Economy

This article is an on-site version of our Trade Secrets newsletter. Premium subscribers can sign up here to get the newsletter delivered every Monday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWe’re asked to use the term “scrambling” sparingly at the FT, as it suggests a degree of physical panic not always appropriate to the modest bureaucratic and corporate manoeuvres we mainly write about. But Canadian Prime Minister Justin Trudeau definitely scrambled to dine with Donald Trump at Mar-a-Lago on Friday night to plead for tariff mercy. He got a statement of positive vibes, into which we should read nothing until the president-elect acts, or until he definitely doesn’t. Today’s newsletter is on Trump’s broadside on the fictional challenge from a Brics currency, and also on the effect of his tariff threats on the furniture giant Ikea. Charted Waters is on the EU’s use of trade defence instruments. So here’s a falsifiable prediction I’d like you to make: will Trump have imposed any new tariffs on Canada by the end of January, 11 days after he takes office? A simple yes-no to alan.beattie@ft.com.Get in touch. Email me at alan.beattie@ft.comCurrency claptrapThe cry “Thar she blows!” went up on Saturday as Donald Trump surfaced with another explosive threat, this time against the Brics countries for their plans to create a currency to replace the dollar. Just two tiny issues with this gibberish. One, the Brics nations do not in fact have an alternative to the dollar. Two, they’re more likely to look for one in earnest if Trump ramps up using the dollar to coerce them.The Brics, and particularly Russia, have a general growling resentment about the US’s control over the global payments and bank funding systems, which enables it to impose financial sanctions beyond America’s borders. They have done a bit of bilateral trading in local currencies to try to avoid said sanctions. But there are no serious plans beyond some hilariously quixotic briefing, including an idea apparently out of Moscow about a currency backed by gold which goes beyond straightforward goldbug fan fiction and is essentially just howling at the moon.If they did want to challenge the dollar, the logical way would be to put forward one of their own currencies as a rival, but the only one of remotely plausible size is the Chinese renminbi, and no one’s about to adopt a global currency which is protected by capital controls.OK, so enough shooting fish in a barrel. What conclusions do we draw from this? One, it underlines the failure of emerging markets to organise themselves into a coherent geoeconomic force, certainly in the financial system. (Chinese power in trade and technology, by the way, is a very different issue, which I’ll get to later this week.) Second, as I’ve said before, Trump hasn’t decided whether he wants a dollar that dominates the global financial system or (as vice-president-elect JD Vance does) a weak dollar that benefits US exports. It is of course possible to have both, as Trade Secrets favourite Karthik Sankaran has consistently and I think correctly argued, but this level of sophistication is not where Trump or Vance are at.So Trump is again proving my argument that he has prejudices, not a plan. Having said that, nothing is going to provide an incentive to countries finding other options to the dollar quite as much as Trump weaponising it yet further. Imposing sanctions on Iran and Russia is one thing. If Trump starts trying to cut China out of the dollar system the search for an alternative will gain urgency.Flat-pack frettingOf all the examples of the Trump tariff challenges so far, this one last week caught my eye. Ingka Group, the Ikea franchisee that runs 90 per cent of the furniture giant’s stores, announced a fall in earnings and said its performance would be threatened further by Trump’s tariff war.When I spoke in September to Jon Abrahamsson Ring, the chief executive of Inter Ikea, which owns the brand and designs the products, he was clear that the American market was particularly vulnerable to trade conflict and transport interruptions. Unlike a lot of consumer goods companies, Ikea doesn’t do a lot of labour cost arbitrage, that is producing in cheaper Asian countries and selling globally. Europe makes up 70 per cent of sales, and 70 per cent of that is produced in Europe. Heavy use of automation offsets high European labour costs. (Hence production was less affected by Covid-19 than you might have imagined: the main problems were in transport and particularly in opening the stores.)Meanwhile, its Asian stores are similarly mainly supplied from Asia. But as Ring told me: “The Americas is the one place we need to increase regional/local production. At the moment only 