Study: China tariff would add $156B to US GDP

Container shipIt turns out that economists are starting to get on board with the idea that protectionism can work:

The Coalition for a Prosperous America (CPA) has won the prestigious Edmund A. Mennis Award from the National Association for Business Economics (NABE) for a study showing that a permanent tariff on China would benefit the US economy. The award from the nation’s leading association of business economists confirms a growing acceptance of pro-US trade policies needed to address the nation’s economic challenges.

The study, Decoupling from China – An Economic Analysis of the Impact on the U.S. Economy of a Permanent Tariff on Chinese Imports, co-authored by CPA Chief Economist Jeff Ferry and Senior Economist Steven Byers, modeled the effects of a 25 percent tariff on imports from China. It found that after five years the tariff would add $156 billion to annual GDP and 948,000 jobs to the US economy. […]

Michael Stumo, CEO of the CPA, said, “I am very proud of the cutting edge work of our CPA economics team. Receiving this important national award among a crowded competitive field of economic papers is an honor. We have long been concerned that standard economic models produce incorrect results, leading to trade policy that destroys US jobs. Our team has broken new ground on how decoupling from China will produce economic gains, rather than pain, even as America’s national interest is served.”

“The effects of freer trade on the US economy are complex, and often negative for long-term economic growth and income equality,” said Ferry. “In this study, we attempted to show that activist trade intervention like tariffs, if implemented correctly, can produce positive results for the US economy. We are very grateful to the NABE for recognizing our work.”

Hurting their feelings

Imagine my shock that Joe Tsai, the Taiwanese-Canadian co-founder of Alibaba and owner of the Brooklyn Nets, is gravely displeased by a tweet posted (and quickly deleted) by Houston Rockets general manager Daryl Morey:

Open letter to all NBA fans:

When I bought controlling interest in the Brooklyn Nets in September, I didn’t expect my first public communication with our fans would be to comment on something as politically charged and grossly misunderstood as the way hundreds of millions of Chinese NBA fans feel about what just happened.

By now you have heard that Chinese fans have reacted extremely negatively to a tweet put out by Houston Rockets GM Daryl Morey in support of protests in Hong Kong.

The Rockets, who by far had been the favorite team in China, are now effectively shut out of the Chinese market as fans abandon their love for the team, broadcasters refuse to air their games and Chinese corporates pull sponsorships in droves.

Fans in China are calling for an explanation – if they are not getting it from the Houston Rockets, then it is natural that they ask others associated with the NBA to express a view.

The NBA is a fan-first league. When hundreds of millions of fans are furious over an issue, the league, and anyone associated with the NBA, will have to pay attention. As a Governor of one of the 30 NBA teams, and a Chinese having spent a good part of my professional life in China, I need to speak up.

What is the problem with people freely expressing their opinion? This freedom is an inherent American value and the NBA has been very progressive in allowing players and other constituents a platform to speak out on issues.

The problem is, there are certain topics that are third-rail issues in certain countries, societies and communities.

Supporting a separatist movement in a Chinese territory is one of those third-rail issues, not only for the Chinese government, but also for all citizens in China.

The one thing that is terribly misunderstood, and often ignored, by the western press and those critical of China is that 1.4 billion Chinese citizens stand united when it comes to the territorial integrity of China and the country’s sovereignty over her homeland. This issue is non-negotiable.

A bit of historical perspective is important. In the mid-19thcentury, China fought two Opium Wars with the British, aided by the French, who forced through illegal trade of opium to China. A very weak Qing Dynasty government lost the wars and the result was the ceding of Hong Kong to the British as a colony.

The invasion of Chinese territories by foreign forces continued against a weak and defenseless Qing government, which precipitated in the Boxer Rebellion by Chinese peasants at the turn of the 20th century. In response, the Eight Nations Alliance – comprised of Japan, Russia, Britain, France, United States, Germany, Italy and Austria-Hungary – dispatched their forces to occupy Chinese territories in the name of humanitarian intervention. The foreign forces marched into the Chinese capital Peking (now called Beijing), defeated the peasant rebels and proceeded to loot and pillage the capital city.

In 1937, Japan invaded China by capturing Beijing, Shanghai and the then-Chinese capital Nanjing. Imperial Japanese troops committed mass murder and rape against the residents of Nanjing, resulting in several hundred thousand civilian deaths. The war of resistance by the Chinese against Japan ended after tens of millions of Chinese casualties, and only after America joined the war against Japan post-Pearl Harbor.

