Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is the author of A Random Walk Down Wall Street A shaky, temporary truce may have been declared in the trade war between the US and China but it is clear the world has regrettably entered a new era of increased friction in the flow of goods and services. That will carry a big cost for growth in the global economy.There could be legitimate arguments for limited and targeted tariffs designed to enhance national security or to help negotiate a lowering of trade barriers imposed by other nations. But a policy of imposing higher permanent general tariffs allegedly to increase US wealth is completely misguided. It will not achieve the goal of restoring American manufacturing. Most economists would agree with the determination of David Ricardo, who wrote in the early 1800s that free international trade can increase the overall welfare of nations. What Ricardo argued was that the availability of goods and services of both of two trading nations could be increased if each country specialised in the products on which they had a relative advantage.If each country did this and imported goods in areas where they were relatively inefficient, the total amount of output available for both countries would be larger than if each country produced everything themselves. International trade was not a zero-sum game. Trade can make both countries richer.A simple illustration will show the benefits of trade. Think of two countries, Britain and France, each of which has only 100 hours of labour available. Suppose if Britain devoted half its labour — 50 hours — to cloth, it could produce 50 units of that. The remaining 50 hours if devoted to wine could produce 10 barrels. France, however, could produce 50 barrels of wine by devoting 50 hours to wine production but only 20 units of cloth with the remaining 50 hours of labour. Total production in both countries would be 70 cloth and 60 wine.Now suppose instead that each country specialises with its 100 hours of labour. Britain produces 100 units of cloth. France concentrates exclusively on wine, making 100 barrels. Total combined production is far greater. By engaging in specialisation and trade both countries are better off. If Britain trades 40 units of its cloth for 40 units of wine, it can consume 60 units of cloth and 40 barrels of wine. France can have 60 wine and 40 cloth. This was Ricardo’s universally accepted contribution over 200 years ago.Consider now an actual example of aluminium and wheat production in the US and Canada. Canada has a comparative (and absolute) advantage over the US in the production of aluminium because it is able to rely exclusively on inexpensive, clean, reliable and renewable hydropower. Clearly efficiency is maximised by having Canada produce aluminium and trade with the US by importing wheat. Indeed, this is precisely what has happened when markets have been allowed to function without restraint. But now misguided policy seeks to eliminate the positive benefits of trade by imposing punitive tariffs on Canada, our previously friendly trading partner.Would it even be possible to substitute US production of primary aluminium for Canadian sources? In a recent interview, William Oplinger, the chief executive of Alcoa, was asked that question. He did indicate that it might be possible but that it would take seven to 10 years to build the production facilities required. Moreover, investment of billions of dollars would be required, and it is far from certain that such funds could be raised. Oplinger also warned in February the tariffs could cost about 20,000 US aluminium industry jobs and a further 80,000 jobs in sectors that support it.But it is very unlikely that a new crop of production plants could be run. Aluminum production requires availability of enormous power, and the US power grid would be unable to handle the smelting demand. There are already concerns that power supplies will not be able to meet the increased use of artificial intelligence. Reshoring of aluminium smelting may not even be possible.To be sure, we do need to be concerned for the losers created by unfettered trade. But the solution lies in using our educational system to provide training for the good jobs that will be required in areas such as energy generation, telecommunications, skilled repair and healthcare, and in facilitating the geographic mobility needed to take advantage of the new economic opportunities. Cutting ourselves off from the benefits of free trade will not make us richer in the long run. Permanent general tariffs will only make the US and foreign nations considerably poorer.  More

