The Finance 202: USMCA isn’t expected to have a big impact on the economy

THE TICKER

President Trump is on track to secure a political victory by forging a breakthrough with congressional Democrats to update the North American trade pact. But in a sign the agreement has more to do with rebranding than substance, economists project the deal will provide a minimal macroeconomic boost. 

Studies by both the International Monetary Fund and the International Trade Commission conclude the revamped pact won’t meaningfully goose economic growth: The ITC projects it will raise GDP by 0.35 percent after six years; and the IMF says its broad effects will be “negligible.”

Indeed, economists say the agreement may be most important for what it prevents. Trump had threatened to pull the United States out of NAFTA if the three countries couldn’t reach a deal. That would have spelled a disastrous breakdown in cross-border commerce with the two most important U.S. trading partners. “At a time when slower global growth, rising protectionism, lingering policy uncertainty and a strong dollar are constraining activity, the deal prevents a negative impact worth 0.5% of GDP from a dissolution of Nafta,” Oxford Economics chief U.S. economist Gregory Daco writes in a note to clients.

Investors largely shrugged off the announcement of the deal, with the Dow Jones industrial average and the S&P 500 actually shedding 0.1 percent on the day.

The updated pact — officially the United States-Mexico-Canada Agreement (USMCA) — along with a Phase 1 agreement with China to ease trade tensions with that country “will provide only limited overall gains for the economy, according to independent studies, economists and executives,” my colleague David Lynch writes. “In particular, there is little chance that large numbers of outsourced factory jobs will return to the United States, as the president promised.”

The United States shed nearly 6 million manufacturing jobs after NAFTA took effect in 1994 and China joined the World Trade Organization in 2001, but the tweaked USMCA deal stands to replace only 50,000 of them, Lynch notes, citing the ITC study.

The assessments stand in stark contrast to the Trump administration’s messaging on the deal. White House press secretary Stephanie Grisham called it “the biggest and best trade agreement in the history of the world.” U.S. Trade Representative Robert E. Lighthizer likewise hailed it as “the best trade agreement in history.”

The administration has some rare backup from congressional Democratic leaders, though they are apportioning the credit differently. “There is no question that this trade agreement is much better than NAFTA. It is infinitely better than what was initially proposed by the administration,” House Speaker Nancy Pelosi (D-Calif.) said. “We’re declaring victory for the American worker.”

And business groups from those representing steel to semiconductors praised the agreement and urged its swift ratification.

But not all industries fared equally. Tech, for example, emerged as a winner, per the Wall Street Journal’s Natalie Andrews, William Mauldin and Anthony Harrup: “The final deal still included liability protections for online content, language backed by technology firms that Pelosi sought to strip out of the bill. Mrs. Pelosi said she realized the tech protections were in the deal after she had already set the negotiating parameters. ‘I was too late going into it,’ Mrs. Pelosi said. ‘I lost.’”

Drugmakers, meanwhile, got shafted, per my colleague Heather Long: “Last year’s USMCA deal gave a certain type drug known as ‘biologics’ 10 years of exclusivity on the market. Democrats say this is now gone, a blow to drug companies that wanted more years to be able to charge higher prices. A factsheet Democrats provided also says that pharma companies won’t get three additional years of patent protection when they submit paperwork about a new use of a drug.”

And the auto industry will face rules mandating higher worker pay and the use of a larger share of North American components. That will mean higher costs, and, as Heather writes, it could also crimp selection, “especially on small cars that used to be produced in Mexico but may not be able to be brought across the border duty-free anymore.”

MARKET MOVERS

— Fed expected to hold steady. WSJ’s Nick Timiraos: “Federal Reserve officials are likely to hold their benchmark interest rate steady after their two-day meeting concludes Wednesday and aren’t expected to make notable changes to their wait-and-see posture on more rate reductions. The Fed cut interest rates by a quarter-percentage point at its past three meetings, most recently in late October to a range between 1.5% and 1.75%. This week’s meeting is shaping up as a comparatively uneventful end to a year that has been ‘far from dull,’ as Fed Chairman Jerome Powell dryly observed in a speech last month…

“Mr. Powell has said the economic outlook would need to weaken materially for the Fed to consider lowering rates further. His press conference is the most likely venue for any cues about whether this has changed, but recent data—including soft manufacturing activity but strong hiring—offer little reason for him to recast this message.”