I am going into all of this because a student of history will understand that the Chinese psyche has heavy baggage when it comes to any threat, foreign or domestic, to carve up Chinese territories.

When the topic of any separatist movement comes up, Chinese people feel a strong sense of shame and anger because of this history of foreign occupation.

By now I hope you can begin to understand why the Daryl Morey tweet is so damaging to the relationship with our fans in China. I don’t know Daryl personally. I am sure he’s a fine NBA general manager, and I will take at face value his subsequent apology that he was not as well informed as he should have been. But the hurt that this incident has caused will take a long time to repair.

I hope to help the League to move on from this incident. I will continue to be an outspoken NBA Governor on issues that are important to China. I ask that our Chinese fans keep the faith in what the NBA and basketball can do to unite people from all over the world.

Sincerely,
Joe Tsai

Those of us who are familiar with China have received this history lesson before. Many times. And in a sense, the reaction of the fans is understandable. For other examples of this type of thing, see here, here, here and here.

Quote from the second link:

The Marriott International hotel chain has apologised and condemned “separatists” in China after the Beijing government shut down its website over an online questionnaire that suggested some Chinese regions were separate countries.

China’s Cyberspace Administration, the internet watchdog, said the hotelier had “seriously violated national laws and hurt the feelings of the Chinese people” after a customer survey listed Tibet, Taiwan, Hong Kong and Macau as separate countries. The regulator ordered Marriott’s website and booking applications to close for a week.

Note that phrase, “hurt the feelings of the Chinese people”—another formulation that China watchers will be very familiar with—and compare to Tsai’s version:

When the topic of any separatist movement comes up, Chinese people feel a strong sense of shame and anger because of this history of foreign occupation. […] the hurt that this incident has caused will take a long time to repair.

Shame. Anger. Hurt feelings. Separatism. Opium Wars. This is what American companies must now deal with because, well, 1.4 billion customers. (China is the NBA’s largest international market.)

Here we see the clash between two different, utterly incompatible value systems, each with its own virtues and flaws, which are now mutually entangled in a way that never before would have been possible due to globalization. The increasing preposterousness of the situation suggests that a great Untangling is coming, and soon.

“The largest evacuation since Dunkirk”

It’s hard to think of a more fittingly bizarre metaphor for the state of the world today than this:

Nearly 15,000 Thomas Cook customers have been repatriated so far following the travel company’s collapse, with about 135,000 more still stranded abroad.

It will take about two weeks to bring all the Britons home as part of Operation Matterhorn, the UK’s biggest peacetime repatriation and the largest evacuation since Dunkirk.

Rival travel firm TUI is helping to get people booked on Thomas Cook flights home.

The Civil Aviation Authority (CAA) completed 64 rescue flights on Monday, the first day of the operation, bringing 14,700 people back to the UK.

It is expected to bring back 16,800 people on 74 flights on Tuesday in a flight programme costing at least £100million.

Did I not prophecy the end of tourism? Could Operation Matterhorn be the inflection point marking the start of a new era – the unwinding of global travel?

And most importantly, are you not entertained?

Countries need manufacturing

Integrated circuit manufacturing

Alan Tonelson explains why, briefly:

Not that economists have been killing it in recent decades in properly evaluating the importance of manufacturing. But if Woodward had bothered to consult one, the odds would have been higher that he’d have encountered the idea that industry is kind of important for any country seeking to build or maintain a world-class military. Or” that it’s historically been the U.S. economy’s leader in productivity growth (although as RealityChek regulars know, it’s recently been losing its mojo on that score). Or that it boasts one of the nation’s biggest employment multipliers – meaning that the creation of each American manufacturing job generates an outsized number of jobs elsewhere in the economy compared with employment increases in most other sectors. Or that manufacturing accounts for the lion’s share of American business research and development spending.

