Global Market Perspective | A Fisher Investments Blog

Tearing Down Taiwan ’s Tariffs?

Last week’s newly ratified free trade agreement between the US and South Korea seems to have had an interesting effect in Europe: Taiwan is making a big push for free trade with the EU.

Where’s the connection? The US and EU are Taiwan ’s third- and fourth-largest trade partners. However, now that both have free trade with South Korea (the EU/South Korea deal took effect this summer), Taiwanese officials are worried South Korea will cut into their international market. Since goods travel between South Korea and the US/EU duty-free, the US and EU have incentives to trade more with South Korea and less with Taiwan, which still charges hefty tariffs on certain goods and imposes other structural obstacles.

Losing out on trade opportunities wouldn’t be good for Taiwan, since trade is a large component of economic output—the higher total trade (imports and exports), the better for the economy. Thus, it wants to level the playing field. Taiwan ’s Vice Economics Minister, Lin Sheng-Chung, is touring Europe to promote a potential trade pact with the EU. Mr. Chung gave a well received speech in the British Parliament last Thursday, touting Taiwan ’s emerging economy and desire to trade more with Europe . Friday, the European Chamber of CommerceTaipei (ECCT) echoed that call, encouraging Taiwan to lower some of its non-tariff trade barriers so a trade agreement could progress. For instance, the ECCT recommended Taiwan adopt European standards for product testing, drop bans on some products from China and toughen its stance on patents and intellectual property.

Likely, these are the opening salvos in what will be a lengthy negotiating process—trade agreements can take years to finalize. If officials are successful, and a trade pact is inked, both Taiwan and Europe would benefit. According to the ECCT, a pact “would take advantage of untapped potential to boost two-way-trade, GDP and create jobs.” Plus, consumers on each side would have access to cheaper goods and services due to the elimination of tariffs on existing products and more open doors for new ones. This is surely one to watch in the coming months.

 

North Korea Inches Forward

The New York Times has a great piece on North Korea ’s fledgling “free trade and economic zones”:

Tending a Small Patch of Capitalism in North Korea

Edward Wong, The New York Times

North Korea has been ravaged by decades of militant communism, which has spurred famine and poverty nationwide. Though baby steps toward a freer economic system in a few regions probably won’t lead to sweeping changes any time soon, perhaps the government will see the benefits they bring and allow the economy to open more over time.

 

Stop Me if You Think You’ve Heard This One Before*

Hamish McRae at the Independent has a sound take on the recent slew of seemingly negative news about Britain ’s economy: “The best way to make sense of this constant barrage of information, most of it negative, is to keep asking what is actually new and what is a rehash of stuff we already know.”

This is always a sensible approach. By the time information is widely known, markets have typically already reacted to it. Even when old information is spun in different ways, it usually doesn’t have much power to move equities meaningfully, in either direction. Markets have already moved past it and are pricing in new information and the probabilities of different events happening. It’s a lot like driving a car: Looking only in the rear view mirror doesn’t tell you what’s on the road ahead of you.

To borrow one of Mr. McRae’s examples, consider last week’s news that Moody’s downgraded the credit ratings of 12 British banks. The downgrade, of course, was a new event. However, it was long expected and—importantly—based on things we already knew about these institutions. If smaller banks come under stress, the government will probably let them fail, while larger banks, with deeper ties to the British and global financial systems, will more likely receive some government support in order to lower the risk of their troubles spilling over. The government has been heading in this direction for a while, as demonstrated by the Independent Commission on Banking’s recent proposals for financial sector reforms. Moody’s simply took this old news and gave it new clothes, in the form of a rating downgrade. And to perhaps confirm the downgrades don’t really change anything, Moody’s vouched for the UK banking system’s overall health: “The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government.”

Another recently repackaged item is the UK ’s second quarter 2011 economic growth. Last week, the Office for National Statistics announced the economy grew only 0.1% from April through June, less than originally estimated. Though flattish growth isn’t great news, it’s important to put it in context: the number is now more than three months old. As highlighted in our last post, some key economic indicators suggest growth picked up in the third quarter. Mr. McRae adds, “our service industries are still expecting growth and, what is more, are still profitable.” Looking at only the second quarter’s reading doesn’t really tell us what’s happened in the three-plus months since—and, much less, what will happen from here.

It wouldn’t be surprising for negative economic news to continue. But taking a minute to distinguish well-known stories from those with new information can give us all a healthier perspective, and a better sense of how the economy is truly progressing.

