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Trade tensions, dollar danger cloud economic optimism in Davos

By Noah Barkin

DAVOS, Switzerland (Reuters) – A trade war between the United States and China and a strengthening dollar are among the biggest threats to a brightening global economic outlook, according to leading economists at the World Economic Forum in Davos.

As political leaders, businessmen and bankers converge on the resort in the Swiss Alps this week, they can draw hope from a more benign economic picture and a rally in global stock markets on expectations of major stimulus under a new U.S. administration led by Donald Trump.

The backdrop is brighter than it was a year ago, when concerns about a rapid economic slowdown in China led to what Credit Suisse CEO Tidjane Thiam described at the time as “the worst start to any year on record in financial markets ever”.

“I am more optimistic than last year. If no major political or geopolitical uncertainties materialize and derail the world economy, it might even surprise to the upside in 2017,” Axel Weber, the chairman of Swiss bank UBS <UBSG.S> and a former president of the German Bundesbank, told Reuters.

Still, there are big storm clouds on the horizon.

“It is too early to give the all clear,” Weber continued. “This cyclical upswing hides but does not solve the world’s underlying structural problems, which are excessive debt, over-reliance on monetary policy, and adverse demographic developments.”

Among the biggest concerns for 2017 cited by the half dozen economists interviewed by Reuters was the threat of a U.S.-China trade war, and broader economic tensions, triggered by what they fear could be a more confrontational Trump administration.

Trump is threatening to brand China a currency manipulator and impose heavy tariffs on imports of Chinese goods. Last month he named leading China critic Peter Navarro, author of the book “Death by China”, as a top trade adviser.

“This is the key uncertainty because you don’t know how much the rhetoric is a ploy to get better deals,” said Raghuram Rajan, an economist at the University of Chicago who stepped down as governor of India’s central bank last September.

“I’m worried about the people he is surrounding himself with. If they have a more protectionist world view and believe the reason the U.S. is not doing well is because others are cheating that creates a certain kind of rhetoric that could end up very badly for the world.”

CURRENCY RISKS

Last month, the U.S. Federal Reserve hiked interest rates for just the second time in a decade, a sign that the lengthy period of ultra-loose monetary policy that followed the global financial crisis may be coming to an end.

The World Bank said last week that it expects global growth to accelerate to 2.7 percent this year, up from a post-crisis low of 2.3 percent in 2016, on the back of a pickup in U.S. growth and a recovery in emerging markets fueled by a rise in commodity prices.

A year ago in Davos, both Rajan and Weber warned about the limits of loose monetary policy. But now that the Fed is in tightening mode, a new set of risks has emerged.

One is a further strengthening of the dollar, which is already hovering near 14-year highs against the euro.

A further appreciation could widen the U.S. trade deficit, increasing pressure on Trump to resort to protectionist policies. It could also expose weaknesses in the balance sheets of borrowers outside the United States who have borrowed in dollars but hold domestic currency assets.

In Europe, by contrast, a stronger dollar could add fuel to a solid if unspectacular economic recovery, allowing the European Central Bank to plot an end to its own easy money policies including the bond-buying, or quantitative easing (QE), program it recently extended through to the end of 2017.

While welcome, this would also come with risks, particularly for the peripheral euro zone countries that have come to depend on QE to keep a lid on their borrowing costs.

“Just when you think the euro zone is stable it might turn out not to be,” said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund (IMF).

“If U.S. interest rates continue to rise and the dollar appreciates against the euro it’s going to start getting very hard for (ECB President) Mario Draghi to tell the story that he’s doing QE to prop up inflation. If he ever slows down on QE, the vulnerabilities of the periphery countries are huge.”

EUROPEAN BANKS

Rajan and Richard Baldwin of the Graduate Institute in Geneva said they viewed European banks as another big risk for the global outlook. Italy agreed last month to inject about 6.6 billion euros into Monte dei Paschi di Siena <BMPS.MI>, but the weakness of other Italian banks and German institutions, including Deutsche Bank <DBKGn.DE>, remain a concern.

However the biggest threat may be political. Were French far-right leader Marine Le Pen, who favors a Brexit-style referendum on France’s EU membership, to deliver a Trump-like surprise in the two-round French election in April and May, doubts about the future of the EU and euro zone will increase.

The chances of that seem slim for now. A poll last week suggested conservative candidate Francois Fillon would beat Le Pen in a runoff by a 63 to 37 percent margin. But after two seismic political shocks in 2016 – Trump and Brexit – no one is counting her out.

