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In defence of NAFTA

Thu, 02/02/2017 - 15:47

THE North American Free Trade Agreement (NAFTA) has long been a populist punchbag. In the American presidential campaign of 1992, Ross Perot—an oddball Texas billionaire and independent candidate—claimed to hear a “giant sucking sound” as Mexico prepared to hoover up American jobs. Since its enactment, right-wing conspiracy theorists have speculated that NAFTA is merely a first step towards “North American Union”, and the swapping of the almighty dollar for the “amero”. Donald Trump, who plans to renegotiate (or scrap) the deal, mined a rich vein of anti-NAFTA sentiment during his campaign, calling it “the single worst trade deal ever approved in this country”. Even NAFTA’s cheerleaders (a more reticent bunch) might concede that the deal has fallen short of their expectations. But it is in none of the signatories’ interests to rip it up or roll it back.

America and Canada opened talks on a free-trade area with Mexico in 1990, shortly after securing their own bilateral deal, and it was bringing in Mexico that proved so contentious in America. When NAFTA took effect in 1994, it eliminated tariffs on more than half of its members’...

Why even win-win trade deals are tough

Thu, 02/02/2017 - 15:47

IN THE wee hours of December 7th 2013, after weeks of haggling, exhausted trade representatives stood to applaud. Agreement had been reached on the first trade deal in the history of the World Trade Organisation (WTO). No longer could it be accused of being a talking shop, crimped by consensus. “For the first time in our history, the WTO has truly delivered,” said Roberto Azevêdo, the body’s chief. The deal is tantalisingly close to coming into force, needing just two more national ratifications. Chad, Jordan, Kuwait and Rwanda are competing to take it over the line.

In theory, the Trade Facilitation Agreement (TFA) is a beacon of hope on the trade landscape. It was unanimously agreed to by rich and poor countries. If fully implemented, it could have an even bigger impact than slashing all tariffs. It is an example of a win-win deal, in which peer pressure pokes governments into making life easier and more prosperous.

The agreement shies away from slashing subsidies or toppling tariffs, and instead hacks at the thicket of regulatory trade barriers. The red tape is stickiest in poorer countries; in sub-Saharan Africa...

Ethiopia’s state-of-the-art commodity exchange

Thu, 02/02/2017 - 15:47

ON THE walls of the Ethiopia Commodity Exchange (ECX) in Addis Ababa, the capital, hang glossy black-and-white photographs of provincial market towns and rustic life. For the merchants and brokers striding across its high-tech trading floor they serve as a reminder that the ECX, sub-Saharan Africa’s most modern commodity exchange outside Johannesburg, exists for a simple, practical purpose: to transform Ethiopian agriculture.

It has some way to go. By connecting smallholder farmers to global markets, the exchange, launched with a fanfare in 2008, was supposed to help reduce hunger. The hope was it would reduce price volatility and incentivise farmers to plant crops. But staple foods such as haricot beans today account for less than 10% of its trade. Its annual turnover—worth about $1bn—is dominated instead by two export crops, coffee and sesame seeds. In 2015, despite a dire drought, Ethiopia did avoid famine, but the ECX played little role: its maize and wheat contracts had lapsed by then because of concerns that exports would jeopardise domestic food supplies. Cutting out middlemen seems not to have done much for smallholders: studies...

“Alt-beta” funds offer hedge-fund-like investments more cheaply

Thu, 02/02/2017 - 15:47

INVESTORS love to complain about hedge funds, which have delivered measly returns for the past several years and are notorious for their high fees. Yet so far, most have stuck with them. One reason is that the hedge funds’ mission—to provide returns uncorrelated with overall market performance—has been hard to replicate. But a fast-growing hedge-fund-like product, known as the “alternative beta” fund, allows investors much cheaper access to a similar style of investment.

“Alt-beta”, as it is usually called, is a bit of a misnomer. The word “beta” is typically used to mean broad market returns, which can be bought into through index-tracking funds. “Alpha” is the term used to describe the premium added by a skilled fund manager. The idea driving both “alt-beta” funds and longer-established “smart-beta” ones, is that, just as “beta” can be distinguished from “alpha”, so returns can be ascribed to identifiable, predictable factors. One example is the “value” effect: ie, that undervalued companies tend to outperform the market.