10 per cent is produced in the region.”I asked him about the threat of Trump tariffs. His answer: “We do monitor the possible impact of transatlantic trade conflict, but in reality we would be doing this anyway.” The thing is, though, which risk exactly are you mitigating? If you’re sourcing locally because of the threat of interruptions to transatlantic or transpacific trade, then you can treat all of the Americas as a single production area and market. Buy your wood in Canada, they’ve got lots of it. But even before Trump, the US earlier this year escalated a long-running trade dispute by nearly doubling tariffs on imports of so-called softwood lumber, challenging its long dominance in the US market. And with Trump threatening Canada with tariffs it would be bold to assume you can treat North America as a single market as you might the EU.Charted watersCall the EU protectionist if you like, but when it comes to trade defence (or trade remedies as the US would call it) including antidumping and antisubsidy duties, it’s actually quite a light user.Trade linksIn more depressing death-of-multilateralism news, talks have failed on a treaty to reduce plastic use. There’s still a great future in them evidently.The FT looks at how exposed the US car industry is to the Trump tariffs.Speaking of cars, the Chinese car company BYD is thinking again about the wisdom of building an EV plant in Mexico given Trump’s threats.EU solidarity and the hell with it, Part I: Poland joins France in opposing the EU-Mercosur deal, reducing the chances of an emblematic victory for the forces of rule-based trade.EU solidarity and the hell with it, Part II: like Justin Trudeau, the Dutch government is trying to get Trump’s ear on trade before he takes office. There’s some palace politics stuff kicking around about why Trump didn’t appoint Robert Lighthizer to his administration, which I’d greet with the usual shrug.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youChris Giles on Central Banks — Vital news and views on what central banks are thinking, inflation, interest rates and money. 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India’s economic growth slowed more than expected in the second quarter of the financial year, hampered by weaker expansion in manufacturing and consumption, adding pressure on the central bank to cut rates.The government expects growth to accelerate in the second half of the year, Ajay Seth said.It has put in place an “investor friendly policy” to attract investors while simplifying tax rules, Pankaj Chaudhary, India’s junior finance minister, told lawmakers separately on Monday.Prime Minister Narendra Modi, after electoral wins last month in the state assembly elections of Maharashtra and Haryana, is expected to boost spending on infrastructure projects as part of the $576 billion budget plan announced in July.India also plans measures including an increase in incentives to electric vehicle automakers to boost domestic manufacturing and amend insurance laws to raise the foreign direct investment (FDI) limit to 100% from 74%. Analysts said that an increase in government spending in the second half of the fiscal year ending in March 2025, should boost growth. “The quarter ending December is likely to benefit from a rise in government expenditure over the last few weeks,” said Pranjul Bhandari, chief economist at HSBC Research. Bhandari added that a sharp rise in services and goods exports in October was likely to gain momentum, as inventories are stocked up globally in anticipation of higher trade tariffs in 2025. More

LONDON (Reuters) -French borrowing costs rose above those of Greece on Monday for the first time, as Michel Barnier’s government teetered on the brink of collapse, underlining a dramatic shift in how lenders view the creditworthiness of euro zone members.The far-right National Rally (RN) party on Monday said it was ready to trigger a no-confidence vote in the government, in the latest salvo in a dispute over Barnier’s proposed budget that includes 60 billion euros ($63 billion) in tax hikes and spending cuts.Bond investors worry that the collapse of the government would mean any effort to cut borrowing is jettisoned.”It’s hard to see what the end-game would be if the government would fall now,” said Michiel Tukker, senior European rates strategist at lender ING.”Quite a milestone is the symbolic passing of Greek yields versus French yields,” he said. “Historically there used to be a fixed hierarchy – Greek is the riskiest, then Italian, then French, then German – and there’s been a breakdown in people’s minds of how those countries are ranked.”In the middle of the euro zone sovereign crisis in 2012, Greece’s borrowing costs, as measured by its 