Good morning from Davos.
The trade war between the U.S. and China has had dramatic affects on the global economy — that much is clear from conversations with executives here. U.S. companies have shifted supply chains out of China to avoid tariffs. And more dramatically, Chinese companies have reduced investment plans in the U.S. As I mentioned Monday, the percentage of Chinese executives who cite the U.S. as their top market for investment dropped precipitously in PWC’s annual CEO survey from 59% last year to 17% this year.
Chinese investors have pulled back because of clear signals both from their own government and from the U.S. Speaking on a panel here yesterday, Nobel prize-winning economist Michael Spence pointed out that investment flows “carry with them both employment and knowledge transfer.” The move by Japanese car companies to build plants in the U.S. in the 1980s played a significant role in reducing trade tensions; this time, that process has been stopped short. And while China critics are right that American companies, willingly or unwillingly, transferred technology to China over the past two decades, the reverse flow is being cut off just as the Chinese have moved from imitators to innovators.
This is what former Treasury Secretary Hank Paulson referred to last year as the “economic iron curtain” that is descending between the U.S. and China. Negative effects for both the short-term and long-term prospects of the global economy are becoming clearer.
More news below.
As the U.K. careens toward a no-deal Brexit, companies are jumping ship. The most ironic departure is that of Dyson, whose founder James Dyson is a prominent Brexit advocate. The company is moving its HQ to Singapore. Sony’s European HQ is moving from London to Amsterdam. The 182-year-old British ferry firm P&O is re-registering its entire fleet under the Cypriot flag. And in the auto and electronics industries, stockpiling continues. Guardian
The U.S. has turned down Beijing’s offer to send commerce and finance vice-ministers to Washington for preparatory trade talks this week. The visit would have paved the way for higher-level talks aimed at ending the trade war, but the Americans say there has been a lack of progress on Chinese structural economic reform and the pivotal forced-technology-transfers issue. Financial Times
Deutsche and Danske
The Danske Bank money-laundering scandal just got more intense, after the Federal Reserve opened an investigation into how Deutsche Bank’s U.S. business handled suspicious transactions from the Danish bank. Danske used its German counterpart, among other banks, to move money abroad. Bloomberg
Marginal Tax Rates
CNBC ran a piece about how the elite financiers at Davos find Alexandria Ocasio-Cortez’s proposals for a 70% marginal tax rate on earnings above $10 million “scary.” Ocasio-Cortez’s response, now included in an updated version of the piece: “It’s wild that some people are more scared of a marginal tax rate than the fact that 40% of Americans struggle to pay for at least one basic need, like food or rent.” CNBC
Around the Water Cooler
European markets fell this morning thanks to slowdown and trade-war fears, plus warnings from payments group Ingenico and chipmaker supplier ASML Holding. Metro Bank also missed profits, knocking its shares by an impressive 27%. Reuters
U.S. housing sales were down more than 10% year-on-year last month, hitting the lowest level in three years. Why? Less-than-comfortingly, economists views vary on this one. Some say it’s higher interests rates, some say it’s rising house prices, some say it’s the stock market turmoil. News of the falling figures added to the stock market decline. Fortune
“I would go so far to say ‘thank God’ for the global economic slowdown,” said Thomas Lembong, Indonesia’s investment chief. Why? The boom has been “built on some rising financial risks, particularly an out-of-control shadow banking sector in China and a bubble in technology shares and investments,” and addressing the risks is a good thing, he said. CNBC
The Supreme Court has agreed to hear a gun rights case for the first time in almost a decade. The case involves a review of New York City’s regulations limiting the transportation of guns. Also yesterday, the conservative-dominated court said the Trump administration’s ban on transgender troops in the military could take effect. Wall Street Journal