TheChek News Flow

WASHINGTON — Toymakers breathed a little easier this week when President Trump announced plans to delay tariffs on many goods from China — but their relief may not last long.

The delay pushes a new 10 percent tariff on some Chinese imports to December from September, and allows companies and retailers to avoid paying an additional tax on the goods they’re bringing into the United States for the all-important holiday shopping season. Yet toymakers are already looking ahead to next year’s holiday season, and fretting about the crippling uncertainty that the president’s on-again, off-again trade policy has created for them.

“Everybody is just on this roller coaster, trying to stay one step ahead or keep up with this inconsistent, irrational trade policy that is coming out of the White House,” said Jay Foreman, the chief executive of Basic Fun, which manufactures toys like Lite-Brite, K’nex building sets and Lincoln Logs, the vast majority of which are made in China. “It’s just a nightmare.”

Mr. Trump and his advisers have urged business leaders to stay focused on the larger picture: that the administration is trying to secure a historic trade deal with China. They say that China has gamed economic rules for decades, leading to the loss of millions of American manufacturing jobs, and that the United States must do what it can to change the behavior now.

After months of negotiations, however, the United States and China appear no closer to a deal. On Thursday, an official from China’s State Council Tariff Commission said China would be taking “the necessary countermeasures” to respond to Mr. Trump’s next tariffs.

Meanwhile, the pain of the tariffs is being felt by American consumers and businesses, and forcing companies, where they can, to reconfigure their global supply chains.

Some companies are moving factories out of China to countries like Vietnam and India to avoid being hit by the tariffs. But that strategy also introduces risks for an industry, focused on children, that depends on carefully controlled facilities and strict health and safety standards.

Mr. Trump’s latest round of tariffs would have affected nearly $300 billion of Chinese products as of Sept. 1, on top of a 25 percent tariff that is already in place on roughly $250 billion of goods.

Instead, tariffs on about $160 billion of consumer products, including toys, shoes, apparel, laptops and mobile phones, will be delayed until Dec. 15, while tariffs on a few items will be canceled altogether.

“Obviously, toys are a sympathetic product,” said Matt McAlvanah, a spokesman for the United States trade representative in the Obama administration who is now a policy analyst for Farmers for Free Trade, an anti-tariff advocacy group. “I think it’s an admission that it would be politically unpopular to see price increases during the holiday season.”

Toymakers both large and small say they don’t have the ability to absorb cost increases, and would have to almost immediately raise prices. The typical toy in the United States retails for only $10, and profit margins for some of them may be just pennies on the dollar, according to the Toy Association, an industry group.

Mr. Foreman, who sources 92 percent of his products from China, said that if tariffs had gone into effect as planned, they would have eaten up two-thirds or more of his profit for the year.

But the company must now decide whether to try to speed up product shipments to beat the new tariff date in December. That could save money, but will tie up capital and will crowd distribution warehouses with products. For many companies, the large outlays and disappearing profit margins risk throwing lending covenants with banks out of whack.

“It just causes chaos from the top to the bottom of the whole business model,” Mr. Foreman said.

Moving operations out of China to lower-cost countries without tariffs may not eliminate the issue, either. Mr. Trump has threatened tariffs on Mexico, for example, to try to get the country to do more to restrain migrants. The administration has also weighed tariffs on Vietnam because of that country’s rising exports to the United States.

Hasbro, which is based in Rhode Island and makes Nerf, Transformers, Play-Doh and Disney Princess merchandise, said last month that it would aim to produce just half of the goods it sells in the American market in China by the end of 2020. It currently makes about two-thirds there. Much of that production will go to India and Vietnam.

Hasbro has said that it must make this shift slowly. At a hearing on the tariffs in Washington in June, John Frascotti, Hasbro’s chief operating officer, said that suppliers in China had been trained to meet strict American product safety standards, and that there was no readily available alternate supply chain outside the country.

China’s factories have not always had the best reputation. The country has faced scandals over toxic infant formula, dog food, drywall and other products. In 2007, Mattel was forced to recall nearly one million toys that had been covered in lead paint by a contract manufacturer in China.

