- U.S. tariff retaliation for digital taxes is more likely after U.S. pulls out of negotiations
- Lighthizer offers generally downbeat trade news
- U.S. unemployment claims expected to remain painfully high
- U.S. leading indicators expected to reboundÂ
- Treasury auctions 5-year TIPS
U.S. tariff retaliation for digital taxes is more likely after U.S. pulls out of negotiations — The chances increased yesterday that the Trump administration will slap tariffs on multiple countries for their digital tax plans.
The Trump administration pulled out of talks with European countries on a digital tax, according to USTR Lighthizer. Mr. Lighthizer told a Congressional committee yesterday that Treasury Secretary Mnuchin told European countries that the U.S. is “no longer involved in the negotiations” since “we were making no headway.”
The U.S. Trade Representative’s Office is already conducting a Section 301 investigation of the digital tax, and the outcome of that investigation could provide the basis for tariffs. The U.S. already announced tariffs against France for its digital tax, although those tariffs have been deferred during a truce and France is not yet collecting the tax.
The Trump administration’s termination of talks with European countries reduces the chances that the talks on digital taxes under the auspices OECD will make any headway. OECD officials hoped to wrap up those talks by year-end, but Bloomberg reports that officials now believe the talks will spill over into 2021.
There seems to be no real hope that the Trump administration will be able to stop the tsunami of countries that are planning to tax the profits of digital companies, mostly U.S. tech giants such as Google, Amazon, and Facebook. There is a very real chance that the Trump administration by this autumn will go ahead with tariffs as retaliation for digital taxes.
Lighthizer offers generally downbeat trade news — Most of USTR Lighthizer’s testimony yesterday before the House Ways and Means Committee illustrated the potential for new trade tensions before the November election. Mr. Lighthizer said that the U.S. has made “very little” headway with the EU on trade. The EU is expected to soon get a WTO ruling in its favor on Boeing subsidies, which would allow the EU to slap WTO-sanctioned tariffs on the U.S. and effectively retaliate for earlier U.S. tariffs on the EU for Airbus subsidies.
The U.S. is also still trying to get the EU to negotiate on agriculture, which the EU refuses to do, despite the implicit threat by President Trump to slap tariffs on EU autos. The U.S. is making no headway in those trade talks.
The markets may soon have US/Japanese trade relations to worry about again. Mr. Lighthizer said that the U.S. plans to start phase 2 trade talks with Japan in a “couple of months.” The main U.S. cudgel is again expected to be a threat to slap tariffs on Japanese autos.
In some positive news, Mr. Lighthizer said the US/Chinese trade agreement is an “excellent deal” and that China has reaffirmed its intention to live up to its agreement to buy $200 billion of extra U.S. products in 2020/21. He noted that China recently bought $1 billion of U.S. cotton. However, he said energy purchases have been a problem and that China in particular needs to buy more U.S. ethanol.
China is far behind its targets for purchasing U.S. products and there is little hope that China will meet this year’s targets. President Trump has so far let China slide due to the pandemic, but Mr. Trump could start ramping up new pressure on China to buy more U.S. farm products ahead of the November election.
In some slightly positive UK/EU news, European Commission President Ursula von der Leyen on Wednesday seemed to soften the EU position a bit on EU demands for full fishing rights in UK waters and for the European Court of Justice to have jurisdiction over EU/UK trade disputes. EU and UK officials will hold a marathon round of formal talks from June 29 until late July, and then another round in mid-August. There will be a hard-Brexit at year-end if there is no EU/UK trade deal or transition extension by then.
U.S. unemployment claims expected to remain painfully high — The market consensus is for today’s U.S. initial unemployment claims report to fall a bit from last week’s report but remain extremely high at 1.29 million in the week ended last Friday. Initial claims in last week’s report fell by -355,000 to 1.542 million.
There is currently a huge amount of churn in the labor market where many employees are still being laid off by strapped companies, while other companies are reopening and are hiring back at least some of their employees. The net effect is expected to be a -1.079 million decline in continuing unemployment claims in today’s report to 19.850 million, adding to last week’s -339,000 decline to 20.929 million. Continuing claims are currently about 19 million above the pre-pandemic level, showing that 19 million people are currently on the unemployment rolls due to the pandemic.
U.S. leading indicators expected to rebound — The consensus is for today’s May leading indicators index to rebound higher by +2.4% m/m after March’s drop of -7.4% and April’s drop of -4.4%. On a year-on-year basis, the LEI in April fell by -11.5% y/y, which was the worst figure since 2008. Any recovery in the LEI will be a welcome sign that the U.S. economy is bouncing higher, even if at a disappointingly slow pace.
Treasury auctions 5-year TIPS — The Treasury today will sell $15 billion of 5-year TIPS in a reopening of April’s auction of the 1/8% 5-year TIPS of April 2025. Today’s 5-year TIPS issue was trading at -0.737% in when-issued trading late yesterday afternoon. There was strong demand for yesterday’s 20-year T-bond auction, with a bid cover ratio of 2.63.