Smart-beta and alt-beta funds are close cousins, but differ in their methods and in their outcomes. Both...

Emerging markets’ Trump tantrum abates, except in Turkey

Thu, 02/02/2017 - 15:47

THE Syrian consulate in Istanbul’s elegant Nisantasi quarter is a busy spot. Men huddle outside in the cold, waiting for their turn to slip through the building’s ornate doors. The rest of the neighbourhood is, however, unusually subdued. A string of terrorist attacks in the city and an attempted coup in July, followed by a purge of suspected sympathisers, has dampened spirits. “After a bomb goes off, no one goes out. A week is lost,” says one shopkeeper.

Besides war next door and terror at home, Turkey’s economy has been rocked by political upheaval farther afield: the lira has plummeted by over 15% against the dollar since America’s election on November 8th. Many tenants cannot now afford Nisantasi’s rents, often priced in foreign currency. Even the childhood home of Orhan Pamuk, Turkey’s best-known novelist (pictured), has a “for rent” sign on the door.

Back in November, Turkey had a lot of company in its economic misery. Other emerging markets also reacted badly to America’s election result, prompting talk of a “Trump tantrum” to match the “taper tantrum” after May 2013, when America’s Federal Reserve began musing about reducing...

What if interest expenses were no longer tax-deductible?

Thu, 02/02/2017 - 15:47

ONE reason why the American equity market has rallied since the election of Donald Trump is the hope that taxes on corporate profits will be cut. But that measure has to be paid for, and analysts are only just starting to figure out where the burden might fall.

The initial focus has been on the idea of border-adjustment taxes. But another way of raising revenue is to remove companies’ right to deduct their interest expenses from their taxable income. That proviso has been in place since 1918, when it was introduced to help firms struggling with the impact of the first world war—evidence that tax breaks, once granted, are hard to remove.

Allowing interest payments, but not dividends, to be deducted from corporate profits before tax is paid is a huge distortion to the system. It is a perk worth around 11% of the value of corporate assets. It has tended to encourage companies to take on more debt. By doing so, it may make the economy more risky at the margin: in a recession, highly-indebted companies are likely to go bust more quickly, whereas companies with lots of equity capital can ride out the storm. As a result,...

The custodian-bank business

Thu, 02/02/2017 - 15:47

NO ACTOR has ever sat nude in a bathtub to explain the intricacies of the bank-custody business, as Margot Robbie did for mortgage-backed securities in “The Big Short”, a successful film. The blame lies with the custody business’s virtues, not its flaws.

Instead of the 2% fees Ms Robbie mentions for offloading rubbishy securities onto suckers, bank-custody fees are tallied in hundredths of a percentage point. Custody bankers are generally neither glamorous nor crooked. They are accountants and software engineers catering to well-informed clients: the owners and managers of huge amounts of financial assets. The services they offer include: holding, valuing and transferring securities; receiving interest and dividends; and providing notice of corporate actions. The business grows with the financial markets, but more slowly. Years of almost seamless and scandal-free performance have made the business well-nigh invisible. But not quite.

Custody has habitually been “sticky”: the loss of a large account is unusual. But on January 25th BlackRock, a gargantuan asset manager, announced that it was moving custody assets worth $1trn from State...

India floats the idea of a universal basic income

Thu, 02/02/2017 - 15:47

Basic needs

NOVEMBER 8th was not just the day of Donald Trump’s election. It was also when Indians found out most banknotes would lose all value unless promptly exchanged. Ever since, many have expected their patience in enduring the ensuing chaos to be rewarded in some way. Might scrapped cash unredeemed by presumed tax-dodgers be recycled into a lump-sum payment to each and every citizen? Or would the annual budget, presented on February 1st, be full of giveaways ahead of a string of state elections? In the event, the budget was restrained to the point of dullness. But the government’s closely-watched “economic survey”, released the previous day, hinted at a much bigger giveaway in the works: a universal basic income (UBI) payable to every single Indian.

The idea of a cash payment made to citizens irrespective of their wealth is centuries old. It has become newly fashionable in some rich countries, among both left-wing thinkers (who like its redistributive aspects) and their right-wing foes (who think it results in a less meddlesome state). The idea has had its fans in India: a small UBI scheme was launched as a pilot...