But China’s stature as a supplier has improved. International companies have carefully policed supply chains, and turned to external auditors to ensure rules are followed. China has set up test labs that ensure that exported toys — many of which will wind up in children’s mouths, whether they’re supposed to or not — meet rigorous American and European safety standards.

“What we see in terms of standards is that China is way above countries like Bangladesh, Malaysia and Vietnam,” said Sebastien Breteau, the chief executive of QIMA, which audits supply chains for some of the largest retailers and clothing brands in the United States.

Mr. Breteau said his company found many more instances of child labor, human trafficking, environmental violations and dangerous conditions for workers in Southeast Asia.

These violations often happen not at the factories of major companies but at the partner factories they contract with. When companies are trying to quickly relocate supply chains to get ahead of tariffs — and compete for factory space — these risks can be magnified, Mr. Breteau said.

The Toy Association, which represents Hasbro, Mattel and Lego, as well as small toymakers, said any moves in company supply chains were being done in a measured way, to make sure the same strict safety standards are followed.

“We built this business with China over the last four or five decades,” said Steve Pasierb, the president of the association. “It’s going to take a decade to move.”

China’s wages are gradually rising, making it less attractive for companies looking to get labor-intensive work, like sewing clothes or assembling electronics, done inexpensively. But companies say China’s position as a factory to the world for so many products has given the country an important advantage.

It remains a one-stop shop for many manufacturers. Whether companies need a plastic doll shoe or a computer chip, it can most likely be sourced within 50 miles of a Chinese factory.

Although the administration’s aim is to bring manufacturing back to the United States, toymakers say that isn’t realistic for many low-margin products.

Jim Barber, the owner of Luke’s Toy Factory, which makes eco-friendly trucks for toddlers in Danbury, Conn., said he would like to sell to more lower-income people in the United States, but he realizes that his market is the consumers who can afford to spend money to get what they want, not the majority of people for whom price is the paramount issue.

“You can go to any consumer survey you want and they say, ‘Yes, I’d be willing to pay more for an American-made toy,’” Mr. Barber said. “It’s a complete lie. You talk to any retailer and they’ll tell you that’s not true.”

“Price is what sells toys,” he added. “Price and Batman.”

The president projects optimism about the economy and his re-election chances, but his advisers are watching markets closely

WASHINGTON—President Trump has made the strong economy the central selling point of his presidency, and his advisers believe it is the key to winning a second term.

But this week’s damaging economic developments—resulting in fresh warnings of a possible impending recession—threaten to complicate that message 14 months before the election.

Mr. Trump and his advisers say publicly they aren’t worried. White House officials add that Mr. Trump—even as he continues to heap scorn on the Federal Reserve and its chairman, Jerome Powell—will keep touting the economy, as he did during a Thursday night rally in Manchester, N.H.

“The economy is phenomenal right now,” Mr. Trump said Thursday during an interview with a New Hampshire radio station. “With a normalized interest rate, we’re doing phenomenal. We had a couple of bad days. But we’re going to have some very good days.”

While he reacts to economic developments on Twitter, Mr. Trump has been privately assuring advisers that he isn’t bothered by recent drops in the stock market, according to two people who have spoken to him lately. And while more economists are predicting a recession in the next year, the threat isn’t considered a certainty.

The question for Trump’s campaign is whether he can continue to project such optimism through November 2020 in an uncertain environment.

“The president has spent his entire first term trumpeting the positive effects of the economy,” said Kevin Madden, a Republican strategist who previously worked on the presidential campaigns of Mitt Romney and George W. Bush. “So when we start to see indicators that maybe it’s beginning to soften, that has to be a core concern for them from a messaging standpoint, but also from the voter attitude standpoint.”

Adding to Mr. Trump’s challenge, Mr. Madden said, is that the president’s own policies are bolstering concerns about the state of the economy. “A great deal of the uncertainty and volatility is being driven by the White House’s trade policies,” he said.

