ft 29'11

U suffers most from global trade slowdown

OECD quarterly report finds bloc’s large economies experiencing fall in imports and exports while outlook remains gloomy

VALENTINA ROMEI — LONDON

The global trade slowdown is hitting the EU the hardest, according to OECD data, as uncertainty over the UK’s exit from the trading bloc and Germany’s industrial downturn add to disruption caused by US-China trade tensions.

Exports from the EU contracted 1.8 per cent in the third quarter compared with the previous three-month period, while imports fell 0.4 per cent, according to figures yesterday from the Paris-based body of mostly rich countries.

Exports and imports declined across all large EU economies, with falls of 3.6 per cent and 1.7 per cent respectively in France, and of 0.4 per cent and 1.8 per cent in Germany. In Italy, trade dropped for the sixth consecutive quarter: exports decreased 1.2 per cent and imports slipped 1 per cent.

This was a more severe contraction than the overall 0.7 per cent fall in exports across the G20 group of major economies, which account for about 85 per cent of world output. G20 imports dropped 0.9 per cent in the same period.

Trade in goods waned in the third quarter in nearly 80 per cent of the 50 countries and regions tracked by the OECD, while imports fell in the US and across all the big Asian economies, including China.

Laurence Boone, OECD chief economist, last week warned that high levels of uncertainty on trade policy and geopolitics had resulted in stagnating global trade, which is dragging down economic activity in almost all major economies.

The geographically widespread exports contraction also partially reflects lower oil prices and depreciation in other significant currencies against the dollar; the OECD reports its trade data in dollar values.

Poor trade performance is a particular drag on growth in Europe as many EU economies are relatively open, with a high level of reliance on trade; in Germany, trade is equivalent to 87 per cent of gross domestic product, compared with 27 per cent for the US.

“European merchandise trade has been impacted significantly by uncertainty surrounding the trade war and Brexit,” said Timme Spakman, an economist at ING. At the same time “the slowdown of German industry had an impact on European trade, as German producers ran down inventories rather than importing new intermediates”.

A survey by the European Investment Bank this week showed that more than 70 per cent of businesses in the EU and the US quoted uncertainty as a reason not to invest. In the UK, exports contracted sharply as a result of Brexit uncertainty and the fall in the value of sterling against the dollar.

In response to the slowdown in trade and growth, leading central banks have moved in recent months to ease monetary policy, but analysts said this had not had an effect. “Policy easing in the US, China and the eurozone is not yet feeding through so all remain a drag on trade growth,” said Adam Slater, lead economist at Oxford Economics.

While there are some signs of stabilisation in sentiment indicators, the outlook in the near future remains gloomy. He added: “Any improvement in the trade picture looks fragile and limited.”

Europe needs its own Belt and Road Initiative

A push to connect the continent will promote autonomy and growth

In a belated, correct recognition, the European Commission in March called China an economic competitor and “a systemic rival promoting alternative models of governance”. One of the most vivid illustrations of this phenomenon is the interest that a string of countries along Europe’s eastern and south-eastern flank, both EU members and not, have shown in Beijing’s invitation to join its Belt and Road Initiative.

The “17+1” is the informal name for China’s platform to discuss the BRI with the European end of its vast project to tie the Eurasian continent closer together. It captures the balance of influence well: 17 small European countries gathered around one giant. Brussels is right to worry that China is seeking to divide and rule, undermining a collective European policy.

Surprisingly, perhaps, China is not paying heavily for such influence by sending a lot of foreign direct investment to Europe. In fact European FDI in China is much bigger than the other way round, at least when it comes to greenfield investment rather than mere acquisitions of existing assets. Financially, China should be no match for the EU in its own backyard.

If Beijing can secure such interest for modest amounts of cash, it is because the EU’s own offer is so meagre that it makes China’s look attractive. Nor have European leaders presented anything like a political vision to rival Belt and Road’s promise of more connected markets. If Europe is serious about its desire for strategic autonomy, this must change.