10-year bond yield, shot to more than 37 percentage points above those of France, as Greece looked destined to default on its debts.Fast forward 12-1/2 years and Greek bond yields on Monday morning briefly traded 0.01 percentage points below France’s at around 2.9%, according to LSEG data. The French political crisis was also weighing on the euro, which was 0.6% lower versus the U.S. dollar.France’s rising debt levels had been slowly eroding its advantages in the bond market for years. Then, the risk premium investors demand to buy French debt compared to its neighbours shot higher in June when President Emmanuel Macron called a snap election that resulted in a fragile hung parliament.Meanwhile, the countries once at the centre of the 2012 crisis and labeled the PIGS – Portugal, Italy, Greece and Spain – have cut their debt levels and become more attractive to bond investors.Greek public debt was already running at 100% of GDP before the euro zone crisis and surged to more than 200% as COVID-19 hit in 2020. But it has since dropped to around 160% of GDP and economists expect it to continue to fall. French debt is historically elevated at around 110% of GDP and rising. The state has spent heavily in response to the shocks of COVID-19 and the Ukraine war, while tax receipts have lagged expectations. “Even if the government did achieve its planned consolidation, France would still have a pretty elevated budget deficit,” said Max Kitson, rates strategist at Barclays (LON:BARC).”If you look at Greece’s debt-to-GDP profile, you have a downwards trajectory which contrasts with France’s upwards trajectory.”Similar efforts to rein in debt – as well as years of bond purchases by the European Central Bank – in Ireland, Portugal and Spain have seen those countries’ borrowing costs fall below those of France.On the plus side for France, its bond yields have not risen sharply in absolute terms. The 10-year yield in fact fell around 24 basis points in November as weak euro zone economic data boosted investor bets on European Central Bank rate cuts.S&P Global Ratings on Friday held its rating on France’s long-term sovereign debt, in what has proved to be a fleeting moment of respite for Barnier’s government. More

While the brunt of potential tariffs is likely to fall on Europe and other major trading partners, the interconnected nature of global trade means Britain’s economy is not immune to the fallout.As per UBS’ note, the UK’s relatively small trade surplus with the U.S. in goods—just £2.4 billion in 2023—puts it lower on the priority list for Washington’s tariff targets. By contrast, the European Union recorded a much larger goods trade surplus of €177 billion with the U.S. in the same year. This makes the EU a more likely focal point for targeted measures, particularly as U.S. trade policy under Trump is expected to be driven by a desire to reduce bilateral trade deficits.The UK’s trade position is further buffered by its surplus in services, estimated at nearly £69 billion in 2023. Services, unlike goods, are not expected to be subjected to new tariffs, offering some economic insulation. Yet, as UBS analysts flag, this relative immunity does not shield the UK from the broader economic consequences of a tariff-driven slowdown in global trade.Even if the UK avoids direct tariffs, it remains deeply tied to the fortunes of its trading partners. The EU, which remains Britain’s largest trading partner post-Brexit, could see a hit to its economy if U.S. tariffs are imposed on European goods. Such a slowdown would inevitably affect UK exports to the EU and other regions, creating indirect economic pressures. UBS warns that as a “small, open economy,” the UK is particularly exposed to shifts in global trade dynamics.While trade relations between the UK and U.S. have generally been strong, with minimal trade imbalances compared to other blocs, UBS analysts caution against complacency. They argue that the broader uncertainty surrounding U.S. trade policies could still affect business sentiment and investment decisions in the UK, even if tariffs do not directly impact British goods.The analysts suggest that while tariffs may not rank high on the list of immediate concerns for the UK economy, their knock-on effects could add to the challenges Britain faces in navigating a fragile global economic landscape. For now, the UK’s focus remains on mitigating the secondary impacts of trade policy shifts, while continuing to leverage its strengths in the services sector to bolster economic resilience. More