Economic experts say that Mr. Trump’s trade war with China has alarmed Americans about the future of trade, and that the changing cost of doing business is causing trepidation about investment. Trade disruptions have also meant immediate trouble for export-dependent economies such as Germany.

The ebbs and flows of the economy are being watched closely by Mr. Trump’s political supporters. One official at the pro-Trump super-PAC America First equated the impact of a potential recession to other politically seismic events, such as a domestic terrorist attack or a declaration of war.

An economic downturn would provide substantial fodder for Democratic presidential candidates, who were already attacking Mr. Trump’s handling of the economy before this week’s warning signs.

“The country’s economic foundation is fragile,” presidential candidate and Massachusetts wrote in a blog post last month titled “The Coming Economic Crash—And How to Stop It.” “The Trump administration’s reckless behavior is increasing the odds of just such a shock.”

California Sen. Kamala Harris, in a five-day bus tour across Iowa, criticized Mr. Trump for “crowing” about a strong economy, while many Americans, she said, are struggling to pay rent and have to rely on payday lenders. “Today’s economy is not working for working people in America, and it needs to be addressed,” Ms. Harris said at a rally in West Des Moines on Saturday.

Trump campaign spokesman Tim Murtaugh said in the statement that Trump’s policies have “produced the best economy Americans have experienced in their lifetimes.”

Mr. Trump, who is spending the week vacationing at his New Jersey golf course, has sought to place the blame for any economic downturn on the Fed, spending much of Wednesday attacking the central bank and Mr. Powell, and saying that the trade tension with China is “not the problem.” White House officials said they expect Mr. Trump to continue publicly criticizing Mr. Powell.

Mr. Trump and his aides are also falling back on a familiar rejoinder: blaming the media. Mr. Trump, in a tweet Thursday, accused the media of “doing everything they can to crash the economy because they think that will be bad for me and my re-election.”

One White House official said it is too early to determine whether the economic news poses a serious risk to Mr. Trump’s re-election chances. White House and campaign aides acknowledged privately that a recession would threaten Mr. Trump’s re-election bid, which some advisers—and the president himself—believe will be a tough fight, even with a good economy.

“A full-blown recession would certainly cause the Trump re-election campaign to have to hit the reset button. A strong economy is at the center of President Trump’s argument for a second term,” said Dan Eberhart, a Republican donor and energy company executive. But he added, “The media follows the day-to-day changes in the market much closer than the voters do. This week’s data is a caution flag, but we’ve got plenty of laps left to go in this race.”

The White House has already taken steps to reassure political allies about the state of the economy. Its Office of Intergovernmental Affairs invited state and local officials to an off-the-record call next Tuesday with National Economic Council Director Larry Kudlow and other senior administration officials to discuss the economy. The emailed invitation included a screenshot of a tweet by Mr. Trump praising the U.S. economy as the “Biggest, Strongest and Most Powerful,” according to a copy viewed by the Journal.

An economic downturn could damage the one polling area where Mr. Trump has been on an upward trajectory in recent months. In a May Wall Street Journal/NBC News poll, 51% said they approved of Mr. Trump’s handling of the economy, up from 44% about two years earlier.

That same poll showed 51% of Americans disapproved of his overall job performance. A majority of Americans have said they disapproved of his job performance in 19 of the 20 polls taken since he took office.

Mr. Trump’s poor approval makes it difficult to persuade swing voters to re-elect him, a campaign adviser said. At a campaign rally in New Hampshire on Thursday, the president suggested that his re-election depends on votes from Americans who don’t like him.

“You have no choice,” Mr. Trump said, adding that replacing him would jeopardize economic gains from the past few years. “Whether you love me or hate me, you gotta vote for me.”

Mr. Trump’s advisers said they have no plans to change his economy-focused messaging. “Why would we stop touting the economy because of a recession warning?” asked one Trump campaign official, who wasn’t authorized to speak on the record. “The reality is that the bond market and stock market will do their thing, but the president’s policies are helping working Americans—wages are up, jobs are up, labor participation is up.”