A report launched last week by the Vienna Institute for International Economic Studies usefully illustrates the scale of ambition that is needed. It proposes a “European Silk Road” along two routes connecting Lisbon to Uralsk and Milan to Volgograd and Baku. It envisages €1tn of investment in state of the art climate-friendly transport infrastructure such as high-speed rail and roads fit for electric vehicles.

There are, of course, many things to question in a proposal of this magnitude. It neglects the need for north-south as well as east-west links, and the budgeting is rough. Some of the funding methods it suggests are highly speculative, such as a sovereign wealth fund capitalised with the European Central Bank’s securities holdings.

It also gets some important things right. It acknowledges that transport infrastructure, measured for example in motorway kilometres per population, is a lot patchier in east/south-east Europe than in the richer EU states. It sees the high returns such infrastructure could generate by boosting the region’s economic productivity. And it notes the gains from physically integrating not just the EU’s own members but the wider neighbourhood.

The specifics of the report are less important than the bigger case it makes for an ambitious connectivity project. It is realistic about the scale of financing that needs to be mobilised — in the range of a trillion euros, or 7 per cent of the EU’s gross domestic product for one year. A mix of first-tranche public financing, guarantees and plans for monetising some of the benefits through user fees should help attract ample private funding. With pension funds and other investors asking for long-term investments, infrastructure commitments at this scale could remedy some of the side-effects of prevailing ultra-low interest rates.

A big push for physical connectivity has a political function too: it offers a narrative to give the European project a more concrete meaning to its citizens and neighbours. If such a story proved more attractive than the China-centric model, the EU would have clinched a true geostrategic prize.

Employers should do more to lift low UK productivity levels

Izabella Kaminska in her piece on trends in the gig economy makes some helpful observations on productivity levels of both short-term and long-term workers (“Gig economy employers are undermining the social contract”, November 26).

The idea, however, that a caring employer contributes to society by engaging staff on a long-term basis, believing that lower productivity in later years is effectively subsidised by more productive younger workers, attributes a benevolence to employers which is not borne out by commercial reality. More important is the questionable assumption that older workers are less productive and committed because of life events such as illness, divorce or childcare. Surveys actually show the opposite including the fact that in general terms experienced workers are more disciplined and conscientious than their younger counterparts, despite having to deal with such life events.

Ms Kaminska is correct to assert that employers only employ the most productive workers, as evidenced by the fact that employers generally do not retain employees who fail to perform, particularly when highly paid; this is hardly a long-term welfare plan.

But her theory runs the risk of perpetuating the stereotype that older workers are physically and mentally less capable than younger workers, following a period in which such ageism was becoming less fashionable.

There is an assumption that productivity levels within the UK gig economy are high, whereas compared with other countries this is not the case, with evidence suggesting that this could be addressed by investing in staff development and training.

And whatever happened to work experience, once considered to be a vital commodity, particularly for successful professionals, but increasingly underrated it seems.

Tuesday’s edition also included your obituary of Frank Barlow, the former chief executive of Pearson. In referring to his record as a visionary leader and an outstanding manager and negotiator, particularly in his later years, it is barely conceivable that he could have achieved so much without years of hard-won experience in the newspaper industry negotiating with unions, managers and competitors, a fact no doubt recognised by Pearson at the time.

Keith Corkan

Corbyn pressed to reboot Labour strategy

Candidates call for bigger push to defend seats after poll forecasts Tory victory

JIM PICKARD, GEORGE PARKER AND SEBASTIAN PAYNE

Labour leader Jeremy Corbyn is coming under growing pressure from his party’s own candidates to rethink his “ludicrous” election strategy and focus efforts on staving off an anticipated Tory onslaught, rather than trying to gain seats across the country.

Mr Corbyn has been visiting a large number of Conservative seats that he hopes to win, but an in-depth YouGov poll this week suggested the party should instead be focused on defending 44 Labour seats at risk to Boris Johnson’s party.