— Tech stocks enjoy banner year, in the face of serious threats. NYT’s Matt Phillips: “This year, the S&P 500 tech sector is up more than 40 percent, handily outpacing the 25 percent gain for the benchmark index over all, which is itself the third-best annual return of the past two decades. Apple stock is up 70 percent, and it set a high-water mark last week. Google’s parent company, Alphabet, is up 28.5 percent, and set its own record on Monday. Microsoft shares have soared 49 percent in 2019, and Amazon is up 16 percent.

“And Facebook — whose chief executive, Mark Zuckerberg, has spent much of the past two years telling lawmakers why his company can be trusted on issues as varied as personal data and cryptocurrency — is up 53 percent. Tech has surged in part thanks to the tide of rate cuts unleashed by the Federal Reserve, which has lifted all boats. The gains also reflect the relief investors are feeling that the trade war’s worst outcomes haven’t come to pass.”

— Gundlach: Recession risk recedes. Bloomberg News: “Jeffrey Gundlach said the odds of a recession have fallen and warned investors to steer clear of corporate debt because of rising risks of a weak dollar. There’s a 35% chance of a recession by the end of next year, the bond manager said Tuesday. In September, he predicted 75%… While the bull market shows no signs of abating, investors and analysts have been watching closely for any weakness in the economy. Gundlach’s forecast is in step with economists who see the recession odds at 33%.”

TRUMP TRACKER

TRADE FLY-AROUND:

— U.S. and China planning for tariff delay: “U.S. and Chinese trade negotiators are laying the groundwork for a delay of a fresh round of tariffs set to kick in on Dec. 15, according to officials on both sides, as they continue to haggle over how to get Beijing to commit to massive purchases of U.S. farm products President Trump is insisting on for a near-term deal,” the Wall Street Journal’s Lingling Wei and Bob Davis report.

“In recent days, officials in both Beijing and Washington have signaled that Sunday is not the final date for reaching a so-called phase-one deal — even though that is the date President Trump has set for tariffs to increase on $165 billion of Chinese goods. That date could be extended, as has happened several times when the two sides thought they were on the verge of a deal. Those prior deals, though, never held and tariffs continued to mount.”

— Kudlow: No decision yet on Brazil, Argentina tariffs. Bloomberg News’s Saleha Mohsin and Rachel Gamarski: “Trump’s top economic adviser said Tuesday the administration hasn’t made a decision about re-imposing steel tariffs on Brazil and Argentina, even though the president said last week the duties were ‘effective immediately.’ Reinstating such tariffs has been discussed but there’s no decision yet, Larry Kudlow, the director of the White House’s National Economic Council, said at the Wall Street Journal’s CEO Council in Washington.

“The Brazilian government has yet to be notified by the U.S. about the intention to impose more duties on the country’s steel, according to a person with direct knowledge of the matter. Brazil plans to wait until it has official communication from the U.S. to make any decisions, the person said.”

POCKET CHANGE

— Barr says antitrust tech probes will be completed in 2020: “Attorney General William Barr said on Tuesday that he hoped to have Justice Department investigations of the big tech platforms — Facebook Inc, Alphabet Inc’s Google, Amazon.com Inc. and Apple Inc — completed next year,” Reuters’s Diane Bartz reports.

“The four tech companies have been lightning rods for regulator probes this year. In addition to the Justice investigations, the Federal Trade Commission, state attorneys general and Congress are looking at one or more of the companies. Barr said that the Justice Department review was not limited to antitrust, but that looking for anti-competitive behavior was ‘front and center.’ ” (Amazon CEO Jeff Bezos owns The Washington Post)

— Exxon cleared in climate-change accounting case: “A New York state judge cleared Exxon Mobil Corp. XOM of fraud claims, saying New York’s attorney general had failed to establish that the oil giant had deceived investors about how it accounted for the cost of future climate-change regulation,” the WSJ’s Corinne Ramey reports.

“The verdict Tuesday capped a nearly three-week civil trial between the state and Exxon, which had spent several years fighting the case. The company is battling similar accusations in other state and federal courts. In his 55-page ruling, New York State Supreme Court Justice Barry Ostrager said the attorney general’s office didn’t prove that the company had violated the Martin Act, a broad antifraud statute commonly used to pursue financial crime, or other similar laws.”

— Chevron makes more than $10 billion write-down: “Chevron Corp. is writing down the value of its assets by more than $10 billion, a concession that in an age of oil and gas overabundance, some will not be profitable anytime soon,” the WSJ’s Christopher M. Matthews and Rebecca Elliott report.