“Political surprises may fundamentally alter the currently favorable economic and financial outlook for 2017,” said Weber.

(Reporting by Noah Barkin; Editing by Pravin Char)

China posts worst export fall since 2009 as fears of U.S. trade war loom

By Elias Glenn and Sue-Lin Wong

BEIJING (Reuters) – China’s massive export engine sputtered for the second year in a row in 2016, with shipments falling in the face of persistently weak global demand and officials voicing fears of a trade war with the United States that is clouding the outlook for 2017.

In one week, China’s leaders will see if President-elect Donald Trump makes good on a campaign pledge to brand Beijing a currency manipulator on his first day in office, and starts to follow up on a threat to slap high tariffs on Chinese goods.

Even if the Trump administration takes no concrete action immediately, analysts say the specter of deteriorating U.S.-China trade and political ties is likely to weigh on the confidence of exporters and investors worldwide.

The world’s largest trading nation posted gloomy data on Friday, with 2016 exports falling 7.7 percent and imports down 5.5 percent. The export drop was the second annual decline in a row and the worst since the depths of the global crisis in 2009.

It will be tough for foreign trade to improve this year, especially if the inauguration of Trump and other major political changes limit the growth of China’s exports due to greater protectionist measures, the country’s customs agency said on Friday.

“The trend of anti-globalization is becoming increasingly evident, and China is the biggest victim of this trend,” customs spokesman Huang Songping told reporters.

“We will pay close attention to foreign trade policy after Trump is inaugurated president,” Huang said. Trump will be sworn in on Jan. 20.

China’s trade surplus with the United States was $366 billion in 2015, according to U.S. customs data, which Trump could seize on in a bid to bring Beijing to the negotiating table to press for concessions, economists at Bank of America Merrill Lynch said in a recent research note.

A sustained trade surplus of more than $20 billion against the United States is one of three criteria used by the U.S. Treasury to designate another country as a currency manipulator.

China is likely to point out that its own data showed the surplus fell to $250.79 billion in 2016 from $260.91 billion in 2015, but that may get short shrift in Washington.

“Our worry is that Trump’s stance towards China’s trade could bring about long-term structural weakness in China’s exports,” economists at ANZ said in a note.

“Trump’s trade policy will likely motivate U.S. businesses to move their manufacturing facilities away from China, although the latter’s efforts in promoting high-end manufacturing may offset part of the loss.”

On Wednesday, China may have set off a warning shot to the Trump administration. Beijing announced even higher anti-dumping duties on imports of certain animal feed from the United States than it proposed last year.

“Instead of caving in and trying to prepare voluntary export restraints like Japan did with their auto exports back in the 1980s, we believe China would start by strongly protesting against the labeling with the IMF, but not to initiate more aggressive retaliation … immediately,” the BofA Merrill Lynch Global Research report said.

“That said, even a ‘war of words’ could weaken investor confidence not only in the U.S. and China, but globally.”

CHINA’S DECEMBER EXPORTS FALL

China’s December exports fell by a more-than-expected 6.1 percent on-year, while imports beat forecasts slightly, growing 3.1 percent on its strong demand for commodities which has helped buoy global resources prices.

An unexpected 0.1 percent rise in shipments in November, while scant, had raised hopes that China was catching up to an export improvement being seen in some other Asian economies.

China reported a trade surplus of $40.82 billion for December, versus November’s $44.61 billion.

While the export picture has been grim all year, with shipments rising in only two months out of 12, import trends have been more encouraging of late, pointing to a pick-up in domestic demand as companies brought in more raw materials from iron ore to copper to help feed a construction boom.

China imported record amounts of crude oil, iron ore, copper and soybeans in 2016, plus large volumes of coal used for heating and in steelmaking.

“Trade protectionism is on the rise but China is relying more on domestic demand,” said Wen Bin, an economist at Minsheng Bank in Beijing.

Prolonged weakness in exports has forced China’s government to rely on higher spending and massive bank lending to boost the economy, at the risk of adding to a huge pile of debt which some analysts warn is nearing danger levels.

Data next Friday is expected to almost certainly show that 2016 economic growth hit Beijing’s target of 6.5-7 percent thanks to that flurry of stimulus.

But signs are mounting that the red-hot property market may have peaked, meaning China may have less appetite this year for imports of building-related materials.

“It is hard to see what could drive a more substantial recovery in Chinese trade,” Julian Evans-Pritchard, China Economist at Capital Economics, wrote in a note.