Mr. Madden said that in 2012, positive economic developments made it challenging for the Romney campaign to criticize then-President Barack Obama ’s handling of the economy, as voters grew increasingly optimistic over the course of the year. Should Mr. Trump see the reverse next year, he said, “that’ll create problems.”

freenet AG ("freenet") [ISIN DE000A0Z2ZZ5] announces its decision to vote against the CHF 4.1bn proposed capital increase of Sunrise Communications Group AG ("Sunrise") in relation to its envisaged acquisition of UPC Switzerland ("Transaction"), as the current terms of the transaction, in particular the purchase price, synergy allocation and the transaction structure are unbalanced and unfavorable for all Sunrise shareholders.

Sunrise announced on 27 February 2019 that it has signed a binding agreement to acquire the Swiss cable operator UPC Switzerland, a fully-owned subsidiary of Liberty Global, for an enterprise value of CHF 6.3bn paid in cash. As part of the Transaction financing, Sunrise envisages to undertake a rights issue to raise approx. CHF 4.1bn and will seek approval from its shareholders for this at an Extraordinary General Meeting, expected to be held in the second half of 2019.

The purchase price and implied valuation for UPC Switzerland is too high, in particular in light of the cable industry being under severe pressure and UPC Switzerland's operational performance (as further evidenced by its Q2'19 results). For a fair transaction for all Sunrise shareholders, the purchase price should be lowered.

Thursday’s economic reports provide fresh evidence of a split between consumer-driven strength and weakness in manufacturing

WASHINGTON—American shoppers gave the U.S. economy a boost in July, countering manufacturing-sector weakness, while Wall Street continued to have jitters about faltering growth.

Retail sales, a measure of purchases at stores, restaurants and online, climbed a seasonally adjusted 0.7% in July from a month earlier, the Commerce Department said Thursday.

The robust report—the strongest reading since March—is a positive signal for the U.S. economy, at least for now, amid warning signs of a global slowdown.

U.S. stocks stabilized after release of the sales figures. The government data came as Walmart Inc. reported sales rose in the second quarter, and the retail giant raised its profit forecasts for the year. J.C. Penney Co., however, fared worse in its latest quarter with sales down 9%.

Consumer spending accounts for more than two-thirds of U.S. economic output. Spending gains will feed into the broader pace of economic growth for the quarter, which could offset weakness from manufacturing and business investment.

After the retail-sales report, forecasting firm Macroeconomic Advisers raised its gross-domestic-product growth prediction, to a 2% annual rate in the third quarter from an earlier estimate of 1.7%. The Atlanta Fed said the retail-sales report caused it to raise its estimate of third-quarter growth. Its GDPNow real-time growth estimator now stands at 2.2%, up from 1.9% in the Aug. 8 estimate.

Still, U.S. industrial output fell last month as the manufacturing sector continued to struggle. Manufacturing output, the biggest component of industrial production, fell 0.4% in July from a month earlier, the Federal Reserve said Thursday. That helped tug down broader output across factories, mines and utilities last month.

Trade-related headwinds, weak global growth and a strong dollar that crimps demand for U.S. exports have taken a toll on manufacturers this year, weighing on the U.S. expansion, the longest on record. U.S.-China trade tensions rattled financial markets this week, and another market signal—the yield curve—contributed to the volatility.

The yield on the 30-year Treasury note fell to a fresh record low Thursday as demand surged for long-term Treasury securities amid rising concerns about the risks of decelerating global economic growth. The 30-year Treasury yield fell as low as 1.917% while the benchmark 10-year Treasury yield fell as low as 1.478%, the lowest in three years, according to Tradeweb.

The longer-term trend in manufacturing production shows the sector is pulling back: Output has fallen more than 1.5% since December 2018.

Thursday’s data did little to change the picture for Federal Reserve policy makers. The Fed cut interest rates in late July by a quarter-percentage point in a pre-emptive strike to cushion the economy from a global slowdown and trade tensions, although Chairman Jerome Powell said then that consumption “is the main engine driving the economy forward.”