Japan’s largest companies have said tariffs planned by the Trump administration could erode annual profits by tens of billions of dollars, with the probability of a bigger impact in the event of a US recession. Groups including Toyota, Sony and Mizuho could suffer a total hit as high as ¥4tn ($27.6bn), according to Financial Times calculations based on company guidance during the current full-year earnings season.The total could rise, with many companies refusing to provide estimates, citing “extreme uncertainty”, and some still to report.With executives at leading industrial groups reporting a massive impact from tariffs, pressure is increasing on the country’s negotiators to secure a deal to lower levies, analysts said. Chief negotiator Ryosei Akazawa plans a third round of talks with US Treasury secretary Scott Bessent by the end of the month.Japanese car companies, as well as steel and aluminium producers, are subject to tariffs of 25 per cent on US imports, while other sectors have 24 per cent levies on their goods as part of President Donald Trump’s “reciprocal” tariffs. The automotive industry, Japan’s biggest export sector, is the most exposed. In 2023, Japan shipped 1.5mn vehicles to the US, worth more than $40bn, and car manufacturers ship many vehicles and parts into the US from Mexico and Canada, which have also been stung by tariffs.“The impact of tariff policies is huge,” said Toshihiro Mibe, chief executive of Honda, which predicted ¥650bn ($4.5bn) of extra costs and has slashed its investment plans to 2030 by ¥3tn ($20bn) to ¥7tn.Toyota is the hardest hit, estimating an impact of $1.2bn in April and May.Some content could not load. Check your internet connection or browser settings.The $27.6bn total was calculated by adding up tariff impact figures provided by the country’s top 100 largest groups by market capitalisation, car companies and others that cited a large impact, in their earnings presentations or calls. Most of the estimates given by Japanese groups assume no measures to offset the charges such as a product price rise. When a range was given, the middle estimate was taken, and when the impact was said to be “several billions of yen”, it was assumed to be ¥3bn.For Toyota and Mazda, the annual impact was extrapolated from the monthly figure for the remainder of their financial year, which resulted in a total that was lower than estimates made by SBI Securities.The earnings also revealed large vulnerabilities across the rest of Japan, despite efforts over decades to localise production in the US, and many companies not putting a figure on the potential pain.Tadashi Imai, president at Nippon Steel, which is still attempting to buy US Steel for $15bn and declined to estimate the tariff blow, said the levies were “expected to have a tremendous impact on the domestic and overseas steel industries, including indirect effects”.Many companies said they could take countermeasures to soften the impact by raising prices or shifting more production to the US.“In the medium to long term, we would like to change the source of product supply and become more efficient to reduce the impact of tariffs,” said Takuya Imayoshi, president of Komatsu, which has been a target of Trump’s ire for many years over its competitively priced excavators. A lengthy period of tariffs would probably mean a much larger financial hit, with leaders of many companies saying no reliable estimate could be provided, given the volatility and uncertainty over their implementation.“There is no point in just reporting numbers when we have no idea what the underlying assumptions are,” said Ryo Hirooka, chief financial officer of Hoya, a glasses and contact lens manufacturer, 15 per cent of whose sales are generated in the US.Others have put in provisional “buffers” to account for extra tariff-related costs, such as the ¥40bn given by the trading house Sumitomo Corporation. President Shingo Ueno said: “This is the first time ever that we have announced our results with a buffer factored in [to the forecast] from the very beginning. I think that alone shows how extremely uncertain the situation is.”There is also a risk that Japan’s economy could be steered further off course. Figures released on Friday showed Japanese GDP turned negative in the January-to-March period from the previous quarter, even before the US tariffs had begun to show in the export numbers. While broadly in line with market expectations, the 0.7 per cent annualised quarter-on-quarter contraction highlighted fragility, said analysts.Japan’s trade negotiations with the US appear to have lost some of their early momentum and corporate leaders are urging the government to accelerate efforts to strike a deal.“I would expect that they move faster, to be very honest,” said Nissan chief executive Ivan Espinosa. “We do need to get clarity as soon as possible.” More

The Paris School of Economics sits on the drab grounds of what was once the École Normale Superieure for girls, tucked away on the city’s unspectacular bottom edge. The PSE was only founded in 2006. It only teaches graduate students. It can’t match Harvard’s $53bn endowment. Yet it’s a remarkably influential place.The school’s president, Esther Duflo, is a Nobel laureate in economics recently returned to her hometown from Harvard. The PSE’s co-founder, Thomas Piketty, did more than anyone else to put inequality on his profession’s agenda. Two decades ago, he also supervised the masters thesis of the school’s current star, Gabriel Zucman, on whether high taxes prompt rich people to emigrate. Today Zucman, a boyish-looking 38, winner of the John Bates Clark Medal for young economists that often precedes a Nobel, is leading a drive to impose a global wealth tax on the super-rich.The EU Tax Observatory, which Zucman runs, hosted a conference in April at the PSE for the small but global community that has clustered around this tax. Besides economists, there were delegates from the IMF, the Brazilian government, Belgium’s workers’ party and an OECD official attending in her private capacity as a “tax nerd”. PSE’s more profit-maximising students snuck in for free helpings of the Parisian-quality lunch