Infrastructure: the thread

I have a bridge in Oklahoma to sell you

Investor and “extreme salesman” Adam Townsend has a few thoughts on US infrastructure spending. Behold, a Twitter thread that I think is worth preserving for posterity:

Adam Townsend
@adamscrabble
1. This is going to be a fun thread, it’s gonna be about finance and U.S. infrastructure. If that’s your groove, you’re going to swing. Lets begin… Historically, infrastructure financing has been done through public authority issuance of bonds….,

2. …the interest on which is tax-exempt to the recipient. There are three problems
Lower quality revenue stream projects need an equity component or a guarantee by a creditworthy public authority or municipality. These are becoming scarcer…

3. Construction costs tend to be higher when projects are built by the government rather than the private sector. These higher construction costs offset the benefit of lower interest rates, especially in today’s low rate environment when spreads between taxable…

4. and tax-free bonds are so small
Not all projects may meet the complex eligibility rules. Public bonds need to be issued in relatively large amounts so that there is a reasonable aftermarket. The money must also be spent on the project within a certain amount of time…

5. relative to the date the bonds are issued. These restrictions limit the extent to which the drawdown of the funds can be matched to the construction schedule. In today’s especially low short-term rate environment this means the project will have to pay a negative interest rate

6. arbitrage on money it actually doesn’t need yet or get a short term construction loan and run the risk that interest rates will rise between the date that the loan is taken down and the date of the long term refinancing.

7. now.. lets talk about NEW FUNDING MECHANISMS! were talking about…Pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows…

8. from the debt that finances their construction, operation and maintenance.
Recently… the Japan Government Pension Investment Fund has been in cabinet-level talks. The GPIF will purchase debt issued by American corporations to finance infrastructure projects.

9. Up to 5% of the roughly $1.14 trillion in assets controlled by the megafund can go toward overseas infrastructure projects,,, [Related: “The US and Japan have emerged as new investment destinations, making up 11% and 3%, respectively, of the total global infrastructure assets, GPIF said,” but so far this total is only a few billion dollars]
I had this discussion at cabinet level with Trumps people… lets talk about it…

10. The Trump infrastructure tax financing plan
A major private sector, revenue neutral option to help finance a significant share of the nation’s infrastructure needs. For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay…

11, …operating costs, the interest and principal on the debt,and the dividends on the equity.
The difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utilization rates, and operating costs will be over the decades.

12. Therefore,an equity cushion to absorb such risk is required by lenders. The size of the required equity cushion will vary with the riskiness of the project. Assuming an average leverage will be about five times equity.

13. ok, now ure bored, so its gonna get crazy fun now, cool?
Some numbers,,,
Every $200 billion in additional infrastructure expenditures creates $88billion more in wages for average Americans and increases real GDP growth by more than a percentage point.

14, Each GDP point creates 1.2 million additional jobs.
I’m gonna blow ure mind now, buckle up!

The US has infrastructure needs of about $3.6 trillion through 2020, including…

15. $1.7 trillion for roads, bridges and transit alone
Traffic delays cost the U.S. economy more than $50 billion annually
iPhones are smarter than many of our air traffic control systems

As a reward for being such a great guest, here’s a pic of me and my cat

btw, Peter Navarro who was the tzar pushing the Infrastructure plan, was moved over to Trade tzar – where he is truly
🔥
🔥
🔥

A mot of people have asked about what Obama did with the 787 billion that was allocated for infrastructure. So, I am going to explain reality, sit back and read on. Lets begin anew…

118,000 bridges have been recorded as hazardous. This is about 30% of the American bridges yet account for only 6% of the United States population: Oklahoma, Missouri, Kansas, Nebraska and South Dakota. Iowa alone has 25,000 bridges and only 3 million citizens.

These bridges do not have an industrial use. Of our 600,000 bridges most are trafficked only by livestock and people on a scenic walk. They have nothing to do with interstate commerce, GDP growth or national public infrastructure.

There are also 19,000 structurally deficient bridges in another 35 states, these states have a combined population of 175 million and more than 600 citizens per bridge.

80% of bridges in need of serious repair are in California. They have improperly used earmarked monies for general fund expenditures. Money was allocated, it was spent elsewhere by the state (wink and nudge to the State public employee pension system. More cat pix. /End

Running the numbers

Professor Balding does the math on US/China tariffs and finds that there may be somewhat less to the “trade war” than meets the eye:

Playing with some numbers here. YTD US exports to China are down 19% and imports from China are down 12%. To the horror of sky is falling people, these are borderline irrelevant numbers set against the US and global economies. Let’s have some perspective. For instance, 1/n

If US exports to China rose by an unprecedented amount of 19% rather than falling 19%, this would raise US GDP 0.1%. Just for illustration, imports and exports rising by those amounts rather than falling are equal to only 0.4% of US GDP. As a percentage of world GDP this 2/n