A few weeks ago one senior Corbyn ally told the FT that the allocation of resources was 80:20 in favour of “offensive” seats rather than “defensive” ones but that strategy is now under scrutiny.

The YouGov poll predicted a Tory majority of 68 seats with Labour suffering its second worst defeat since 1945. Mr Corbyn’s party was projected to win 211 seats against 359 for the Tories, while the Liberal Democrats would secure just 13.

Many candidates, speaking on the condition of anonymity, said the leadership was suffering from “hubris” — in the words of one. “It’s a ludicrous strategy, it’s a ridiculous strategy,” said another.

A third candidate said that Labour head office believed it could fight a repeat of the 2017 campaign, despite circumstances having changed — with the Tories under a new, more popular leader. He accused the party leader and John McDonnell, shadow chancellor, of taking the wrong lessons from the last election.

“Jeremy and John think that if we had put more effort into taking seats two years ago we would now be running the government,” he said. “The problem is that this time around the data and feedback are pointing to a major setback.”

Another candidate described the strategy of trying to win dozens of seats from the Tories as a “kamikaze mission”, adding that “Jeremy believes his own hype, that he’s some kind of Messiah”.

Marcus Roberts, a former Labour strategist who is now a pollster at YouGov, said: “Labour now needs to decide whether to pivot resources towards existing seats or continuing to hope they can turn the campaign around and that another 2017 moment is around the corner. My view is that they should become defensive.”

Party insiders say that enthusiastic volunteers — particularly from Momentum, the pro-Corbyn grassroots group — are keen to try to unseat Tory “big beasts” such as Mr Johnson in Uxbridge and South Ruislip and Iain Duncan Smith in Chingford and Woodford Green.

There were fewer visible signs of activity in marginal seats where Labour looks likely to lose, however.

John Woodcock, one-time Labour MP turned independent — who is standing down from his Barrow seat — said “you would have to be dogmatically blind” not to see the hostility of voters to Mr Corbyn and the party’s Brexit policy.

The results of the YouGov poll were paradoxically seen as a big problem by Mr Johnson’s team: his aides fear it could embolden people to back Labour or the Liberal Democrats without worrying their vote would put Mr Corbyn in Number 10. “Nothing good can come of this,” said one Tory official.

IFS

Parties not being ‘honest’ on spending and tax plans

CHRIS GILES — ECONOMICS EDITOR

All the main parties in the election are seeking to deceive voters with dishonest tax and spending plans that lack credibility, a prominent think-tank said in a scathing report yesterday.

Paul Johnson, director of the Institute for Fiscal Studies, acknowledged however that underneath the party spin, “rarely can a starker choice have been placed before the UK electorate”.

The Conservatives, he said were offering a view of the world that everything in Britain was “just fine”, while Labour wanted “to change everything” and the “radical” Liberal Democrats also proposed to make “a decisive move away from the policies of the past decade”.

The IFS was even-handed in its criticism of the choices parties were offering voters, saying they did not offer “a properly credible prospectus” and were not being “honest”. Mr Johnson said it was important not simply to take manifestos as a programme for government because “manifestos and what actually happens are rarely the same thing”.

The Conservatives’ weakness, he said, was born out of a failure to stick to its 2017 manifesto that had promised more public spending cuts and much lower borrowing. This, the IFS said, was likely to be repeated if Boris Johnson won the December 12 poll. Although the Tories added to health spending plans significantly in 2018 and education in September this year, he said outside healthcare they were still proposing public service spending 14 per cent below the 2010 level in real terms.

“It is highly likely that the Conservatives would end up spending more than their manifesto implies and thus taxing or borrowing more,” Mr Johnson said.