“Further upside to economic activity, both in China and abroad, is probably now limited given declines in trend growth. Instead, the risks to trade lie to the downside…,” he said, saying the chance of a damaging China-U.S. trade spat has risen since Trump’s appointment of hardliners to lead trade policy.

A decline in China’s trade surplus in 2016, to just under $510 billion from $594 billion in 2015, may also reduce authorities’ ability to offset capital outflow pressures, which have helped drive its yuan currency to more than eight-year lows, ANZ economists said.

(Reporting by Lusha Zhang, Elias Glenn, Sue-Lin Wong and Kevin Yao; Writing by Sue-Lin Wong; Editing by Kim Coghill)

China rejects U.S. trade claims, says outlook challenging, complicated

employees stand next to container ship, holding U.S. trade goods

BEIJING (Reuters) – China’s commerce ministry said on Thursday it will “try all methods” to stabilize trade in what it sees as a challenging and complicated trade outlook this year.

Commerce Ministry spokesman Sun Jiwen told a regular briefing in Beijing that China faced weak foreign demand and “intensifying trade protectionism.”

Sun’s comments came as China faces threats from incoming U.S. President Donald Trump to impose heavy import taxes on Chinese goods entering the United States, China’s largest trade partner.

The Commerce Ministry spokesman dismissed the U.S.-China Economic and Security Review Commission’s November 2016 Report to Congress, which accused China of violating global trade rules.

The report said: “China continues to violate the spirit and the letter of its international obligations by pursuing import substitution policies, imposing forced technology transfers, engaging in cyber-enabled theft of intellectual property, and obstructing the free flow of information and commerce.”

Sun insisted China had strictly adhered to World Trade Organization rules.

“The report’s understanding of problems in China-U.S. trade and investment, and the reasons behind it, are different from China’s. China can’t accept it,” Sun said.

“We hope for equal dialogues and cooperation to resolve conflicts.”

(Reporting by Yawen Chen and Michael Martina; Editing by Eric Meijer)

Seeking a trade, Israel to withhold bodies of Palestinian militants

Palestinian Hamas militants march during a military parade marking the 29th anniversary of the founding of the Hamas movement, in the northern of Gaza St

JERUSALEM (Reuters) – Israel said on Sunday it will withhold the bodies of Palestinian militants killed in attacks against its citizens as it seeks to pressure the Islamist movement Hamas to return the remains of soldiers and hand back missing Israeli civilians.

Hamas says it is holding two Israeli soldiers whom the army declared dead after they were lost in action in the 2014 Gaza war. The group also says it is holding two Israeli civilians who strayed into the Hamas-ruled Gaza Strip.

Israel’s security cabinet, a forum of senior ministers, made the decision on Sunday, enacting what it said would be a permanent policy for dealing with the bodies of militants.

“The security cabinet discussed ways to effect the return of fallen soldiers and of civilians held in the Gaza Strip … and decided that (the bodies of militants) should be buried, rather than returned,” the statement said.

Under the new policy, the bodies could be exhumed and handed back for burial if Hamas was willing to strike deals. It marks a hardening of Israel’s stance: during 2016, according to the Israeli army, 102 bodies were returned for burial.

Israeli officials have previously signaled they are willing to repeat past amnesties of jailed Palestinians in order to recover the two soldiers’ remains and the civilians held by Hamas. But Hamas has said Israel must make a preliminary release of prisoners before it will discuss such a deal.

(Writing by Ori Lewis; Editing by Mark Trevelyan; Editing by Mark Trevelyan)

Philippines’ Duterte says may follow Russia’s withdrawal from ‘useless’ ICC

Philippine President Rodrigo Duterte gestures while delivering a speech during the 80th National Bureau of Investigation (NBI) founding anniversary at the NBI headquarters in metro Ma

MANILA (Reuters) – Philippines President Rodrigo Duterte on Thursday said he might follow Russia and withdraw from the International Criminal Court (ICC), citing criticism from Western nations for a rash of killings unleashed by his war on drugs.

Duterte described the ICC as “useless” and expressed frustration about the West’s allegations of extrajudicial killings and its failure to understand his crackdown on narcotics. He also appeared to blame the United Nations for failing to prevent wars all over the world.

Russian President Vladimir Putin signed an executive order removing Russia’s signature from the founding treaty of the ICC on Wednesday, and Duterte said he might consider doing the same.

