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Economic data shows limited damage from tariffs, though it might take years to see full Impact

WASHINGTON—Farmers took a big hit. Importers of auto parts, furniture and machinery choked down punishing tariffs. Investment between the world’s two largest economies dropped.

Much of the U.S. economy is largely unscathed by two turbulent years of trade war with China, economic indicators show. Yet economic growth is trending near 2% in 2019, well short of the Trump administration’s goal of 3%.

The U.S. and China are preparing to sign a first-stage trade accord on Wednesday, easing trade tensions and making the tariffs worth it, in the administration’s view. The deal “protects American innovation and creates a level playing field for our great farmers, ranchers, manufacturers, and entrepreneurs,” said Judd Deere, a White House spokesman, adding, “President Trump protected the American worker and fundamentally changed our relationship with China.”

At the same time, most Chinese imports are still subject to U.S. tariffs, and many trade issues remain the subject of sharp disagreement.

“China is set to do little more than restore agricultural purchases and offer some nice words on financial services and intellectual property,” said Benn Steil, the director of international economics at the Council on Foreign Relations. “Trump could have had that two years ago without the tariff damage.”

And economists warn it could take years for the full consequences to be realized.

“People are wanting to wrap this up in a bow and draw lessons and put this behind us, but I really think it’s way too premature,” said Chad Bown, senior fellow at the Peterson Institute for International Economics, a nonpartisan policy outfit.

Here is a look at the far-reaching impacts of the trade war.

American farmers took the brunt of the damage, as China largely halted purchases of major U.S. exports like soybeans. Annual U.S. farm exports to China plunged from nearly $25 billion in recent years to below $7 billion at its low point in the 12 months through April 2019.

Farm debt levels last year reached new records, as delinquencies and bankruptcies rose. Bad weather conditions also took a toll.

The damage was tempered to a degree by the U.S. government responding with $28 billion in aid to farmers. The USDA estimated its aid payments will make up one-third of U.S. farm income in 2019. Any fallout for the broader U.S. economy is also limited because few Americans—only about 1%—make their living on farms.

Farmers also fretted that trading relations with China they worked hard to secure might never recover. Agricultural purchases are now set to resume under the phase-one trade deal, with a goal of reaching $40 billion to $50 billion a year.

The Trump administration’s tariffs on $360 billion of Chinese imports initially focused on machinery and capital goods purchased by businesses, but later expanded to a range of consumer products.

A basket of goods subject to the tariffs, including auto parts, appliances and furniture, has risen in price by about 3% since 2017, compared with a decline of about 1% for core goods. Overall inflation has remained stable; the total consumer-price index rose 2% in the past year.

While Mr. Trump frequently claimed China would pay the tariffs, they have been paid by U.S. importers.

Research by Alberto Cavallo, a professor at Harvard University and leading expert on inflation, showed the prices paid by importers for goods with tariffs jumped, meaning Chinese exporters didn’t cut their prices or absorb tariffs through currency depreciation.

“The burden has mostly fallen on the U.S. importers because a) Chinese exporters have not reduced their U.S. dollar border prices, and b) U.S. importers/retailers have chosen not to pass on to the U.S. consumers most of the additional cost,” said Mr. Cavallo, who co-wrote a paper on the economic impact of the tariffs with the chief economist of the International Monetary Fund, as well as economists at the Boston Federal Reserve and the University of Chicago.

After decades of surging commerce between the world’s two largest economies, trade took a sharp step back. U.S. exports to China dropped by nearly $30 billion, while imports from China fell by over $70 billion, for a decline of over $100 billion in trade.

Investment in the U.S. economy slumped. Foreign direct investment slowed to nearly a halt in the early part of 2018, and was weak again in mid-2019.

Total investment in the U.S. economy, which includes building structures like new factories or purchasing equipment for those factories, contracted in the second and third quarters of 2019.

Nancy McLernon, president of the Organization for International Investment, which represents companies making cross-border investments, said international companies in general are more reluctant to invest in the U.S. because of the trade tensions.

“That’s bad news, especially when you consider that international companies employ 20% of America’s manufacturing workforce and produce 25% of all U.S. goods exports.”

Factories in both the U.S. and China suffered amid a slowdown in global trade and investment.

Industrial activity world-wide slumped. U.S. factories have been a weak spot. In the jobs report released Friday, the Labor Department reported U.S. manufacturers shed 12,000 jobs in December.

But most Americans work in fields that have nothing to do with the trade war, and U.S. job gains have been driven by industries like professional services, leisure and hospitality, and health care.

In early 2018, the Trump administration was taking a victory lap after achieving its goal of growing the economy by 3% a year, or more. In February of that year, the White House forecast that the economy would continue growing over 3% a year in 2018 and 2019, and that the economy would be so strong the Federal Reserve would continue raising interest rates.

Instead, as the trade war wore on, the administration began imploring the Fed to slash interest rates to bolster the economy. The Fed cut rates three times. Even so, the economy has cooled toward 2%.