buffet. The message of the conference: the super-rich pay lower tax rates than ordinary people, but Zucman and his followers intend to change that.Economist Gabriel Zucman runs the EU Tax Observatory More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Chinese investment in Europe rose for the first time in seven years in 2024, driven by a surge in electric vehicle and battery projects in Hungary, even as Chinese firms increasingly shunned the UK, Germany and France.Total Chinese foreign direct investment in the EU and UK climbed 47 per cent to €10bn last year, according to data from the Berlin-based Mercator Institute for China Studies and consultancy Rhodium Group. While the rebound marked a break in the downward trend, total FDI was just a fifth of the 2016 peak and was heavily concentrated among a small group of firms, including battery makers CATL and Envision, tech group Tencent and carmaker Geely.“The EU remains attractive for Chinese investment,” said Max Zenglein, chief economist at Merics. But he warned that Beijing could increasingly deploy corporate investment as “a tool for strategic influence”.Facing mounting political scrutiny and trade tensions, Chinese companies have pivoted from mergers and acquisitions to greenfield investments. CATL’s €7.5bn battery facility in Debrecen and BYD’s planned €5bn electric vehicle plant in Szeged — both in Hungary — are emblematic of the shift.Hungary accounted for 31 per cent of all Chinese investment in Europe in 2024, retaining its position as the top destination for a second consecutive year. In contrast, the combined share of the UK, Germany and France fell to just 20 per cent, down from an average of 52 per cent over the previous five years.Prime Minister Viktor Orbán, widely seen as China’s closest supporter within the EU, sees Chinese capital as providing a vital pillar to the economy amid weak domestic growth.China’s carmakers are under pressure to expand abroad as they grapple with overcapacity and faltering demand at home. The EU’s decision last October to impose tariffs of up to 45 per cent on Chinese car imports has further incentivised local production within the bloc.Nevertheless, the study noted a sharp drop in new investment announcements by Chinese electric-vehicle manufacturers — down 79 per cent last year compared with 2022—2023 levels. Battery-maker Svolt, for instance, abandoned plans for two plants in Germany worth €4.2bn, while a European Commission preliminary foreign subsidy investigation into BYD’s Hungary plant could further dampen momentum, it said.The decline was partially offset by a modest uptick in M&A. Tencent acquired Polish video game developer Techland for €1.5bn, though such dealmaking activity is expected to remain subdued. The traditional motivation for M&A — access to Western technology — has waned as China builds its own R&D capabilities.Chinese investment in strategic sectors such as renewable energy is also drawing heightened scrutiny across Europe. Yet the authors of the study saw scope for a short-term easing in tensions, as some EU member states sought to avoid simultaneous trade conflicts with both Beijing and Washington, while China renewed a charm offensive aimed at Brussels. More

Stay informed with free updatesSimply sign up to the More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldIs the dominance of the dollar about to fade away? Donald Trump insists that “if we lost the dollar as the world currency . . . that would be the equivalent of losing a war”. Yet he himself could be the cause of such a loss. Reliance on a foreign currency depends on trust in its own soundness and liquidity. Trust in the dollar has been slowly eroding for a while. Now, under Trump, the US has become erratic, indifferent and even hostile: why would one trust a country that has launched a trade war on allies?Yet, while outsiders might wish to diversify away from the dollar, they lack a compelling alternative. So, what, if anything, might replace its hegemony?The dollar has been the world’s leading currency for a century. Yet the dollar itself replaced the pound sterling after the first world war, as the UK’s power and wealth declined. Objectively, the US is not declining as the UK was at that time: according to the IMF, its share in nominal global GDP was 26 per cent in 2024, against 25 per cent in 1980. Given the rise of China’s economy during that period, this is remarkable. The US also remains at the frontier of world technological development and the foremost military power. Its financial markets are still much the deepest and most liquid. Moreover, in the fourth quarter of last year, 58 per cent of global reserves were in dollars, down from 71 per cent in the first quarter of 1999, but far ahead of the euro’s 20 per cent. According to MacroMicro, 81 per cent of trade finance, 48 per cent of international bonds and 47 per cent of cross-border banking claims are still in dollars.So what could go wrong? In his work on the international system, Charles Kindleberger argued that the stability of an open world economy depended on the existence of a hegemonic power willing and able to provide essential public goods: open markets for trade; a stable money; and a lender of last resort in a crisis. The British provided all three up to 1914. The US was to do so after 1945. But in that intervening period the UK could not — and the US would not — provide