% to finish at 6,584.40.
Overall, the MSCI Asia ex-Japan index added 0.18%.
Markets in Singapore and Taiwan were closed on Friday.

Japan GDP beats expectations

Japan’s economy saw its third straight quarterly expansion in the three months that ended in June, growing at an annualized rate of 1.8% in the period, according to government data on Friday. That was much better than a median forecast for 0.4% growth.
Compared against the previous quarter, gross domestic product gained 0.4%, also beating expectations.
Capital expenditure also rose 1.5% against the previous quarter, while private consumption grew 0.6%.
“The numbers were quite above consensus and I think, in particular, the large contribution from the domestic demand part of the economy was particularly robust,” Kathy Matsui, vice chair and chief Japan strategist at Goldman Sachs Japan, told CNBC’s “Squawk Box” shortly after the data release.
“We had at Goldman, an above consensus view but ... it came in even above that estimate and I think that kind of underscores the reality, at least from our point of view, that both consumption and private (capital expenditure) remain kind of the engines of Japan’s economy at least for the foreseeable future.” Matsui said.

China watch

China’s consumer price index in July rose 2.8% on-year — its fastest year-on-year pace since February 2018, according to data from the National Bureau of Statistics. In particular, food prices soared in July to 9.1% from a year ago, amid surging prices of pork as the country battles African swine fever.
The producer price index for that period fell more than expected. It declined 0.3% year-on-year in July, the largest decline in annual terms since August 2016, Reuters reported.
Meanwhile, the People’s Bank of China fixed its midpoint for the yuan at 7.0136 against the dollar on Friday — the second time this week the benchmark rate was set weaker than 7. The onshore yuan last traded at 7.0478 against the greenback, and the offshore yuan changed hands at 7.0734 per dollar.
The Chinese currency came into sharper focus this week after it weakened past the 7-yuan-per-dollar mark on Monday for the first time since the 2008 global financial crisis and sent global markets into a frenzy.

Asia-Pacific Market Indexes Chart

NIKKEINikkei 225 IndexNIKKEI20684.8291.470.44
HSIHang Seng IndexHSI25939.30-181.47-0.69
ASX 200S&P/ASX 200ASX 2006584.4016.300.25
KOSPIKOSPI IndexKOSPI1937.7517.140.89
CNBC 100CNBC 100 ASIA IDXCNBC 1007717.1010.200.13

Currencies and oil

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 97.566 after touching lows below 97.5 yesterday.
The Japanese yen traded at 105.92 against the dollar after seeing an earlier high of 105.71.
The Australian dollar changed hands at $0.6810 after touching an earlier low of $0.6776, as Reserve Bank of Australia governor Philip Lowe said Friday it was “reasonable to expect an extended period of low interest rates.” Lowe’s comments came on the back of a larger than expected rate cut by the Reserve Bank of New Zealand on Tuesday.
Oil prices were largely unchanged in the afternoon of Asian trading hours. The international benchmark Brent crude futures was just below the flatline at $57.37 per barrel while U.S. crude futures were flat at $52.54 per barrel.
— Reuters and CNBC’s Fred Imbert contributed to this report.