Other factors slowed the U.S. economy. The boost from the 2017 tax overhaul was beginning to fade. Europe’s economy faces long-running demographic challenges. A number of major emerging markets like Argentina and Turkey experienced currency crises that dragged down global growth. Overall, global growth in 2019 had its worst year since the financial crisis.

China’s growth faltered too. After running at nearly 7% in 2017, its economy is predicted by the World Bank to grow less than 6% in 2020, which would be the slowest pace in about three decades.

The trade war—which called into question the fundamentals of U.S.-China relations—kept Chinese business sentiment depressed and ordinary consumers wary. Many businesses put investment and expansion plans on hold and even laid off workers.

Without the trade war, Mr. Daco of Oxford Economics estimates the U.S. would have grown 2.6% last year, and the global economy about 2.9%.

Exactly how much was lost can’t be determined, because no one can know how many factories might otherwise have been opened; how many plans were postponed as executives chased exemptions to tariffs; how many investments would have been made; or how many metric tons of soybeans China might have needed from U.S. buyers.

“One thing we learned: It’s not just the tariffs and how large they are,” said Ayhan Kose, director of the World Bank’s global macroeconomic outlook. “It is this type of uncertainty. How the discourse takes place has a huge impact on uncertainty and in turn on activity. It is the constant unpredictability of what happens next.”

African oligarchs turn to Asian offshore destinations

Light regulation and a full array of services hold the prospect of good old-fashioned plunder

Isabel dos Santos, Africa’s richest woman and the daughter of Angola’s former president José Eduardo dos Santos, has moved her residence and that of several of her companies to Dubai.

The revelation emerged early this month, just days after Angola froze Ms dos Santos’s assets in the country, a noteworthy escalation in the government’s offensive against the family that ruled the oil-rich state for 38 years until 2017.

As her political clout evaporates in western Europe and investigations there come to a head, it may become difficult for Ms dos Santos to divide her time between her former main residences in London and Lisbon.

Ms dos Santos’s reported move to the Jumeirah Bay gated community (her companies are now based in the Almas Tower) is only the latest of a number of high profile escapes by African oligarchs with legal troubles to Dubai, including the Gupta brothers’ move from South Africa.

These spectacular events reveal deeper patterns of shifting offshore dynamics. Capital flight out of Africa by African elites and foreigners alike is recognised as a serious, perennial problem undermining African development. It is estimated to far exceed foreign aid to the continent and its pace has quickened in tandem with African economic growth since the turn of the century.

Until about a decade ago, capital flight out of Africa mostly occurred through a variety of onshore financial centres and offshore havens in OECD states and British Overseas Territories. Since then, diversification towards Asian financial centres has become noticeable. Dubai is a high profile location, but others such as Singapore and Hong Kong also feature prominently.

There are three main reasons for this. The first is the increased regulatory burden in more traditional financial centres. From multiple Caribbean jurisdictions to the Channel Islands and from Switzerland to Lichtenstein, the nature of the offshore game may not have changed radically, but a rhetorical shift away from secrecy, a much greater degree of investigative scrutiny and genuine legal changes have rerouted some African wealth flows into more opaque locations. International businesses active in Africa such as commodity traders have also reacted to bad press in places like Geneva by decamping to light-regulation Dubai and Singapore.

The second reason is that, by moving to new financial centres, African oligarchs encounter the same service providers that work for them in London, Lisbon, Paris, Zurich and other traditional centres. Dubai, Hong Kong and Singapore feature the same top-range banks, legal firms, commodity traders, management consultants and all-purpose advisers they would find in more traditional locations. Many of these service providers cheerfully suggest to their African clients that they should relocate to more amenable contexts and continue their relationships on new ground. In short, the new Asian settings feature world-class service provision, in places committed to a much greater degree of discretion than is increasingly the case in western financial centres.

The third reason is the proactive role played by Asian governments in attracting new global business. As Oxford academic Matthew Erie explains in a notable recent investigation of Asia’s new legal hubs, governments in the region promise world-class infrastructure and service provision as well as political stability and the rule of law. (The latter is a more credible offering in Singapore and Hong Kong than in Dubai, of course, but the autocratic nature of Dubai’s government is offset by a unique receptivity to some characters and types of money flow.)

Much of this economic activity is legitimate and the result of institutions and capabilities put in place by governments, but many associated flows are not. Indeed, it is the symbiotic relationship between licit and illicit business that seems conducive in such locations. The policy approach is too often either to turn a blind eye or to actually encourage this. Welcoming opaque financing and politically exposed persons from Africa and elsewhere is often a deliberate strategy, not an unintended consequence.

This will sound familiar to those tracking the workings of Asian financial centres and the way in which they have hoovered up business from often fraught regional settings.

Russian, central Asian, Middle Eastern and south Asian offshoring strategies have used such channels for decades. In the African setting, however, this was the case only to a limited extent until the past decade, except for a narrow connection between north-east Africa, especially Somalia, and Dubai.