India flirts with a UBI

Thu, 02/02/2017 - 09:25

Basic needs

NOVEMBER 8th was not just the day of Donald Trump’s election. It was also when Indians found out most banknotes would lose all value unless promptly exchanged. Ever since, many have expected their patience in enduring the ensuing chaos to be rewarded in some way. Might scrapped cash unredeemed by presumed tax-dodgers be recycled into a lump-sum payment to each and every citizen? Or would the annual budget, presented on February 1st, be full of giveaways ahead of a string of state elections? In the event, the budget was restrained to the point of dullness. But the government’s closely-watched “economic survey”, released the previous day, hinted at a much bigger giveaway in the works: a universal basic income (UBI) payable to every single Indian.

The idea of a cash payment made to citizens irrespective of their wealth is centuries old. It has become newly fashionable in some rich countries, among both left-wing thinkers (who like its redistributive aspects) and their right-wing foes (who think it results in a less meddlesome state). The idea has had its fans in India: a small UBI scheme was launched as a...

Warren Buffett extends his dominance of retroactive reinsurance

Thu, 01/26/2017 - 15:44

IT IS a niche market, but a big one, and it is increasingly dominated by Warren Buffett’s Berkshire Hathaway. On January 20th its reinsurance subsidiary, National Indemnity Company (NICO), agreed with American International Group (AIG), a big insurer, to acquire excess losses on old insurance policies. In one of the largest such “retroactive reinsurance” deals ever announced, NICO will be on the hook for four-fifths of all losses above $25bn, up to $20bn, in exchange for a payment of $9.8bn now. The deal comes just a few weeks after a similar deal giving up to $1.5bn of coverage to Hartford, another American insurance giant.

For much of the 15 years since the term retroactive reinsurance came into use, Berkshire, through NICO, has been at the forefront. The structure allows insurers to rid themselves of so-called “long-tail” exposures, ie, claims that may come in years or decades after policies were written. Often, they cover long-term environmental risks like pollution, or asbestos-related disease, where workers may fall ill many years after exposure. In the largest previous deal in 2006 NICO provided reinsurance coverage worth $7bn for...

A big Chinese province admits faking its economic data

Thu, 01/26/2017 - 15:44

AT THE start of 2014 a senior official in the statistics bureau of Liaoning, an industrial province in north-eastern China, told his army of boffins to cultivate a spirit of innovation in their work. “Liberate your minds,” he exhorted an annual planning meeting. They took him at his word. In one of the biggest scandals to rock the murky world of Chinese economic data, the government admitted this month that Liaoning had faked its fiscal data from 2011 to 2014, inflating revenues by about 20%.

For those inclined to distrust all Chinese numbers, the announcement was simple vindication. But a closer look paints a different picture: of central authorities wanting to get a better read on the economy but being impeded at the local level—and by one of the usual suspects at that.

In manipulating statistics, Liaoning has form. When Li Keqiang, now prime minister, was Communist Party chief of the province in the 2000s, he confided to America’s ambassador to China that its GDP figures were “man-made” and unreliable. Mr Li’s comments have often been cited by critics of Chinese data, though his concerns focused just on Liaoning...

The definition of “maximum employment” needs updating

Thu, 01/26/2017 - 15:44

“IT IS fair to say the economy is near maximum employment,” said Janet Yellen, chairman of the Federal Reserve, in recent comments preparing markets for rate rises to come. But “maximum employment”, like pornography, is in the eye of the beholder. American adults, of whom only about 69% have a job, seem less than maximally employed. In previous eras, governments of countries scarred by economic hardship set themselves the goal of “full” employment. Today, the target is termed “maximum”. But it is the same concept. It needs a bit of updating.

Ms Yellen has a particular definition of maximum employment in mind, built on the economic experience of the past half-century. In the 1960s and 1970s a consensus (or, at least, what passes for one in macroeconomics) emerged that government efforts to boost demand could push unemployment only so low. Below that “natural rate”, it would soon start climbing again and inflation would accelerate. So now central bankers take a guess at the natural rate and at how quickly unemployment that is “too low” will spark inflation. Maximum employment, in their view, is the sweet spot: the labour market is as...

