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US Retaliation Against Mexico Could Erode Economic Growth

US Retaliation Against Mexico Could Erode Economic Growth

By Wednesday, 06 June 2018 08:34 AM Current | Bio | Archive

US – Mexico Trade

Trade squabbles continue. Mexico put tariffs, which took effect immediately, on American products ranging from steel to pork and bourbon on Tuesday, retaliating against the tariffs on steel imposed by President Donald Trump and taking aim at Republican strongholds ahead of U.S. congressional elections in November.

Of course, Mexican consumers of steel can still buy from Europe and others without paying the new tax (tariff). American consumers of steel either have to pay their tax (tariff) or they have to buy their domestic product that they didn’t want to buy in the first place.

The question is whether this situation now escalates.

Any retaliation from the United States could start the descent into a trade war when policies reduce real trade as a share of real GDP.

Sino-US Trade

Meanwhile, China has “offered” to boost purchases of American goods by about $25 billion this year, showing particular willingness to step up imports of crude oil, coal and farm products, according to people briefed on trade talks between the two countries.

It’s interesting to take note how the offer underscores how commodities have shifted from being seen as a potential casualty of the trade conflict to a possible beneficiary of Beijing’s pledge to import more American goods. China’s coal purchases from the U.S. could triple in value this year to about $1.3 billion.

Italy’s New Policies

Italy’s new Prime Minister Conte faces today another confidence vote, which he should win. Yesterday’s vote in the lower house of Parliament was notable not for the vote itself but for the reiteration of the “cash for all” fiscal program, which has worried financial markets.

However, it is the “cash for all” nature of the program that is the concern, not any prospect of leaving the euro. That idea is quietly fading away.

Bonds sold of moderately with the Italian 10-year bond yields up to 2.92 percent this morning, but there are no queues of people lining up outside banks. It is bank runs that signal the possible demise of a monetary union, bond yields signal many things.

Interestingly, yesterday Conte supported an opening to Russia by saying: “We will promote a review of the sanctions system, starting with those that threaten to penalize Russian civil society.”

European Central Bank (ECB)

Conte’s “cash for all” announced policy presents an interesting position for the European Central Bank (ECB) which will be meeting next week when some kind of decision will be made about the “unnecessary” bond buying program.

The suggestion, and it is just a suggestion, is that either the program’s end will be announced, or the program’s end will be “hinted” in the subsequent press conference with a wink from ECB President Draghi. The program itself should normally conclude later on in the year.

Today, ECB chief economist Peter Praet and close ally of Draghi said: “Waning market expectations of sizeable further expansions of our program have been accompanied by inflation expectations that are increasingly consistent with our aim of inflation to be at a level of below, but close to, 2 percent over the medium term.’

Now, ECB bond buying in the face of a prolific Italian fiscal policy is an interesting conflictual situation. Anyway, next week the ECB Governing Council will have to assess whether progress so far has been “sufficient” to warrant a gradual unwinding of its net purchases.

Depending on what will be decided, Thursday June 14 could be an interesting day in the foreign-exchange markets

Emerging Markets – India

The Reserve Bank of India has raised today its benchmark interest rate by 0.25 percentage points to 6.25 percent, citing concerns about growing inflationary pressures stemming from rising oil prices and recent currency depreciation.

This was the first rate increase since 2014 and the first time since the central bank applied its new inflation target of 4 percent.

India’s crude oil bill has risen around 12 per cent since the last policy review in April.

The Indian rupee (INR) has fallen by about 5.50 percent since January this year.

The rate increase, which surprised many in the markets, comes just days after the Governor of the central bank, Urjit Patel, wrote in the Financial Times of concern about the turbulence in emerging markets, stemming from the Fed’s moves to trim its balance sheets and the substantial increase in the increase of U.S. Treasuries to pay for tax cuts.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Any retaliation from the United States could start the descent into a trade war when policies reduce real trade as a share of real GDP.
us, mexico, trade, war, gdp
Wednesday, 06 June 2018 08:34 AM
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