Amounts to 0.1% of world GDP. Put another way. This might be having a small impact on US and Chinese economies, it is irrelevant to the global economy. To put this number in perspective for China. If Chinese exports rose by 12% instead of falling by that amount you the US, 3/n

The Chinese economy would have grown by $63 billion. This would have added 0.45% to their economy. However this is a tiny number compared they reliance on credit. By comparison, China has added more $3 trillion in new credit since this time last year. In other words, 4/n

The marginal difference in trade is equal to 2% of rapidly expanding credit flows. Whatever your thoughts on the state of affairs a wee bit of reality is needed when blaming all nature of phenomenon on the not a trade war trade war. Done.

Meanwhile, in Thailand:

Thai officials glimpse a silver lining in the U.S.-China trade war as companies such as Sony Corp. move production to Southeast Asia’s second-largest economy.

At least 10 firms are in the process of relocating some production to Thailand from China, according to the National Economic & Social Development Council. More than a dozen others could potentially choose Thailand, it said in a statement.

“We may not see the impact on the economy now, but in the second half of 2019, it could become a positive factor for growth,” the agency’s Deputy Secretary-General Wichayayuth Boonchit said Monday.

Manufacturers are trying to escape US tariffs on imports from China.

The 10 firms moving some manufacturing to Thailand include Sony, Sharp Corp., Harley-Davidson Inc. and Delta Electronics Inc. Most have finalized locations near Bangkok or in the so-called Eastern Economic Corridor development zone, according to the economic and social development agency.

That’ll learn ’em

Merlin Swire and Carrie Lam

Merlin Swire and Carrie Lam

This should do much to improve business confidence in Hong Kong as a transparent, law-governed, international financial center:

The forced public kowtow by Cathay Pacific and parent Swire Group is punishment for the airline’s nonchalance over its employees’ involvement in Hong Kong’s protest movement. […]

  • Group chairman Merlin Swire was summoned to Beijing and ordered to fire Cathay’s top two senior managers.
  • For additional humiliation, the news was broken by state CCTV before the company had a chance to make an announcement.
  • The share price plummeted (sending a message that China could ruin stockholders and perhaps enable second-largest owner state-owned Air China to buy up the remains).
  • The SCMP quotes a source as saying “Merlin had to save [ritually dismember] Cathay to save Swire.” Swire’s Mainland interests include property, Coca-Cola bottling and much more. The great and ancient hong had zero choice.
  • Top executives Rupert Hogg and Paul Loo have been banished from the Swire Group as a whole. Anyone else who hires them in future will be defying the Wrath of the Panda and will, in Beijing’s eyes, be ‘hostile to China’.
  • Hastily appointed replacement CEO Augustus Tang, the SCMP implies, has been chosen for his ethnicity, as a further sign of submission to the Han emperor.

Fascinating to see the iron fist poking through the velvet glove.

A giant, flaming pile of fraud

Reading the blogger Deep Throat IPO’s commentary on the matter, one gets the impression that Alibaba is the dark heart of the dysfunctional global economy. Bear in mind that the Chinese e-commerce firm is listed on the New York Stock Exchange and that the author is commenting on the company’s own SEC filing and earnings call, i.e. all of this information is out in the open:

Alibaba management (Joe, Daniel, Maggie and Robert) and their “analysts” spent much of the hour collectively congratulating themselves on the greatness of their fake 51% revenue growth and their unverifiable, fake, GMV [gross merchandise volume], which has now ballooned to US$853 Billion. This “ecosystem” GMV, due to these phenomenal, dubious growth rates, is now roughly the same size as the Global GMV of both Amazon ($277 Billion) and Walmart ($625 Billion including estimated Third Party GMV) combined. Alibaba GMV has increased roughly ten fold since 2012. They are on pace to Reach $1 Trillion by next year. Alibaba’s GMV sold, according to management, has quickly grown to roughly the same as Switzerland’s GDP, with about the same level of opacity. Miraculous…..perhaps even unbelievable, to say the least. […]

2.) Speaking of “earnings” there was not one question, comment or slide in the deck that mentioned earnings. NOT ONE….an entire hour of fluff….. and “earnings” wasn’t discussed, described, commented on or mentioned. This is odd for an “earnings” call….don’t you think? When we look at the press release, we can understand why. On page 40 there is a $2.974 Billion accounting “Gain on the revaluation of assets” which was roughly equal to net income for the quarter. i.e.) If we exclude this gain, the business had no earnings from operations. […]

They’ve gained 36,000 employees since last year, a 55% growth rate. Perhaps they are getting away from that “asset/people light” business model.