The reports Thursday provided fresh evidence of a split between strength in consumer-related sectors of the U.S. economy and weakness in the manufacturing sector.

The U.S. experienced a similar situation in early 2016, when indicators pointed to a possible recession: Stock-market declines, a slowdown in job creation, falling corporate profits and contraction in a factory sector weakened by a strong dollar.

Yet the economy pulled through and continued to grow.

Still, Stephen Stanley, chief economist Amherst Pierpont Securities, said that while the current situation looks similar in many ways, “The trade situation is more potent” now.

Although manufacturing accounts for a small share of gross-domestic product, the sector is sensitive to shifts in global demand, making it a bellwether for the broader U.S. economy.

In the second quarter, the U.S. economy slowed but still grew at a solid 2.1% annual rate as strong consumer spending offset a drop in business investment.

“The consumer is still healthy,” Macy’s Inc. CEO Jeff Gennette said Wednesday.

He added, however, that while unemployment remains low, challenges could curtail consumer spending down the road, including the possibility of higher prices stemming from tariffs on some Chinese imports.

While American shoppers were a bulwark to signs of weak growth at the start of the third quarter, recent consumer-confidence surveys show households’ optimism is based on the strong labor market and wage gains.

Slowdowns in the manufacturing and housing sectors “don’t bode well for a diversified and well-supported economy in the second half of the year,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co., adding “I don’t think the consumer is going to carry the economy alone.”

Some analysts say that rising labor costs, weak earnings and companies’ limited pricing power could prompt them to rein in hiring, a factor that could hurt consumers’ spending power.

At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.

“If the corporate sector is getting pinched, they will react by trying to reduce costs and inevitably that impinges on labor,” said MFR Inc. economist Joshua Shapiro.

Signs of labor-market strain appeared in Thursday’s data. Nonfarm labor productivity rose at a solid 2.3% annual pace in the second quarter, but hours worked declined at a 0.4% annual rate, the Labor Department said.

That marked the steepest drop in workers’ hours since the third quarter of 2009, and pointed to a downshift in business optimism: Companies are more likely to cut hours before they lay off workers.

Kent Lowe, owner of Integrity Heating & Cooling in Charlotte, N.C., said the company saw an unusual slowdown in July, a surprise because the summer is usually the busiest time of year.

“It seems that [customers] were holding off on making that replacement,” he said of demand for heating, ventilation and air-conditioning systems, an expense in the $5,000 to $12,000 range.

“When I see a slowdown like that, I immediately am looking at do I have too many people on staff, because we’re about to go down into a slower time of year,” said Mr. Lowe, who has 18 full-time employees.

Beijing realises the huge risks of sending in troops but it remains a real option

Crystal Kan, a young veteran of the protests that have rocked Hong Kong since mid-June, knows where she will be if Chinese troops roll across the territory to help its embattled police force quell the movement. 

“If the People’s Liberation Army comes, I will probably just stay at home, anticipating the withdrawal of all foreign investment from Hong Kong and possible economic collapse of China that will follow,” Ms Kan, 22, told the Financial Times. 

“Then we will all gather on the streets again after the PLA has left, unless they would like to stay in Hong Kong forever,” she added. “I can’t wait for them to come. We have nothing to lose.” 

Until this week, the scenario that Ms Kan welcomes with the bravado of youth was, for most people in the former British colony of 7.4m people, unthinkable. But events over three dramatic days have threatened the long-held assumption that Beijing would never do anything that might jeopardise Hong Kong’s status as a leading international financial centre. 

Enraged by what they saw as instances of unjustified police “violence” against protesters on the night of August 11, including the use of tear gas inside an underground metro station, thousands of youths descended on Hong Kong International Airport, forcing the cancellation of hundreds of flights. 

During an emotional press conference called during the middle of the crisis at the airport, Carrie Lam, Hong Kong’s embattled, Beijing-appointed chief executive, sounded despondent. “Hong Kong is seriously wounded,” Ms Lam said. “It will take a long time to recover. Let’s set aside differences and spend one minute to look at our city and our home. Can we bear to push it into an abyss where everything will perish?” 