*The Smiths, 1987

 

Respectfully Corrected, Mr. King

Last Thursday, Bank of England (BOE) Governor Mervyn King received widespread attention for suggesting Britain’s present economic situation “is the most serious financial crisis we’ve seen at least since the 1930s, if not ever.” This was his rationale for implementing a new round of quantitative easing: The BOE will purchase £75 billion worth of gilts over the next four months, which should in theory then be lent from banks to individuals and corporations, providing a tailwind to economic growth.

Setting aside questions of the plan’s advisability, is Britain ’s economy truly in as bad of shape as Mr. King suggested? Is today as bad as, if not worse than, the Great Depression?

There’s no doubt the British economy faces challenges, and growth has slowed lately. However, true depression requires a massively shrinking economy, as occurred during the 1930s—but which hasn’t occurred so far in 2011. In fact, the UK ’s nominal GDP is at an all-time high, having recovered from the 2008-2009 recession. Much has been made of recent news the economy grew only 0.1% in the second quarter, but it’s rather normal for economic growth rates to fluctuate in the short-term. Growth often slows temporarily a couple years into an expansion without turning negative.

Following are some other positive highlights from the Office for National Statistics’ Second Quarter 2011 Statistical Bulletin:

• Growth has remained positive in 2010 even though consumer spending has fallen
• Manufacturing output has risen for seven consecutive quarters
• Services output has risen six of the past eight quarters and has grown overall in 2010 and 2011
• Employee incomes grew 3% in 2010 and have continued growing in 2011

Other recent reports also suggest the economy is healthier than given credit for:

• British corporate profits grew in Q2 2011, in both the manufacturing and service sectors
• Productivity increased in Q2 2011
• Business investment grew robustly in Q2 2011, in manufacturing and services
• A key leading indicator showed the service sector grew faster in September
• Another leading indicator showed the manufacturing sector resumed growing in September, following a slight contraction in August.

Based on these facts, it seems premature to say the UK is in either a depression or recession. More likely, it’s experiencing the volatility typical during a growth cycle.

 

North Sea Production Stalls

For many years, American economist Art Laffer has argued that increasing tax rates in some cases causes overall tax revenues to fall. Last week’s report from the Department for Energy and Climate Change includes some evidence to support that theory. As explained in Friday’s Telegraph:

Oil platforms only pumped 947,000 barrels of oil per day in July, down from 984,000 barrels per day in June and more than 1m barrels per day in May.

The Health and Safety Executive has warned that only one in 30 of the UK's North Sea oil rigs is in a good condition. A number of large platforms have closed for major maintenance this year.

However, the business climate may also have something to do with the drop in oil output. Producers have been unhappy that the Treasury raised taxes by 12 percentage points to between 70pc and 82pc depending on the size of the fields at the Budget this spring. This has added millions of pounds to the tax bills of big producers. Whatever the cause, the fall is likely to have a substantial impact on the Chancellor's tax revenue from the oil industry, which amounted to £9bn last year.

The good news is the recent decline in North Sea oil production doesn’t necessarily need to be a long-term trend. The Chancellor increased the taxes on oil production as part of his larger austerity plan, which many believed necessary to put Britain on more sound fiscal footing. However, if these taxes are lowered once the UK’s fiscal issues have stabilized, oil companies would theoretically have incentive to resume higher production levels. Add that to ongoing oil rig maintenance and future improvements in oil extraction technology, and the North Sea can likely remain a vibrant oil producer in the long run.

 

 

 

Suggested Reading

Last Friday’s Financial Times has a good, informative piece on Chancellor Osborne’s efforts to oppose two EU financial proposals. Recommended reading, regardless of one’s views on Britain’s EU membership.

UK Faces Defeat Over Derivatives Clearing

Alex Barker, Jeremy Grant and George Parker, The Financial Times

A recent article on Fisher Investments MarketMinder, “Trifling With Transaction Taxes,” also discusses the EU financial transaction tax proposal in detail. 

 

China’s Counterfeit Crackdown

Days after being taken to task by Western officials for its lax enforcement of intellectual property rights, China recently made a high-profile counterfeiting crackdown in Shanghai. Five people were arrested for making and selling fake iPhones. The Guardian has the scoop here.

It’s tough to tell whether this is the start of a tougher approach to counterfeiters, an isolated bit of pandering to the West, or an attempt to soothe Apple following the discovery of several fake Apple stores in China in July and August. Meanwhile, piracy continues unchecked elsewhere in the country. In Hunan Province, a theme park based on the wildly popular Angry Birds game opened on September 1^st…naturally, without any licensing agreements with the game’s Finnish creators. If China’s serious about ending infringement on Western copyrights, it has its work cut out for it.