Raphael Stevens

From the corner of Fifth Avenue and 57th Street the facade of Tiffany’s looks just as it did in 1961 when Audrey Hepburn, dressed in a long black dress and pearls, nibbled on a croissant outside it. Inside, however, things are rather different. After a four-year, $500m renovation, shoppers are greeted by a more modern experience.Everything shines: the rocks, the metal and marble display cases, the ceilings. What, at first glance, look like arched windows are really 7m-high LED screens showing a diamond bird flitting over Central Park. Lifts at the rear take shoppers to ten floors: one for silver, one for gold, one for “masterpieces”. A three-storey extension, with views over Fifth Avenue, now sits atop the building. These levels are appointment-only. “We call it the diamond on the roof,” quipped Alexandre Arnault, son of Bernard, who owns LVMH, a French conglomerate that bought Tiffany’s in 2021.It is the most glittering example of a luxury trend: huge bets on retail properties. LVMH has bought on Bond Street in London and the Champs-Elysées in Paris. There has been a flurry of deals on New York’s Fifth Avenue. In December Prada purchased its current store, 724 Fifth, and nabbed 720 Fifth, the shop next door, for a total of $835m. On January 22nd Kering, which owns Gucci, announced that it had bought the retail space in 715-717 Fifth for $963m. LVMH is rumoured to be eyeing up 745 Fifth, the space next to Louis Vuitton.These deals are being sorted at breakneck speeds and for record prices. From a handshake to completion, some come together in weeks. The Kering and Prada purchases were, unusually, both “sign and close” deals—entire cash payments were made on the day the contracts were signed. The Kering deal is America’s largest ever high-street retail-property deal.Why the rush? Tiffany has owned 727 Fifth for decades, but most brands have been happy to lease. Will Silverman of Eastdil Secured, an investment bank that advised Jeff Sutton, the developer who sold to both Kering and Prada, points to growth in luxury sales and shifts in interest rates to explain the change of approach.High-end goods began to fly off the shelves during the covid-19 pandemic, when people where flush with cash and had nowhere to go, and the frenzy has not abated since. Beautiful handbags that were once the privilege of the few are now bought by the many. Indeed, last year LVMH’s sales of fashion and leather goods were 40% higher than in 2021.Luxury goods still tend to be sold in person, meaning that retailers are spending eye-watering sums to tempt people into their stores. And the arrival of the masses means they need more space for plush private rooms in which to make sales to their old clientele. “Manhattan might be getting taller,” notes Mr Silverman, “but it’s not getting any wider.” There is a finite amount of truly high-end space.Alone this might be enough to tempt retailers to purchase rather than rent—and buying becomes the clear choice once interest rates are taken into account. Most property owners finance their buildings using a mixture of equity and mortgage debt. In America mortgage rates on commercial buildings are around 6-7%. The cost of equity is higher still. For an investor to buy a space and cover his costs, he might need to charge annual rent worth perhaps 8% of the building’s value.Paying these rates would be foolish for a luxury firm. Since they make so much money, they can issue debt at a yield only slightly above that on German government debt. LVMH’s most recent bonds were oversubscribed at 3.5%. Thus fancy retail spaces are a luxury it can easily afford. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

With vladimir putin issuing threats and Donald Trump musing about withdrawing support, everyone agrees that Europe needs to spend more on its armed forces. What is less widely recognised is how wrenching the shift will be for a continent that has grown used to outsourcing its defence to America. Over the past three decades, politicians have enthusiastically spent the peace dividend on everything bar pilots, sailors and soldiers (see chart).Some European leaders are already making commitments. Germany has created a fund of €100bn ($108bn) to bolster its armed forces and aims to meet the nato target of spending at least 2% of gdp on defence immediately. In France Emmanuel Macron has promised to reach the target this year. Compared with their pre-pandemic average, the continent’s NATO members (and Canada) have already increased defence spending by about 0.26 percentage points of GDP, together hitting a new average of 1.7% of gdp last year.image: The EconomistYet in most cases even 2% will not be enough. Decades of miserliness take a toll: many armed forces across Europe are in a sorry state. According to calculations by Marcel Schlepper and colleagues at the Ifo Institute, a think-tank, the EU’s NATO countries have accumulated underinvestment in equipment of about €550bn (or 4% of the bloc’s GDP) since 1991. Boris Pistorius, Germany’s defence minister, has said that his country’s spending might need to reach 3.5% of gdp in order for its armed forces to rebuild their fighting capabilities.Spending requirements would be lower were it not for fragmentation among the eu’s 27 armed forces, which all favour different kit, and different ways of buying it. Manufacturers will struggle to leap to attention. As Christian Mölling of the German Council on Foreign Relations, another think-tank, notes: “Europe‘s bonsai armies have nurtured bonsai industries.”How will countries meet their more