To put this in perspective, Alibaba’s e-commerce rival, JD.com, announced in March it would hire 10,000 people for its JD Logistics arm “as couriers, warehouse staff, and entry-level managers.” Alibaba claims to have hired 4 times that amount of people in a year. STO Express, the logistics giant in which Alibaba proposed to take a 14% stake in March, has over 14,000 employees, so Alibaba’s employee growth in one year would be roughly 2.5 times the entire headcount of STO Express. Does this make any sense?

[Ed: I would also note that Lazada, the Singapore-based e-commerce firm in which Alibaba bought a controlling stake in 2016, has an estimated 8,000 employees according to Wikipedia.]

The other ratio I find fascinating is GMV per employee. Walmart’s GMV per employee is $284,000. Amazon’s is $428,000. Alibaba’s is $8,366,000 per employee. They are truly masters at doing more with less.

The author doesn’t mince words in his conclusion:

My crystal clear message to the analysts who were on the call is, when this eventually blows up, and there’s no question that it will, you have to understand that the “Sorry I’m just a dumb-ass” defense won’t work anymore. The times, they are a changin’.

You analysts (yes I’m speaking directly to you now) are all highly educated, smart, professional people. You are experts, or at least you are supposed to be, and you, and your respective employers are held to a much higher standard than the rest of the investing world and blogosphere. It’s assumed by naive American Investors that you know exactly what you are doing. Your endorsement means everything. Unfortunately, in this particular case, and many others, it looks like you are accepting a nice paycheck to do exactly what you are told by the Chinese Communist Party. You are also committing, aiding and abetting securities fraud. When you see the accounting travesties and inconsistencies described above, your job is to investigate them, ask tough questions, and if you find the explanations provided by management to be unsatisfactory, you must resign from the account. Your inaction, congratulatory “we” tone and your tacit endorsement of this charade makes you an accessory, not an unwitting pawn. You and your employers have significant legal and political liability for what’s about to happen. There will be no escaping it this time.

A reckoning is coming. Where is the American business press on this? You’d think this would be a top story.

Good news: Rare earths ain’t so rare

Well, this is an actual relief. Rare earths may not, in fact, be America’s Achilles heel (as China appears to think and as I previously thought):

Experts in the field, though, are much less concerned about such a chilling scenario. They say that while a restriction on rare earth exports would have some immediate adverse effects, the US and the rest of the world would adapt in the long run. “If China really cuts off supply entirely then there are short term problems,” Tim Worstall, a former rare earth trader and commodities blogger tells The Verge. “But they’re solvable.”

Far from being an ace in the hole, it turns out rare earths are more of a busted flush.

The reasons for this are numerous, and span geography, chemistry, and history. But the most important factor is also the simplest to explain: rare earths just aren’t that rare.

They can be mined in other places, like Australia, India, Brazil, Canada, and the U.S. China only mines about 80% of the global supply (not the 95% we often hear about). The Mountain Pass mine in California is apparently up and running again. And all is right in the world.

Luckin as tech startup

Tim Culpan of Bloomberg notices an oddity about Luckin Coffee, China’s answer to Starbucks:

The pending Nasdaq debut of China’s Luckin Coffee Inc. begs the question of whether it’s a purveyor of beverages, or a technology company.

As I pore through its 286-page IPO filing, I find myself struggling to decide. It’s kind of like Starbucks Corp., I guess, but also a lot like food-delivery giant Meituan Dianping and ride-hailing pioneer Uber Technologies Inc. […]

Luckin posted 841 million yuan ($125 million) in revenue last year, exploding from 250,000 yuan the year prior. But its operating expenses were three times higher than sales at 2.4 billion yuan. And it wasn’t even materials, store rentals or admin expenses that blew out the bottom line.

Marketing costs were 746 million yuan last year. To make every 100 yuan from selling coffee, Luckin spent 152 yuan to produce and market that cup – not including rent and general expenses.

Spending three times more than revenue makes Luckin a tech startup, not an F&B company.

Is it also part of the Belt and Road?

I previously wrote about Luckin here.