Jurisdictions such as Malta, the British Virgin Islands, Panama and Monaco would have featured more frequently in African offshore scandals of the past. But it was only a matter of time before Asia’s tried and tested channels were taken advantage of by globalising African elites. Roland Marchal, a professor at Sciences Po in Paris and one of the shrewdest observers of African-Persian Gulf relations, noted two decades ago that these were set to expand massively along the lines described here.

We are only now starting to map out this shift. But it is obvious that Africa’s engagement with the offshore world is increasingly diversified and in the process of “Asianising”.

In a forthcoming research report from the Carnegie Endowment for International Peace on Dubai’s role as a hub for global illicit financial flows, Matthew T Page, Jodi Vittori and their colleagues provide evidence and analysis in areas such as human trafficking, the gold trade and money laundering, especially through the real estate market. (Page’s revelations on Nigerian-owned real estate in Dubai are especially eye-opening.)

In Singapore, the government’s otherwise legitimate Global Trader Programme is providing an escape route for many commodity traders keen to avoid overdue reform in the sector. This is a problem for Africa, where commodities make up the biggest share of the continent’s economy and related corruption is a systemic issue.

Hong Kong has surfaced frequently in African offshore stories, from the Gupta saga to Ms dos Santos's interests, as the host of exploitative investment vehicle the Queensway Group and the turning plate for other secretive China-Africa investments.

All of these worrying new connections should be submitted to much closer scrutiny. What we know now is enough to raise red flags.

What can be done with such knowledge is a different matter. Western clout is fast receding in global governance and the west’s own commitment to financial transparency is ambivalent at best.

For their part, large Asian countries such as China and India, along with many African states may complain about individual escapees or brazen instances of capital flight or tax evasion. But they seem ultimately unbothered by these structural developments, which in many ways show supply meeting (enthusiastic) demand. Dubai has in no way expressed displeasure at the presence of the Guptas, Ms dos Santos, or their many counterparts cruising down Sheikh Zayed Road.

This is no reason for civil society, journalists, scholars and anyone who cares about African development to stand by in silence while the mechanisms of resource extraction that have long characterised western dealings with the continent become fully globalised.

At the very least, these trends make a mockery of claims that the Africa-Asia relationship is developmentally minded and will release the continent from the sort of asymmetrical dependence it long had with the west. The full consolidation of these financial relationships would amount to good old-fashioned plunder, even if in 21st century garb.

Flybe says operations continuing after reports of rescue talks

Airline declines to comment on suggestion it is in emergency financing discussions

Flybe has said its operations are continuing as normal after reports that it was in last-ditch talks to stave off collapse less than a year after it escaped insolvency.

Europe’s largest regional airline was thrust into the spotlight overnight after Sky News reported it was in discussions to secure extra financing amid mounting losses, with accounting firm EY on standby to handle the potential administration of the group.

In a statement early on Monday, the group said: “Flybe continues to provide great service and connectivity for our customers while ensuring they can continue to travel as planned. We don’t comment on rumour or speculation.”

The reports come less than a year after Connect Airways — a consortium of Virgin Atlantic, Stobart Air and Cyrus Capital — stepped in to prevent Flybe from going bankrupt.

Connect paid £2.8m for Flybe’s operations and a further £2.2m for the parent company, which valued it at 1p a share — a price the airline had previously described as “disappointingly low”.

Christine Ourmières-Widener, who oversaw the sale of the group as chief executive, stepped down last July after two and a half years at the helm. She was replaced by Virgin Atlantic’s Mark Anderson, who heads up the new parent group.

Flybe has been in operation since 1979 and carries around 8m passengers annually between 71 airports across the UK and Europe. A collapse of the group would put the jobs of its more than 2,400 employees at risk.

John Strickland, an aviation consultant, said the news came as a surprise despite the “challenging” background and losses of the airline.

Flybe maintains an unusually large fleet for a regional carrier, he said, which may have resulted in unaccounted for capacity in a smaller market susceptible to seasonal fluctuations.

According to Monday’s reports, the government has been briefed on the situation. But a Department for Transport spokesperson said it does not “comm

Asian stocks and U.S. futures advanced Monday, while Treasuries, the yen and gold retreated, on optimism over China’s economy and the prospect of a signed U.S. trade deal.

Shares pushed higher in Seoul and Hong Kong, reversed declines in Shanghai and pared losses in Sydney. Japanese markets were closed for a holiday, while European futures were little changed. The S&P 500 slid from record levels Friday with the latest jobs report delivering mixed signals on the strength of the economy. The offshore yuan rose past 6.9 per dollar for the first time since July.

Nikkei +0.47% Hang Seng +1.12% SI +0.98% Shanghai +0.75% Shenzen +1.36%

S&P +0.25% EuroStoxx -0.05% FTSE +0.12% Dax+0.09%SMI -0,25%

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