The independent institute has come under fire from the left over the past week for its criticism of Labour’s tax-raising plans. Yesterday, it was careful not to say Labour’s vision for the economy was an impossible dream. “The big picture is that the size of the state [Labour] is proposing . . . would not be particularly unusual by western European standards, but it’s very unusual by our own historic standards. The idea that you could double [investment] over two or three years — or if you tried — you really would risk wasting a lot of money,” Mr Johnson added.

Sajid Javid, chancellor, seized on the criticism of Labour. “Corbyn can’t pretend it is only the rich or businesses that will pay the price for his plans,” he said.

John McDonnell, shadow chancellor, welcomed the report. “The IFS assessment of Labour’s plans is that we are too ambitious. We accept that with pride,” he said. “We are ambitious for our country and will be investing on the scale needed to end austerity, tackle climate change and build our country’s future.”

The Liberal Democrats’ proposals for broad-based tax increases were praised for their honesty, but the IFS said the centrist party was unlikely to be able to increase childcare provision as fast as Jo Swinson, the party leader, wanted.

‘Manifestos and what actually happens are rarely the same thing’
Paul Johnson, IFS

Wealth taxes will not solve inequality

Megan Greene

For decades, old brownstones in my hometown of Boston were sold off and carved up into individual units. Today, apartment-dwellers are being evicted as these same buildings are being purchased for millions of dollars so the ultra-rich can turn them back into single-family homes.

It is not surprising, then, that the senator Elizabeth Warren of Massachusetts would make inequality and a wealth tax central to her presidential campaign. The economic problem is that whatever your moral views on soaking the rich, history shows wealth taxes do not usually work.

Ms Warren and Bernie Sanders, her rival for the Democratic presidential nomination, each advocate wealth taxes. Ms Warren aims to levy a 2 per cent tax on assets above $50m and up to 6 per cent on billionaires. Mr Sanders wants rates of 1 per cent to 8 per cent on wealth above $32m.

They have two objectives: one is to increase tax revenues to pay for universal healthcare, climate change initiatives and the elimination of student debt. The other is to reduce inequality: over the past 40 years, the share of the country’s wealth held by the top 0.1 per cent of Americans more than doubled to 20 per cent.

But the history of such taxes shows they come up short on both counts. About a dozen OECD countries have tried them. They did not raise much money: as little as 0.2 per cent of gross domestic product a year. Only four still have them. Norway and Spain raise less than 0.5 per cent of GDP, while Switzerland raises twice that. Belgium just last year introduced a wealth tax on some securities.

The extra revenue is often offset by administrative costs. Valuing the possessions of the super-rich is difficult. Gabriel Zucman and Emmanuel Saez, advisers to Ms Warren, argue that 70 per cent to 80 per cent of the wealth of the 0.001 per cent is in listed securities that trade daily and have a clear, market-based value. But, as investors know, these prices can fluctuate significantly. Valuing the other assets — racehorses, artwork and houses — is much more difficult and can take years as auditors and tax authorities disagree. When Austria abolished its wealth tax in 1994, officials cited the administrative costs.

Wealth taxes also create incentives for avoidance and evasion by people moving assets abroad, where they are harder — and more expensive — to find. The French government estimated that 10,000 people with €35bn in assets left the country for tax reasons between 2002 and 2017, when France scrapped its wealth tax in favour of a levy on real estate. Such departures also reduce revenues from income and sales taxes.

It may be harder to avoid an American wealth tax. The US already taxes worldwide income and the Foreign Account Tax Compliance Act requires citizens to report annually on assets held abroad. However, the US also specialises in advisers adept at reducing, delaying and avoiding tax payments.

Proponents of wealth taxes insist that there will be no exemptions, but they may not have reckoned with the lobbying power of the ultra-rich. If some asset classes are given more favourable treatment, expect billionaires to pour money into them, causing price distortions, inefficient allocation of capital and shrinkage of the tax base. Worse, such taxes are administered on wealth minus debt, which provides a motive for the super-rich to rack up debt to buy exempted assets.