Hong Kong’s current political crisis erupted when Ms Lam tried to implement a controversial extradition law that would have allowed Hong Kong residents, for the first time ever, to be extradited to China to face trial for certain crimes. The move ignited a public firestorm given the bill’s perceived threat to the “one country, two systems” framework that preserved both Hong Kong’s civil freedoms and independent legal system grounded in English common law when it reverted to Chinese sovereignty in 1997. Ms Lam has since shelved the bill but not formally withdrawn it, as Ms Kan and her fellow protesters are demanding. 

The fact that Ms Lam’s appeal was followed by another night of chaos at the airport demonstrates just how rudderless her government now is. 

Her apparent desperation also suggested the Chinese government might have no other choice but to intervene if Hong Kong’s 30,000-strong police force cannot contain what has become a “flash mob” rebellion, with fleet-footed, lightly clad protesters routinely running circles around clunkily armoured police in the city’s notorious summer heat and humidity. Indeed, Chinese officials, academics and state-controlled media all seized on events at the airport to justify military intervention if needed.

“The violence in Hong Kong is moving towards terrorism,” Zhang Jian, a Hong Kong expert at the Shanghai Institute of International Studies, said on Thursday at a Beijing media briefing organised at short notice by China’s State Council. “If you don’t take necessary measures, it might morph into real terrorism.” 

“Beijing doesn’t think [military invention] would violate one country, two systems,” says Linda Li, a professor at the City University of Hong Kong. “They want to prepare the international community for it. They want to send the message that this is an option for them.” 

Chinese officials recognise, however, that it would still be a very costly option. 

Deployment of either PLA troops from their various barracks in the territory — or their People’s Armed Police counterparts now camped out just across the border in southern Guangdong province — could end Hong Kong as the world has known it since it was seized by British troops in 1841 and declared a crown colony. 

For almost 180 years, Hong Kong has performed two essential and irreplaceable roles for its Chinese hinterland. It has been an interface between the rest of the world and China, whose economy has been entirely or partially closed since Hong Kong’s establishment, and a refuge for millions of Chinese and their money during periods of turmoil. 

Chinese Communist party leaders long hated Hong Kong as a symbol of the “humiliations” suffered by China at the hands of the UK and other colonial powers in the late 19th and early 20th centuries, as well as its role as a bolt-hole for the party’s many capitalist “class enemies” who fled there after the Communist revolution in 1949. But because they also recognised Hong Kong’s immense value to China, especially as the party launched daring new economic reforms in the 1970s and 1980s, they came up with the “one country, two systems” arrangement. 

More recently, many powerful Chinese political families have also come to appreciate Hong Kong as a safe haven for their immense wealth. The territory has both its own currency, pegged to the US dollar, and an open capital account that has helped it thrive as an international finance centre where Chinese state-owned enterprises have raised billions of dollars through equity offerings since the mid-1990s. “Many big [party] families have an interest in Hong Kong so Beijing wants to keep Hong Kong alive,” says Zhang Lifan, a Beijing-based historian and prominent party critic. 

Mr Zhang also notes that slower economic growth in China and its ongoing trade war with the US make this a particularly bad time for a dramatic escalation of events in Hong Kong. “In the context of the trade war, if Beijing sends in the PLA or PAP it will trigger international sanctions and put Beijing in an even worse situation. Sending in the PLA is a lose-lose situation.” 

One member of Hong Kong’s pro-Beijing establishment, who asked not to be identified, says the central government is still confident it will not have to do the unthinkable. “Beijing is betting this will die down,” he said. “[Their message] is we should present a united front and focus on restoring order.” 

But he is also very concerned about what will happen if Beijing is wrong and it will have to resort to sending forces into Hong Kong. “I worry about the young people [protesting],” he says. “They shouldn’t underestimate how ruthless the Chinese Communist party is.”