The late, great Speaker of the House, Tip O’Neill, once famously quipped that Social Security was “the third rail of politics: touch it, and you die.” Well, in this new highly charged election season, we seem to have found a new third rail: free trade.
The nominee of the Republican party—the party that once hailed free trade as the driver of economic growth—has told voters all across the Rust Belt that America’s trade agreements have merely shipped their jobs in cheap packing crates to China and Mexico. The Democratic nominee, meanwhile, has abandoned her once-staunch support of regional tariff-slashing agreements—including the Trans-Pacific Partnership, which President Obama is still championing.
The often-virulent protectionist rhetoric matches that of anti-globalists around the globe—the same political winds that have given us Brexit, and now threaten a Frexit, and spread worry over the fact that tortillas outsell hamburger buns in America.
And the rhetoric is working—if the aim is to slow down global trade and, ultimately, world economic growth. As we pointed out in yesterday’s letter, the World Trade Organization now expects global trade to inch up by 1.7% this year, down from the 2.8% rate it had previously forecast—which, if so, would be the first time in 15 years that international commerce will grow slower than the world economy. For comparison, real world trade grew twice as fast as global GDP between 1985 and 2007, according to a new report by the International Monetary Fund.
While most of the decline is due to weaker economic activity and investment across the board, at least some can be traced to wall-building. “The slowdown in the pace of trade liberalization and the recent uptick in protectionist measures are holding back international trade in goods,” says the IMF, “even if their quantitative impact thus far has been relatively limited.”
So what can business do to reverse the tide? Yesterday, GE CEO Jeff Immelt offered one suggestion at a discussion hosted by the Council on Foreign Relations in Washington, D.C.: “We have a responsibility to tell our story better than we have so far,”—but tell it, as Immelt explained, “not horizontally” (to like-minded audiences at CFR), but, rather, vertically: up and down company reporting lines.
“We have to start in our towns,” Immelt said. “And then we’ve got to get 15, 20, 30 other companies that are as articulate and willing to advocate for [free trade], because everybody in Ohio should understand how important it is to be a part of this enterprise. Because we have a lot of jobs in Ohio.”
And how many of those are export-focused? “100 percent,” he said.
More news below.
Alan Murray is on vacation this week. Fortune’s Deputy Editor Clifton Leaf is filling in.
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• OPEC’s Nebulous Deal Is a Concrete Admission of Defeat
After three days playing down expectations, OPEC oil ministers agreed “in principle” on the need to cut their oil output by anything between 200,000 and 700,000 barrels a day to support crude prices, which obligingly leapt 6% on the news. Futures have given up some of that on the following caveats: 1. This needs to be confirmed at a formal OPEC meeting, not likely before November (so no actual restraint till then at the earliest); 2. That will involve real sacrifices in allocating quotas to individual countries (much harder than “agreeing in principle”), at least three of which (Nigeria, Libya, Iran) are producing below potential already due to various factors; 3. Russia, the world’s largest oil producer, hasn’t yet signaled it will cooperate; 4. Saudi Arabia’s output normally falls after its own demand peak in the summer anyway; 5. Even if OPEC does agree to quotas, its members routinely cheat on them. All that said, Saudi has obviously reached the limits of its price war strategy. The light at the end of the shale and OFS industries’ tunnel is getting bigger. Fortune
• Congress Overturns Veto on Terrorism Sponsor Bill
Congress overrode a veto issued by President Obama on Wednesday, clearing the way for families of 9/11 victims to file a lawsuit against the Saudi Arabian government. It was the first time Congress had overruled a decision by the president during his presidency and he did not take it lightly. Obama called the override a “mistake,” while saying he understood why it happened. Critics of the override worry that it will inevitably push the U.S. into defending an indefensible double standard. Other countries’ citizens will be encouraged by the precedent to sue the U.S. for the violence it does abroad, since collateral damage from, e.g., drone strikes on Pakistani weddings is much easier to prove as the responsibility of the U.S. government than pinning 9/11 on individual Saudi officials. Fortune
• Trump Allegedly Breached Cuba Sanctions in the 1990s