The case for using a wealth tax to reduce inequality is also problematic. The German research institution Ifo argues that even though they are paid by the very wealthy, “the burden is carried by virtually everyone”. They make economies less competitive and dynamic. That’s because the very rich do not generally park their fortunes in bank vaults — the lion’s share is used for business activities that generate jobs and income. Whittling away wealth can reduce investment, and with it productivity, wages and potential growth.

Many billionaires invest in illiquid assets such as land or private companies. Forced sales to pay wealth taxes could create price distortions, and particularly hurt private companies.

Finally, some legal scholars argue that a US wealth tax might contravene a constitutional clause requiring direct taxes to be proportional to state population. Income taxes are exempt from this rule but it is not clear that is true for wealth taxes.

Inequality has become a central issue in politics worldwide. It’s brought us populism, Brexit and expensive remodelled brownstones in Boston. Wealth taxes are not the right tool to address it.

The writer is a senior fellow at Harvard KennedySchool

Even though the levies are paid by the very rich, the burden is carried by virtually everyone

INSIGHT

Act signals end of US and China’s 20-year honeymoon

Tom Mitchell

In the end it took only 20 years for US-China relations to come full circle. Donald Trump’s decision to sign the Hong Kong Human Rights and Democracy Act into law will further complicate the world’s most important bilateral diplomatic relationship.

Under the act, the US secretary of state is required to make a determination every year as to whether the “one country, two systems” formula that guarantees Hong Kong’s independent legal system and civil liberties is intact. If it is not, the US could revoke special economic and commercial privileges that it extends to the semi-autonomous Chinese territory.

That, in turn, would enrage and probably provoke a concrete response from Chinese leader Xi Jinping, whose administration insists that it continues to honour one country, two systems and is hypersensitive to any suggestions to the contrary.

It is easy to forget that it was only two decades ago that US-China relations were regularly roiled by a similar annual review process. Throughout the 1990s, following the 1989 Tiananmen Square massacre, the Bush and Clinton administrations renewed China’s “most-favoured nation” trade status every year. This simply ensured the tariffs imposed on its exports to the US were the same as those for other trading partners.

And each year, China’s MFN renewal was subject to a heated debate in the US Congress, with legislators threatening to revoke it because of Beijing’s poor human rights record.

But a coalition of pro-business Republicans and farm-state Democrats, egged on by US multinational companies, would block these attempts to revoke China’s MFN status. By the late 1990s, annual renewal of China’s MFN status was assured.

Bill Clinton gave China “permanent” MFN status in 2000 and paved the way for its entry into the World Trade Organization a year later. Max Baucus, Barack Obama’s last ambassador to China, was treated as a hero during his time in Beijing for his efforts — as a Democratic senator for Montana — on behalf of MFN renewal.

For now, that pattern will hold. Trump administration officials have made it clear to their Chinese counterparts that the president could not veto a piece of legislation that sailed through Congress with veto-proof majorities.

In a statement apparently aimed at mollifying China, Mr Trump said that he had signed the act “out of respect for President Xi” and “in hope that . . . China and Hong Kong will be able to amicably settle their differences leading to long-term peace and prosperity for all”.

Mike Pompeo, US secretary of state, is also unlikely to trigger the revocation of Hong Kong’s special status as long as Washington and Beijing work towards a comprehensive trade agreement, denuclearisation of the Korean peninsula and other matters of mutual interest.

“The executive branch is left with a fair amount of discretion in carrying out the law,” said James Green, former head of the US Trade Representative’s office in Beijing. “That, and the non-confrontational White House press release around the bill’s signing, will probably limit the damage in terms of the Chinese response.”

But for Beijing, the act’s passage is a reminder that there is no going back to the relatively easy relations it enjoyed with Washington in the early 2000s.

Mr Trump made it clear last year that he would raise tariffs on Chinese goods as and when he saw fit, and hawks in his administration remain determined to restrict Beijing’s access to a range of technologies.