these goods. The result was calamitous.The era of dollar hegemony has seen many shocks. The postwar recovery of Europe and Japan undermined the fixed exchange rate system agreed at Bretton Woods in 1944. In 1971, Richard Nixon, the president most similar to Trump, devalued the dollar. This, in turn, led to high inflation, which ended only in the 1980s. It also led to floating exchange rates and creation of the European exchange rate mechanism and then the euro. While economists tended to think that currency reserves would cease to be important in a world of floating rates, a plethora of financial and currency crises, above all the Asian crisis of the late 1990s, showed the opposite. Loans from the Federal Reserve also proved of continuing importance, notably in the financial crisis of 2008-09.The Kindleberger conditions are, in short, still relevant. Also relevant is the broader point that network externalities support the emergence and sustainability of dominant global currencies, since all users benefit from using the same currency as others and will continue to do so, if they can. But what if the hegemon uses every economic stick it can, including financial sanctions, to get its way? What if the hegemon threatens invasions of friendly countries and encourages invasions of friendly countries by despots? What if the hegemon undermines its own fiscal and monetary stability and the institutional foundations of its economic success? What if its leader is an unprincipled bully?Some content could not load. Check your internet connection or browser settings.Then both countries and individuals will consider alternatives. The difficulty is that, however unsatisfactory the hegemon might be, the alternatives look worse. The renminbi might be the best currency to use in trading with China. But China has capital controls and illiquid domestic capital markets. These, moreover, reflect the strategic priority of the Chinese Communist party, which is control, both economic and political. China seems quite likely to use economic coercion, too. So, China cannot offer the liquid and safe assets that the US has historically provided.Some content could not load. Check your internet connection or browser settings.The euro does not suffer from these handicaps of the renminbi. So, might it not replace the dollar, at least in part, as Hélène Rey of the London Business School argues? Yes, it might. But it too suffers from defects. The Eurozone is fragmented, because it is not a political union, but rather a club of sovereign states. This political fragmentation also shows in financial and economic fragmentation, which constrains innovation and growth. Above all, the EU is not a hegemonic power. Its appeal may surpass that of the US at its current worst, but it is no match for the US at its best.We are left then with a competition between three alternatives, with some other options — a global currency or a crypto-based world — surely inconceivable. The first option would be transformation of China or the Eurozone and so the emergence of one of them as issuer of a hegemonic currency. The second would be a world with two or three competing currencies, each dominant in different regions. But network effects would create unstable equilibria in such a world, as people rush from one currency to another. This would be more like the 1920s and 1930s than anything since then. The third would be continued domination by the dollar.What sort of dollar hegemony might this be? Ideally, a trustworthy US would re-emerge. But this is ever more unlikely, given the damage now being done at home and abroad. In the kingdom of the blind, the one-eyed man is king. Similarly, even a defective incumbent currency might continue to rule the monetary world, given the lack of high-quality substitutes. Trump would like this world. Most of the rest of us would [email protected] Martin Wolf with myFT and on X More

This is an on-site version of the White House Watch newsletter. You can read the previous edition here. Sign up for free here to get it on Tuesdays and Thursdays. Email us at [email protected] morning and welcome to White House Watch! Let’s dive right into:Donald Trump has left Kyiv and Europe feeling abandoned after making clear the US wants to disentangle itself from negotiations between Russia and Ukraine, and let the warring nations duke out peace for themselves.Trump said he’d end the conflict on his first day in office, but now he has appeared to wash his hands of the peace effort, leaving Ukraine vulnerable at the negotiating table.For observers, this is a turning point that confirms Europeans’ worst fears: seduced by Vladimir Putin’s flattery, Trump is prepared to sell out Kyiv in favour of Moscow. Trump and Putin spoke for more than two hours yesterday in a conversation so friendly that the Russians said neither leader wanted to hang up first. After the call, the US president said that negotiations for a ceasefire would start “immediately”, but that “the conditions for that will be negotiated between the two parties, as it can only be, because they know details of a negotiation that nobody else would be aware of”, seemingly abdicating Washington’s role as peace broker. And who could take its place? Pope Leo XIV. “The Vatican . . . has stated that it would be very interested in hosting negotiations,” Trump said.Just over a week ago, Trump joined other western leaders in promising