ambitious commitments? Those currently failing to reach NATO’s 2% target, which include Belgium and Spain, as well as France and Germany, tend already to have higher taxes. Therefore they will have to reprioritise, moving spending from, say, health and welfare into defence. According to the Ifo Institute’s calculations, in order to spend 3% of GDP on defence, spending on everything else will have to fall by 3% in Germany and Italy, and 2% in Britain and France. Voters may object to having their pensions cut to buy more tanks.Another option is to borrow. Although few economists would normally support funding armed forces via debt, since it is just the sort of regular spending for which taxes are designed, the current shock may warrant bigger deficits. The euro zone’s fiscal rulebook might even make a modest allowance for them. In theory, borrowing would not be a problem in low-debt countries such as Germany and Netherlands. But there are obstacles: Dutch coalition talks have just collapsed over spending differences; German reformers run up against a constitutional debt brake. And additional borrowing would not be wise in much of southern Europe, including Italy and Spain, which last year both spent more on interest payments than their armed forces.That leaves a final option if spending is to rise: EU funding. Kaja Kallas, Estonia’s prime minister, is arguing that the bloc should establish a debt-funded defence budget along the lines of its covid-19 recovery fund. The logic that underpinned the fund—of common EU spending in return for mutually beneficial reforms—would seemingly also apply now, perhaps with reforms this time concerning defence procurement. Yet there is a problem. For the moment, finance ministers in Europe’s north and south remain to be convinced by a fund that would mostly benefit the east. The sad truth is that another shock might be required to prompt them into action. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

A few months before America’s presidential election in 1980, George H.W. Bush paid a visit to Beijing. He got a frosty reception. Days earlier, Bush’s running mate, Ronald Reagan, had angered China by saying that he wanted an official relationship with Taiwan, which China claims as its territory. America should stay out of China’s “internal affairs”, said its foreign minister—just as China would not meddle in America’s presidential race.The prospect of a Reagan victory worried not only China’s leaders but also its exporters. Under President Jimmy Carter, Reagan’s opponent, America had done them the favour of establishing “normal” trading relations, meaning that they faced the same low tariffs America charged most other trading partners. There was, however, a catch. Normal relations had to be approved each year by the president and Congress. Would Reagan revoke them?Chinese exporters, as well as the American companies that buy from them and invest in them, now face a similar threat from another loquacious and charismatic presidential contender: Donald Trump. If he wins in November, he has threatened to escalate the trade war he started in 2018 by imposing tariffs of 60% or more on Chinese goods. His allies have also advocated repealing normal trading relations with China, which became “permanent” in 2000. A new paper by George Alessandria of the University of Rochester and four co-authors suggests that the way exporters responded to the Reagan threat may hold lessons for new trade wars.Entering a foreign market is costly for any firm. It must first establish a “beachhead”, as Richard Baldwin of IMD Business School in Lausanne has written, building distribution channels, advertising itself to potential buyers and bringing products into conformity with local regulations. Many of these upfront costs are fixed (they must be paid even if sales are small) and sunk (they cannot be recovered if the firm packs up and leaves).This has two consequences. Exporting, even in an era of globalisation, is surprisingly rare. A study of French manufacturers in 1985 found that only 15% sold to foreign markets. The figure in a study of Colombian factories was 26%. Even in China in the mid-2000s, a time of hyper-globalisation, the prevalence of exporting varied from 59% (in furniture-making) to 12% (in paper and printing), according to Mr Alessandria and his colleagues. Another consequence is that exporting is persistent. Once a company has established a beachhead, it rarely evacuates from a country.Firms must believe that the rewards will be large enough and last for long enough to justify upfront costs. The prospect of tariff hikes and trade wars makes such calculations harder. Even after Mr Carter lowered tariffs on China, the country’s exporters had to weigh the chances that they would go back up. The fear was acute in industries like toys where the pre-1980 tariffs were much higher than the “normal” tariffs that applied thereafter. Likewise, even after Mr Trump raised tariffs on China in 2018, exporters had to weigh the chances that they would go back down.Exporting from China to America was and remains, in effect, a bet on American trade policy. The pattern of bets reflects firms’ beliefs about the tariffs they will face. Although economists cannot directly observe these beliefs, they can observe the export decisions that reflect them. By examining how trade between America and China has evolved over time and differed from product to product, Mr Alessandria and his co-authors can therefore infer what firms must have believed about future American tariff policy.They find that the