Brexit poses a threat to Ireland’s aircraft-leasing business

Thu, 01/26/2017 - 15:44

THE glass office blocks of Dublin’s docklands still stand proud; the banks that built them no longer do. The financial crisis of 2008 took down Ireland’s six biggest lenders. Within five years Dublin slid from being rated by Z/Yen, a London-based business think-tank, as the world’s tenth-best financial centre to its 70th. Britain’s readiness to leave Europe’s single market has since sparked hopes Dublin’s fortunes could be revived. An English-speaking base from which to keep doing business inside the EU may appeal to London’s bankers. But worries are growing that the impact will not be all good for Dublin.

To see why, look at aircraft finance, perhaps the city’s most successful industry. The topic of Brexit dominated the chatter at the world’s two biggest air-finance conferences, both held in Dublin this month. Drawing more than 4,500 airline bigwigs, lessors and bankers, such gatherings are usually preoccupied by issues such as aeroplane prices and the aviation cycle. This year geopolitics predominated. “In Ireland we’re surrounded by Trump to the west and Brexit to the east,” one industry veteran sighed in despair.


America, China and the risk of a trade war

Thu, 01/26/2017 - 15:44

DONALD TRUMP’S quest to protect American workers from cheating foreigners has begun. But in his first flurry of policy tweets and executive orders, China, his favourite bogeyman, was conspicuously absent. On the campaign trail he deplored China’s currency manipulation, accused it of flouting global trade rules and threatened a 45% tariff on its exports, all to cheering crowds. Now, the world is waiting to see how much of this he meant.

The promise to label China a currency manipulator has not been repeated. An optimistic interpretation is that Mr Trump has realised that the promise was based on an “alternative” fact. China is no longer squashing its currency to gain a competitive edge, but is instead propping it up. A pessimistic one is that Steven Mnuchin, his treasury secretary, who would do the labelling, is not yet confirmed by the Senate.

Mr Trump certainly has the power to wreak trade havoc. A big blanket tariff would slice through supply chains, hurt American consumers and fly in the face of the global system of trade rules overseen by the World Trade Organisation (WTO). But, rather than blow up the world’s trading system, Mr Trump may...

Winners and losers in a China-America trade war

Thu, 01/26/2017 - 15:44

ECONOMIC Armageddon became a bit more likely when Donald Trump took office on January 20th, given his threats to impose a 45% tariff on Chinese imports. “No one will emerge as a winner in a trade war,” Xi Jinping, China’s president, intoned just days earlier. He was not quite right. In any catastrophe, a few survive; some even thrive.

Tariffs that high would serve as a tax on American shoppers buying phones, computers and clothes (see chart). They might not dent their wallets too much—a study found that in 2010 goods and services from China made up less than 3% of consumer spending. Poorer Americans would be hit harder, however, as they spend a higher share of their income on tradable goods.

American importers would suffer from a tariff. Importers of electronics and clothing enjoy higher retail and wholesale margins than other importers. A tariff would eat into them. Their competitors, relying on domestic suppliers, could benefit and raise prices.

A squeeze on trade between America and China would be painful but not catastrophic for China’s economy. It has weaned itself off export-led growth. Analysts from...

Financial markets diverge as central banks start to turn off the taps

Thu, 01/26/2017 - 15:44

INVESTORS are learning to let go of Daddy’s hand. Monetary policy has been very supportive of asset markets over the past eight years but the direction of policy is tilting slowly.

The Federal Reserve has increased rates twice already and is expected to push through another three increases this year. The Bank of England has indicated that the next move in rates could be up or down, but that the former looks more likely, especially as inflation is on the rise. The European Central Bank is scheduled to reduce the amount of bond purchases it makes after the end of March. Only the Bank of Japan seems committed to keeping the monetary taps on “full”.

The market impact is already visible. Morgan Stanley says there has been a “crash” in the tendency for assets to correlate with each other in recent months (see chart). Its measure incorporates correlations between different markets (equities and corporate bonds, for example), and between different regions.

The recent fall in correlations takes the measure back to where it was in the run-up to the 2007-08 financial crisis. During and after the crisis, correlations rose...