“They are useless, those in the international criminal (court). They (Russia) withdrew. I might follow. Why? Only the small ones like us are battered,” Duterte said before his departure for Lima to attend an Asia-Pacific summit.

Duterte is seeking a meeting with Putin in Lima this weekend, which comes as he pursues an independent foreign policy aimed at weaning the Philippines off dependence on longtime ally the United States. He has frequently praised Russia and China.

Duterte, known for his frank statements, speculated that Russia’s ICC move might be because of its air strikes in Syria.

“What could be the reason? I really would not know,” he said. “Maybe to protect what they are doing in Syria, the incessant bombing and the killing of civilians.”

Russia is under international pressure over the Syria air strikes, with some human rights activists and U.S. officials accusing it of bombing civilians and civilian targets. Russia has denied those allegations.

The ICC, which the Philippines became a member of in 2011, has received an ear-bashing from the outspoken Philippine leader, like all those who have showed concern about his war on drugs and the more than 2,400 people killed.

An ICC prosecutor last month said the Hague-based tribunal may have jurisdiction to prosecute the perpetrators of the killings.

Duterte said he was annoyed about the criticism he had received and that “nobody was listening” to his reasons for having the crackdown, including U.S. President Barack Obama.

He took aim at U.S. foreign policy and the United Nations and said he would be happier if China and Russia called the shots.

“You know, if China and Russia would decide to create a new order, I will be the first to join,” he said.

“The killings is endless,” he said, referring to conflicts in the past and current. “The amount is splattering. That is our lesson. Just because it is America, it does not mean that it is good.”

(Reporting by Neil Jerome Morales and Martin Petty)

UK ‘Leave’ vote deflates hopes for U.S.-EU trade deal

By David Lawder

WASHINGTON (Reuters) – Britain’s looming exit from the European Union is another huge setback for negotiations on a massive U.S.-EU free trade deal that were already stalled by deeply entrenched differences and growing anti-trade sentiment on both sides of the Atlantic.

The historic divorce launched by Thursday’s vote will almost certainly further delay substantial progress in the Transatlantic Trade and Investment Partnership (TTIP) talks as the remaining 27 EU states sort out their own new relationship with Britain, trade experts said on Friday.

With French and German officials increasingly voicing skepticism about TTIP’s chances for success, the United Kingdom’s departure from the deal could sink hopes of a deal before President Barack Obama leaves office in January.

“This is yet another reason why TTIP will likely be postponed,” said Heather Conley, European program director at the Center for Strategic and International Studies, a think tank in Washington.

“But to be honest, TTIP isn’t going anywhere, I believe, before 2018 at the earliest,” she said.

U.S. Trade Representative Michael Froman said in a statement on Friday that he was evaluating the UK decision’s impact on TTIP, but would continue to engage with both European and UK counterparts.

“The importance of trade and investment is indisputable in our relationships with both the European Union and the United Kingdom,” Froman said. “The economic and strategic rationale for T-TIP remains strong.”

TTIP negotiators are still expected to meet in Brussels in mid-July as scheduled, but those talks were aimed at focusing on less controversial issues while leaving the thorniest disagreements for U.S. and EU political leaders to resolve. And it is unclear when Britain will launch formal separation proceedings, which will take at least two years.

But analysts said both sides have been reluctant to put their best offers on the table with a new U.S. president due to take office in January and French and German leadership elections nearing in 2017.

The Brexit also will preoccupy EU officials in coming months as they launch their own negotiations with London over the future terms of UK-EU trade, and sort out their post-Brexit priorities, said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, a Brussels-based think tank.

Britain’s departure could leave U.S. negotiators facing a European side that is more dug-in on some issues, said Chad Bown, a senior fellow at the Peterson Institute for International Economics, a think tank in Washington.

“As the UK is part of the coalition of liberal trading economies in the EU, the U.S. is losing one of the more like-minded countries from the group in Brussels sitting on the other side of the negotiating table,” said Bown, a former World Bank economist.

However, Lee-Makiyama, who also sees little chance of a deal before 2018, said Britain’s departure could eliminate one source of disagreement because the UK has insisted on a financial services chapter in the trade deal.

“The only real proponent of banking regulation in TTIP is the UK. Germany and France are probably willing to let it go,” he said. “It still leaves about 20 outstanding issues at nearly the same level of difficulty.”

The TTIP negotiations, which started three years ago, have unable to settle major differences over agriculture, where the EU side has shown little willingness to alter food safety rules that prohibit American beef raised with hormones or genetically modified foods, or open its closely guarded geographical food naming rules, such as for Asiago and feta cheeses.