His signing of the act ensures Hong Kong will be yet another long-running irritant in the two countries’ relationship. The US and China’s two-decade honeymoon has been rocky for more than a year. Now it is officially over. tom.mitchell@ft.com

There is no going back to the relatively easy relations Beijing enjoyed with Washington in the 2000s

GLOBAL INSIGHT WASHINGTON

Dirty money is a curse that dare not speak its name in 2020 election

Edward Luce

After winning the cold war, the US sought to export the rule of law to other countries. That flow has gone into reverse. Today it is importing some of the worst corruption from abroad. America’s largest law firms, real estate companies and lobbying outfits thrive on dirty money. In the process they are leaving stains on US democracy that will not easily come out in the wash.

Donald Trump is the public face of a problem that extends into the heart of the US system. It spans Democrats and Republicans, New York and Washington, the public and private sectors. It is a curse that dare not speak its name in the 2020 election.

It is easy to guess why Joe Biden, the Democratic frontrunner, goes light on it. Mr Biden helped to turn Delaware, his home state, into the most popular domicile for anonymously-owned companies. Without those, The Trump Organization would have garnered far fewer of the investors that bought its condominiums. In one of Mr Trump’s towers in Florida, more than 80 per cent of its units are owned by shell companies. The US has 10 times more shell companies than the next 41 jurisdictions combined, according to the World Bank.

Unlike Mr Trump’s alleged transgressions, Mr Biden’s are legal. But it is “legal graft” that has seeped into US politics — and society. Mr Biden has done as much as any US public figure to put such practices on the statute books.

More surprising is Elizabeth Warren’s silence on links between US politics and global corruption. Early in her campaign for the Democratic nomination, she rolled out numerous plans. These included blueprints to tackle foreign lobbying and corporate malfeasance. Since then, the US senator from Massachusetts has been consumed in a battle to justify her $20tn Medicare-for-All programme. That she is still threatening to die on a cross of M4A raises questions about her political skills. Here is what a better Warren campaign would argue — or indeed any White House contender who is serious about reviving US democracy and fighting global authoritarianism.

America is the largest dirty money haven in the world. Its illicit money flows dwarf that of any other territory, unless you treat Britain and its offshore tax havens as one. The US Treasury estimates that $300bn is laundered annually in America. This is probably a fraction of the true number. Worse, the US government has no idea who controls the companies that channel the money because America lacks a corporate central registry.

There is no US law requiring disclosure of “beneficial ownership”. Banks must report suspicious activity. But law firms, real estate groups, art sellers, incorporated enterprises and non-bank financial institutions are exempt.

Those hoping to clamp down on money laundering are thus heavily outgunned by lobbyists for the status quo. Mrs Warren should point out that the US system offers a red carpet for dirty money. Further, autocrats in Russia, China, Saudi Arabia and elsewhere could not thrive without the connivance of America’s suite of service providers.

The US voter is exhausted with the “forever wars” that Mr Trump and Mrs Warren agree should be brought to an end. A better US foreign policy would be to close down weapons of mass incorporation in states such as Delaware and Nevada and hold their enablers in New York and Washington to account.

US military firepower poses no real danger to Vladimir Putin, Russia’s president. His reaction to the 2010 Panama papers showed how deeply he fears the financial glare. Shining a light on dirty money flows would pose a greater risk to autocracies than five new US aircraft carriers.

The danger, if polls are a guide, is that next year’s election will be a contest between Mr Trump and Mr Biden. Each will accuse the other of being corrupt. In Mr Trump’s case, the evidence appears overwhelming. But Mr Biden’s family has done enough to monetise his name to make that distinction a test of the voter’s research skills. The risk is that many will see little difference between the two.

There used to be a bright red line between America and the world’s kleptocracies. Now they are symbiotically linked. America needs a candidate who can point out that the kleptocrats are winning. If not Mrs Warren, then who? edward.luce@ft.com

Autocrats could not thrive without the connivance of America’s suite of service providers