A fintech startup tries to shake up American student loans

Thu, 01/26/2017 - 15:44

IN AN old factory building in lower Manhattan a fintech startup is seeking answers to a question that has tormented teachers and students for decades: what is the value of a given course, teacher or institution? Climb Credit, with just two dozen employees, provides student loans. The programmes it finances bring returns far higher than can be expected from even highly rated universities.

Climb does not claim to nurture billionaires, nor to care much about any of the intangible benefits of education. Rather, it focuses on sharp, quantifiable increases in earnings. The average size of its loans is $10,000 and it normally finances programmes of less than a year. The subjects range from coding to web design, from underwater welding to programming robots for carmakers (which has the highest rate of return). Some students have scant formal education; others advanced degrees. The rate of return they get is calculated as the uplift in earnings after the course of study, minus its cost (which includes that of servicing the loan, and takes account of the absence of earnings during the course).

Climb’s results so far are hardly conclusive...

Visas as aid

Thu, 01/26/2017 - 15:44

Better in America

TWO years ago, Jon Hegeman, a farmer from Alabama, was struggling to expand his business. He could offer unglamorous but steady work. Potting plants and shifting them to a greenhouse paid $10.59 an hour. He couldn’t find workers; he even tried recruiting from a youth-detention programme.

Mr Hegeman stumbled on a solution when he met Sarah Williamson, of Protect the People (PTP), a charity for people affected by humanitarian disasters. With the International Organisation for Migration, PTP was trying a novel way of helping Haiti after its devastating earthquake in 2010: by taking Haitians to work temporarily in America. The idea appealed to Mr Hegeman, born to missionary parents on the same island (but in the Dominican Republic). With the agencies’ help, eight workers arrived in September 2015.

A new study by Michael Clemens and Hannah Postel of the Centre for Global Development compares those Haitians who secured visas through the project with unsuccessful applicants left behind. The benefits were mind-boggling: the temporary migrants earned a monthly income 1,400% higher than those back...

Indonesia, one of five “fragile” emerging markets, looks stronger now

Thu, 01/19/2017 - 15:42

IN RECENT weeks signs have appeared in the poky arrivals hall at Soekarno-Hatta airport in Jakarta, Indonesia’s capital, exhorting visitors to shun the dollar in the name of national sovereignty. “Use rupiah for all transactions in Indonesia!” travellers are told, as they wait, interminably, at the luggage carousels. That reflects old suspicions of foreign interference in the economy, South-East Asia’s largest, coupled with newer concerns about the currency’s vulnerability to capital flight.

In 2013, when the Federal Reserve’s “tapering” of its asset purchases led to a 21% slide in the rupiah against the dollar, Indonesia was seen as one of the “fragile five” emerging markets. Of late, anxieties have resurfaced. On December 14th the Fed raised interest rates for the first time in a year. More rises are expected this year. Higher yields in advanced economies draw capital from emerging markets, putting pressure on their currencies. The rupiah fell by 3.7% against the dollar in November, the steepest monthly decline for more than a year, as part of a wider sell-off of emerging-market currencies.

This partly explains why Indonesian...

Regulatory settlements raise questions about America’s financial markets

Thu, 01/19/2017 - 15:42

THIS week, Credit Suisse and Deutsche Bank became the latest banking giants to finalise multi-billion dollar settlements with American authorities over misdeeds in the mortgage market in the run-up to the financial crisis. But other, less publicised settlements have hissed out of the waning Obama administration like a series of slow punctures: with Moody’s, a leading credit-rating agency; with Citadel Securities, a critical component of America’s equity-trading system; and with the Port Authority of New York and New Jersey. High-profile defendants all, but the most striking characteristic of the deals is how gently their tyres were let down.

The Moody’s deal, about high ratings accorded securities that crashed during the crisis, was announced late on January 13th, the Friday before a holiday weekend. The other cases were resolved almost as discreetly. Admittedly the amounts involved were comparatively small (Moody’s will pay $864m, Citadel $23m, and the Port Authority a mere $400,000). But the cases were bigger than the numbers suggest.

The Moody’s settlement will inflame suspicions that Wall Street is infested with conflicts of...