European negotiators have complained that the United States has offered too little to open up its vast federal, state and local government procurement markets to European vendors with “Buy American” preferences in place.

Europe also wants access to key U.S. sectors such as maritime transport and aviation, while American negotiators have been frustrated over lack of access to some 200 European sectors ranging from healthcare to education.

The two sides also are far apart on how to resolve disputes. The U.S. side favors a traditional binding arbitration approach, while the Europeans want a court-like system that allows for appeals.

More progress has been made on harmonizing regulations for things like car seat belt anchors, clothes labeling and pharmaceutical inspections.

(Additional reporting by Phil Blenkinsop in Brussels; Editing by Jonathan Oatis)

U.S. trade deficit widens as exports hit five-and-a-half-year low

WASHINGTON (Reuters) – The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low, suggesting trade will continue to weigh on economic growth in the first quarter.

The Commerce Department said on Friday the trade gap increased 2.2 percent to $45.7 billion. December’s trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.

Economists polled by Reuters had forecast the trade deficit widening to $44.0 billion in January. When adjusted for inflation, the deficit increased to $61.97 billion from $60.09 billion in December.

Trade subtracted a quarter of a percentage point from gross domestic product in the fourth quarter, helping to hold down growth to a tepid 1.0 percent annual rate.

In January, exports of goods fell 3.3 percent to $116.9 billion, the lowest level since November 2010. Overall exports of goods and services dropped 2.1 percent to their lowest level since June 2011.

There were declines in food exports, which were the weakest since September 2010. Industrial supplies and materials exports fell to their lowest level since March 2010. Petroleum exports also fell, touching their lowest level since September 2010.

Exports of non-petroleum products were the weakest since February 2011. Exports to the United States’ main trading partners fell broadly in January.

Imports of goods fell 1.6 percent to $180.6 billion, the lowest level since February 2011. Import growth is being constrained by ongoing efforts by businesses to reduce a stockpile of unsold merchandise.

Lower oil prices as well as increased domestic energy production are also helping to curb the import bill. There were declines in imports of industrial supplies and materials.

Automobile imports were, however, the highest on record.

The politically sensitive U.S.-China trade deficit rose 3.7 percent to $28.9 billion in January.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

China Angry After U.S. Sells $1.83 Billion in Weapons to Taiwan

The United States government on Wednesday authorized selling a $1.83 billion defense package to Taiwan, a transaction that immediately drew objections, criticisms and sanctions from China.

CNN reported the package Taiwan purchased mainly consists of weapons used for defense. It includes amphibious assault vehicles, a pair of frigates and anti-aircraft and anti-ship weapons.

A state department spokesman addressed the sale at a news conference on Wednesday, saying it was “based on our assessment of Taiwan’s defense needs” and in line with the government’s existing diplomatic policies regarding China and Taiwan, nations that have long been at odds.

China, though, doesn’t see it that way.

Speaking to Xinhua, China’s state-run media service, Vice Foreign Minister Zheng Zeguang said Beijing “strongly opposes” the transaction, which it believes violates the diplomatic agreements. Zheng told the news agency that China imposed sanctions on the companies involved in the sale.

“No one can shake the firm will of the Chinese government and people to defend their national sovereignty and territorial integrity, and to oppose foreign interference,” Zheng told Xinhua.

Relations between China and Taiwan have been fragile since the Chinese Civil War ended in 1949. Taiwan governs itself, though Beijing claims that the island remains Chinese territory.

It isn’t the first time that the United States has sold weapons to Taiwan.

Focus Taiwan, a news agency, reported it was the fourth transaction since 2008, the year in which U.S. President Barack Obama was elected and Taiwan President Ma Ying-jeou took office. Those deals have been worth more than $20 billion, but this was the first exchange since 2011.

A spokesperson for China’s Defense Ministry, Yang Yujun, told Xinhua on Thursday that the arms transaction was “wrongdoing” that would “inevitably harm China-U.S. military relations.” Xinhua reported Zheng summoned officials at the U.S. embassy in China to discuss the sale.

The U.S. state department doesn’t see why the sale would hurt its relationship with China.

“There’s no need for it to have any derogatory effect on our relationship with China, just like there was no need in the past for it to ever have that effect on China,” spokesman John Kirby told reporters Wednesday. “We still want to work to establish a better, more transparent, more effective relationship with China in the region, and we’re going to continue to work at that.”

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