tariff cuts in 1980 took time to become credible. For several years, exporters from China acted as if the chances of their reversal were 70% or more. The risks ebbed later in the decade after Reagan made his own visit to Beijing, Shanghai and Xi’an in 1984. (It was a “breathtaking experience”, he said, although it took him two stabs to snare a quail’s egg with his chopsticks.) By the time China joined the World Trade Organisation in 2001, the probability had fallen to about 5%.The dynamics of the trade war in 2018 look similar “but in reverse”, write Mr Alessandria and his co-authors. Despite Mr Trump’s fiery rhetoric, Chinese exporters did not act in anticipation of his tariffs. When the war arrived, they expected it to culminate quickly. Judging by their actions in 2019 and 2020, they perceived that the probability the war would soon end was over 90%. When Mr Trump left office and the tariffs did not go with him, their hopes evaporated. The probability of an end to the war fell to 46% in 2021 and to 24% by 2024. The results have a paradoxical implication: entrenchment of tariffs under President Joe Biden did more harm to trade than their imposition under Mr Trump.Bigger and worseWould a second trade war be as damaging? The sheer recklessness of Mr Trump’s latest threat is double-edged. On the one hand, a sweeping 60% tariff would be far more disruptive than the targeted 25% tariffs he imposed in 2018. But their vertiginous height may make them harder to sustain. If they annoy too many consumers, hurt too many American firms or exact too big a toll on the stockmarket, they may prove relatively short-lived. Chinese exporters did not take Mr Trump’s trade threats seriously before 2018. Although they will not want to make the same mistake again, the most damaging of Mr Trump’s policies are ones that outlive his time in office, becoming a permanent feature. And not everything Mr Trump says in his presidential campaigns comes to pass.The same was true of Reagan. He never followed through on his desire to restore official relations with Taiwan. In Beijing, Bush tried hard to quell the anger his remarks had caused. “I certainly respect your views on wanting to stay out of the American election,” he said in response to China’s foreign minister. “I’d like to stay out of it myself sometimes, because it gets pretty hot in the cross-fire.” For China’s exporters and the American firms that buy from them, this year’s election will be just as uncomfortable. ■Read more from Free exchange, our column on economics:In defence of a financial instrument that fails to do its job (Feb 15th)Universities are failing to boost economic growth (Feb 5th)Biden’s chances of re-election are better than they appear (Feb 1st)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Saito Mari, a 28-year-old nurse, was frustrated. Her pay, at just ¥160,000 ($1,100) a month, was meagre; after bills, rent, shopping and a few holidays, she had little left over. So in 2020 she decided to buy some stocks. “I used to think it was too risky,” says Ms Saito, who learned about investing via books and YouTube. “But it was amazing to see my assets grow.”Although Ms Saito’s story would be unremarkable anywhere else, it is part of a sea change in Japan. According to surveys by the Investment Trusts Association, 23% of people in their twenties invested in mutual funds last year, up from 6% in 2016. So did 29% of people in their thirties, up from 10%—a bigger rise than in any other age group. Those with exposure to the Nikkei 225, which on February 22nd passed a record high set in 1989, are reaping the rewards.image: The EconomistJapan’s officials, who want to boost economic growth, have long desired such a shift. The public’s previous aversion to retail investing dates back to the early 1990s, when a stockmarket bubble burst. In the ensuing decades, with inflation minimal or non-existent, low-risk saving came to be seen as virtuous. Some 54% of Japanese household assets are in cash or deposits, against 31% in Britain and 13% in America.Kishida Fumio, Japan’s prime minister, outlined an “Asset Income Doubling Plan” in 2022. This aims to create a virtuous cycle: companies will grow by making use of funds from retail investors; individuals will enjoy the benefits of their growth. As part of the initiative, in January the government improved the terms of its NISA programme, modelled on Britain’s ISA, which exempts retail investors from capital-gains taxes. The same month 900,000 new NISA accounts were opened with the country’s five biggest investment platforms.Mr Kishida’s push has been given extra oomph by economic developments. Under Japan’s zero-interest-rate policy, hoarding cash in a bank brings almost no return. This has been true for a while, but inflation now stands at around 3%—a three-decade high—meaning the value of cash not put to work is being eroded. Young generations, who do not share the trauma of the burst bubble, are more inclined to act.The number of students at ABCash, a financial school in Tokyo targeting millennials, has doubled since 2022, reaching 40,000. Shinjo Sayaka joined after seeing an influencer mention it on Instagram. “It’s hard to talk about money with my family,” she reports. One problem for Mr Kishida is that many youngsters favour international markets over domestic ones. For instance, Ms Saito’s investments include Apple (an American tech giant), the s&p 500 (an index of big American firms) and BioNTech (a German vaccine-maker). Yet perhaps she and others will change their approach if the Nikkei continues to soar. ■ More