A company controlled by GOP presidential nominee Donald Trump did business with Cuba in the late 1990s, in breach of the long-standing ban trade embargo, according to the cover story of this week’s Newsweek. Advance reports of the story indicate that Trump Hotel & Casino Resorts spent at least $68,000—with Trump’s knowledge—funneling the cash through a consulting firm so that it would appear legal by tying it to an after-the-fact charitable endeavor. Trump was at the time considering running for President on the Reform Party ticket and was vocal in his support of the embargo. At the time of writing Trump still hasn’t responded to the claims, which it has so far been impossible to verify. If the story does gain traction, it will make for an interesting contest in Florida in two months’ time. We suspect Marco Rubio in particular will be allowing himself a smile somewhere on the spectrum between “wry” and “bitter.” MSNBC
• California Suspends Relationship With Wells Fargo
California State Treasurer John Chiang announced a sweeping suspension of business relationships with Wells Fargo as punishment for its defrauding of customers. In addition, Chiang vowed to work with the state’s two giant public pension funds to change the bank’s management structure. The sanctions, which will last for 12 months, include suspending Wells Fargo as a managing underwriter on state negotiated bond sales. California is the nation’s largest issuer of municipal debt, so that will hurt Wells’ commission income, as well as sowing more discord within the bank (the underwriting business will be sore at being punished for the retail bank’s failures). Fortune
Around the Water Cooler
• Spotify in Talks to Buy SoundCloud
The world’s biggest streaming service, Swedish-based Spotify, is in advanced talks to buy German rival SoundCloud, according to the Financial Times. SoundCloud’s founders have reportedly been looking for a buyer since the summer, eyeing a valuation of around $1 billion. Both companies are loss-making, despite still-strong subscriber growth at Spotify in particular. The Swedish company lost $194 million last year on revenue of $2.18 billion. SoundCloud has so far existed largely as a service for artists to grow their fan base, and only recently introduced the familiar ‘all-you-can-eat-for-$10-a-month’ recipe used by Spotify and Apple Music. It will substantially boost Spotify’s catalogue, which should logically help the Swedish company close the profitability gap faster. Fortune
• Redstones Line up Viacom/CBS Merger
Sumner Redstone’s National Amusements holding company is getting ready to force Viacom and CBS Corp to merge, in what seems to be a logical conclusion to the corporate soap opera that has lit up 2016. Shares in both companies were lifted some 4% by leaked reports of Redstone’s plans, as the market welcomed the prospect of a more forceful response to the disruption of the media industry by newcomers like Netflix. Analysts’ first impression was that Viacom had more to gain from the deal than CBS, insofar as it would expand the influence of widely-respected CBS CEO Leslie Moonves. Any merger will be another tricky exercise in corporate governance, with the obvious potential for conflicts of interest between National Amusements and minority shareholders in both companies. Fortune
• Wang Jianlin and the China Bubble
Wang Jianlin, China’s richest man and the owner of Wanda Group, took some time out from buying swathes of Hollywood to warn that China’s property market is “the biggest bubble in history.” Which you might think could be a problem for a group that owns 200 malls, shopping complexes and hotels across the Middle Kingdom. Official data have shown prices in certain segments in prime local markets such as Shanghai and Beijing rising sharply again in recent months, as a seemingly endless supply of speculative capital goes in search of the asset class where anti-speculative government regulation is lightest (stocks have been out of fashion for a year, and it was iron ore futures’ turn earlier in the year). ”The problem is the economy hasn't bottomed out,” Wang said. “If we remove leverage too fast, the economy may suffer further.” In which case all that money spent on cash-generative U.S. entertainment assets will come in handy as a hedge. Straits Times
• Now the Other One
Commerzbank, Germany’s second-largest bank, confirmed it will slash around 20% of its workforce--some 9,600 jobs—and suspend its dividend as its new CEO Martin Zielke desperately tries to shore up profitability. The bank will drastically slim down its securities and trading operations and merge what is left of its markets unit into its Mittelstandsbank, which caters to the medium-sized companies that are the backbone of the domestic economy. That’s going to generate a restructuring charge of around $800 million in the third quarter. Its shares (17% of which belong to the German government) fell another 2.1% in Europe, and are now down 39% this year. ECB President Mario Draghi, quite coincidentally, was speaking in the German Bundestag yesterday, and deflected the blame for Germany’s banking troubles away from the ECB’s interest rate policy and onto overcapacity and other bank-specific issues. Bloomberg