WASHINGTON (Reuters) – For much of the past 17 years the Federal Reserve has been the central player in U.S. economic policy, throwing multi-trillion-dollar safety nets under the financial system, offering nearly a decade of ultra-cheap money, jumping redlines during the COVID-19 pandemic, and delving more into areas like equity and climate change.But that expansive role has now shrunk to one of terse policy statements, a meat-and-potatoes debate over interest rates, a declining stash of bonds, and a growing possibility that Fed Chair Jerome Powell may be remembered both as the man who got the U.S. through the economic crisis triggered by the pandemic and the one who made central banking boring again.Former St. Louis Fed President James Bullard was on the policymaking team that saw the central bank’s role expand during the 2007-2009 financial crisis, watched as it mushroomed again during the pandemic and sees it now morphing back into something more normal.In recent years “we had to go back to kind of heavy-duty inflation fighting that is reminiscent of the old days when you did not worry about the zero lower bound, you did not worry about balance sheet policy,” Bullard said. “It is kind of plain vanilla in that respect. Times have changed.”Bullard, who is now the dean of the Mitch Daniels School of Business at Purdue University, will give the opening address on Monday at a conference in Washington about the Fed’s monetary policy framework and its strategy for achieving its mandate to foster price stability and maximum employment.For all the potential controversy around the Fed posed by Donald Trump’s victory in the Nov. 5 election – hints, for example, that the U.S. president-elect might rekindle his first-term feud with Powell by trying to fire or undercut him – there’s an alternate possibility that the framework discussion highlights: That with inflation coming under control, the economy growing, and interest rates in their longer-run historic range, the central bank may be moving somewhat offstage, with its steady focus on inflation now the important thing for the incoming administration to sustain.SUPER-LOW RATES NO LONGER NEEDEDTrump’s initial picks for his economic team have been more conventional than not. The conference in Washington, which is organized by the American Institute for Economic Research, includes a keynote address by Fed Governor Christopher Waller, an appointee from Trump’s first term in the White House who, like Fed Governor Michelle Bowman, would offer an in-house option for new leadership when Powell’s term as central bank chief expires in May 2026. With Powell, Waller has been a leading force in navigating the fight against inflation and steering the Fed system away from issues like climate change that are outside the direct sway of monetary policy and which had raised tensions with some Republicans in Congress.Waller is likely to have a strong voice, too, in reforming the Fed’s current policy framework, which at its adoption in 2020 took the central bank into new territory that many now see as out of step with the current economic environment.The outbreak of the pandemic that year led to widespread unemployment and made the healing of the labor market a top priority for central bankers determined not to see a replay of the slow-paced employment recovery after the 2007-2009 crisis that many feel caused a lost decade, scarring a generation of workers. Chronically weak inflation and historically low interest rates also sparked concerns about stagnation.The 2020 framework tried to address all of those issues with a new commitment to “broad-based and inclusive” employment amid expectations that interest rates would remain low and end up near the zero level “more frequently than in the past.”  The “zero lower bound” is the bane of a central banker’s existence: Once interest rates go to zero, only bad and politically difficult options remain to further support the economy. Interest rates can be pushed into negative territory, in effect taxing people for saving, or other unconventional steps can be taken, such as large-scale bond purchases to suppress long-term rates and promises to keep rates low for a long time.The solution for the 2020 Fed was to promise periods of higher inflation to offset periods of weak price growth, which its policymakers hoped would keep inflation at the central bank’s 2% target on average.What followed, for a variety of reasons, was the worst inflation in 40 years, which spurred the Fed to aggressively raise interest rates in 2022 and 2023. Whatever else that meant for the U.S. economic and political landscape, it may have also juiced the entire economy out of its torpor and put fiscal and other policies back in the driver’s seat. “The economy and stock market simply don’t require super-low rates anymore,” said David Russell, global head of market strategy for TradeStation. “Trade and tax policy will probably matter more than monetary