to impose new punitive measures on Russia if it didn’t implement an immediate ceasefire.But after speaking with Putin yesterday, Trump told European leaders that he did not intend to apply additional pressure on Moscow while bilateral talks between Russia and Ukraine are ongoing, according to two people briefed on the conversation. The Europeans are now racing to convince Trump to stay involved. “It was never realistic to think the US could strike a peace deal between Russia and Ukraine,” said Andrew Weiss, vice-president at the Carnegie Endowment for International Peace. “The goal now seems to be to agree to disagree with Russia and allow the Europeans and Ukrainians to work something out.”Ukrainian President Volodymyr Zelenskyy — who also spoke to Trump yesterday — had a stark warning: “It is crucial for all of us that the United States does not distance itself from the talks and the pursuit of peace, because the only one who benefits from that is Putin.”The latest headlinesWhat we’re hearingWhile the stock market has come roaring back since Trump’s so-called liberation day tariffs brought chaos and steep losses, the pain is set to endure for Main Street as confidence in the US economy takes a hit.“The market has overbought the deal,” said Steve Hanke, a Johns Hopkins University economist who worked as an adviser to Ronald Reagan. “Trump still thinks he’s running Trump Enterprises, not the US economy,” he told the FT’s Claire Jones. While Trump’s climbdown on tariffs — and the détente with China in particular — have cut the chances of a serious recession, his handling of the trade war looms large over the US economy.It could unwind years of exceptional US growth and trigger stagflation that would leave the Federal Reserve’s policymakers in a bind.Some content could not load. Check your internet connection or browser settings.And the trade tensions aren’t gone — they’re just on pause. When the current 90-day deadline for talks expires in July, tariffs could surge again, adding to a climate of uncertainty.The US-China deal “undid a decent amount of the damage”, Jason Furman, economist at Harvard University who worked in Barack Obama’s Council of Economic Advisers, told Claire. “But we’re still going to get a bunch of inflation, we’re still going to get slower growth. And we still don’t know how this play is going to end.”And the anxiety is strangling every economy tied to the US. EU economics commissioner Valdis Dombrovskis told the FT’s Sam Fleming that the global trade war has had “quite a sizeable negative impact” on the bloc’s own forecasts, generating a sharp downgrade to the global growth outlook. It “creates negative confidence effects which affect first and foremost investment decisions”.ViewpointsThe budget fight on Capitol Hill has highlighted Trumpism’s growing split between plutocrats and Steve Bannon’s economic populists, says Edward Luce.Russia and Ukraine are playing along with Trump’s demands to talk about peace, but they each hope the other will get the blame when the efforts founder, writes Gideon Rachman.Rana Foroohar thinks the markets are declaring tariff victory too soon, and that we’re still in for a lot more volatility over the next few years.After Trump announced his cash incentives for undocumented immigrants to “self-deport”, Patti Waldmeir found no takers — just disgust and laughter — in one of Chicago’s immigrant neighbourhoods.Despite the term “woke right” seeming like culture war clickbait, Jemima Kelly thinks there might be something to it.Recommended newsletters for youFT Exclusive — Be the first to see exclusive FT scoops, features, analysis and investigations. Sign up hereBreaking News — Be alerted to the latest stories as soon as they’re published. Sign up here More

Treasury Secretary Scott Bessent will meet his international counterparts at a G7 finance ministers meeting in Canada.Top finance officials from the world’s wealthiest economies will begin gathering in Canada on Tuesday for meetings that are expected to be consumed by renewed fears of a global downturn set off by President Trump’s trade war.The summit of the Group of 7 finance ministers, a traditionally friendly gathering, is likely to be more fraught this year. The tariffs that Mr. Trump has imposed on American allies and adversaries have threatened to blunt global growth and inflame inflation. Europe, Japan and Canada have all been bearing the brunt of the Trump administration’s “America first” economic agenda.The tenor of the discussions could also be complicated by recent tension between the United States and Canada, the country hosting this year’s meetings and one that Mr. Trump has said he wants to annex.“I think it’s going to be awkward,” said Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center.The three days of meetings will include many of the recent topics of discussion, including support for Ukraine, concerns about China’s economic practices and headwinds facing the global economy. However, Mr. Trump’s trade tactics, which many economists view as the biggest threat to global economic stability, will dominate the discussions between Treasury Secretary Scott Bessent and his counterparts.Mr. Bessent, who skipped a gathering of the Group of 20 finance ministers in February, will appear at the international forum for the first time and at a particularly tenuous moment.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More