“In the largest write-down by an energy producer in years, Chevron said Tuesday that it was cutting the value of a number of properties, notably its U.S. shale holdings in Appalachia, by a combined $10 billion to $11 billion. Chevron is also restructuring its operations to focus on fewer prospects in the face of persistently low natural gas prices, and will explore sales of some assets.”

— Boeing’s struggles continue: “Boeing Co. delivered less than half as many planes in the first 11 months of 2019 as in the same period a year earlier, the planemaker said … as it continued to struggle with the grounding of its best-selling 737 MAX jets,” Sanjana Shivdas and Eric Johnson report.

“Deliveries totaled 345 aircraft in the 11 months ended November, compared to 704 last year and were also less than half the number delivered by European rival Airbus in the same period. Customers typically pay over the bulk of the money for a new jetliner on delivery, making it a crucial metric for the world’s big two jetliner producers.”

MONEY ON THE HILL

— Bloomberg pledges $10 million to boost House Democrats. The Post’s Michael Scherer: “Presidential candidate Mike Bloomberg will donate $10 million Thursday to defend vulnerable Democratic House members against paid Republican attacks on their support for impeachment proceedings against President Trump. The money, which is meant to even an arms race on the 2020 congressional battlefield, was cheered by [Pelosi], who has been fielding concerns from some of her members over a costly Republican advertising offensive as the House moves toward an impeachment vote next week.”

Bloomberg remains widely unpopular with voters. The Post’s Scott Clement and Emily Guskin: “Electability is a central pillar of former New York mayor Mike Bloomberg’s newly launched presidential campaign, but a poll released Tuesday finds he is deeply unpopular with voters nationwide.

“A Monmouth University poll found about twice as many registered voters rated Bloomberg negatively as positively — 54 percent unfavorable, 26 percent favorable. That margin was significantly worse than for five other Democratic candidates, as well as for President Trump. That same measure hampered Hillary Clinton’s campaign in 2016. A separate Quinnipiac University poll released Tuesday found that despite Bloomberg’s negative personal ratings, he led Trump by six percentage points in a head-to-head matchup, 48 percent to 42 percent.”

— Buttigieg releases names of McKinsey clients: “Presidential contender Pete Buttigieg released the names of his private and government clients during his stint as a consultant at McKinsey & Company, following weeks of demands from his critics for greater transparency about his fundraising and his past employment,” my colleagues Chelsea Janes and Amy B Wang report. 

“The list includes Blue Cross Blue Shield of Michigan, the Canadian supermarket Loblaws, Best Buy, the Natural Resources Defense Council, the Environmental Protection Agency, the Department of Energy, the U.S. Postal Service and the Department of Defense. According to the campaign, Buttigieg’s work for Blue Cross Blue Shield ‘looked at overhead expenditures such as rent, utilities, and company travel. The project he was assigned to did not involve policies, premiums, or benefits.'”

— Investors fear Pelosi’s drug plan will hurt small biotech firms: “Private equity investors are lobbying against [Pelosi’s] sweeping drug pricing bill, telling her legislative aides in a series of private meetings in recent weeks that the plan would dry up financing for small biotech companies,” CNBC’s Berkeley Lovelace Jr. reports.

“A group of venture capitalists, including Peter Kolchinsky of RA Capital Management, Johannes Fruehauf of BioInnovation Capital and Sara Nayeem of New Enterprise Associates, met with Pelosi’s staff as well as moderate House and Senate Democrats on Oct. 29 to discuss their concerns. The investors have had follow-up meetings since, according to John Stanford, executive director of venture capital advocacy group Incubate.”

— Senators threaten to regulate encryption: Lawmakers “threatened to pass litigation that would force technology companies to provide court-ordered access to encrypted devices and messages unless the businesses can come up with a solution,” CNBC’s Lauren Feiner reports.

“The company representatives were joined by Manhattan District Attorney Cyrus Vance and Matt Tait, a cybersecurity fellow at the University of Texas at Austin, to discuss encryption and lawful access. Tech companies and government agencies are at odds over how to handle encryption in a world where criminals, like the rest of us, are spending more time on their smartphones and other gadgets.”

CHART TOPPER

The trade war has buffeted the Fed all year. Via Bloomberg Graphics: 

DAYBOOK

Today:

• American Eagle, Lululemon, United Natural Foods and Vera Bradley are among the notable companies to report their earnings, per Kiplinger

Thursday:

• Costco, Adobe and Oracle are among the notable companies to report their earnings, per Kiplinger

Friday:

• The Commerce Department releases the latest retail sales numbers

THE FUNNIES

From The Post’s Ann Telnaes:

BULL SESSION