policy going forward.”PREEMPTIVE ACTIONS ‘NECESSARY’Fed officials now see inflation pressures remaining more elevated than before the pandemic, with rates lodged far enough above zero that they can achieve their goals by raising and lowering them, just as central bankers did before the “Great Recession” unleashed use of unconventional methods 17 years ago. Those tools remain at hand, and a big enough shock may see their return. Some economists argue, for example, that the incoming Trump administration’s policies, by simultaneously raising the price of imports with tariffs, stoking spending through lower taxes, and restricting the pool of available workers by limiting immigration, could rock an economy the Fed feels is currently both healthy and in balance.But there is emerging agreement that the central bank’s current framework was tailored too much to the circumstances and risks of the decade after the 2007-2009 crisis and the pandemic era, and needs to return to a more cautious stance on inflation.Fed staff research has suggested that stance provides better job market outcomes anyway, and a return to the old-school philosophy of suppressing inflation before it takes hold has regained favor.”Preemptive monetary policy actions are not only appropriate, but necessary,” economists Christina Romer and David Romer wrote in research for a Brookings Institution conference in September. The Fed “should not deliberately seek a hot labor market,” they wrote, since the blunt tools of monetary policy “cannot … reduce poverty or counter rising inequality.”Powell seems to have anticipated changes ahead, and not unwelcome ones given they indicate the U.S. has escaped the need for extraordinary Fed support, something he was not fully comfortable with in his first years as a central bank governor.After pushing Fed power to its limit during the pandemic, he may leave his successor a much more focused institution.”Twenty years of low inflation ended a year and four months after we did the framework,” Powell said last month in Dallas where he spoke of a return to a more “traditional” style of central banking. “Shouldn’t we change the framework to reflect interest rates are higher now, so that some of the changes we made … shouldn’t be the base case anymore?” More

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ATHENS (Reuters) – The European Central Bank is expected to continue cutting interest rates this month, ECB policymaker Yannis Stournaras said on Monday.”Apparently, we will continue cutting interest rates in December,” Stournaras, the governor at the Bank of Greece and one of the doves on the ECB’s Governing Council who favours lower rates, told a conference in Athens run by a Greek financial website. More

JAKARTA (Reuters) – Indonesia and Canada on Monday signed a Comprehensive Economic Partnership Agreement (CEPA) that aims to strengthen economic ties between the two G20 members, three years after negotiations began. The agreement will take effect in 2026 and was signed in Jakarta by trade ministers of both countries.Indonesia’s trade minister, Budi Santoso, said Indonesia appreciated Canada’s support for its plan to prioritise its critical minerals sector, which was vital for its sustainable growth. “Together, we advance sustainable critical mineral management, supporting Indonesia’s net zero target by 2060, and fostering Canadian investment while driving green growth in both nations,” he told a joint press conference. Indonesia has rich deposits of tin, copper and bauxite, among others, and is the world’s largest source of nickel ore.Under CEPA, Indonesia will see liberalisation of 90.5% of the total tariffs for goods entering Canada with a trade value of $1.4 billion. Two-way trade between Indonesia and Canada was $3.4 billion last year, according to with Indonesia’s trade ministry. Canada has estimated bilateral trade at $5.1 billion in 2023. Canada’s main exports to Indonesia were agriculture products fertilizers, while Indonesia mainly exported machinery and electrical machinery as well as garments and footwear. Canada’s international trade minister, Mary Ng said the country’s cattle industry was also represented on the Jakarta visit and looking to play a part in President Prabowo Subianto’s signature programme to provide free school meals from next year.Asked about U.S. President-elect Donald Trump’s plan to impose 25% tariffs on Canadian goods, Ng told Reuters: “We need to work with the Americans and we’re committed to doing that and that work will certainly continue”.”The good news here is that Canada and Indonesia in the negotiating of this trade agreement means that we are creating a predictability of our trading relationship, bringing down tariffs,” she added. More