Brazil and US formalize negotiations for free-trade deal

Brazil and the US formalized their negotiations for a free trade deal. “What was just a thought now is this: we are officially starting negotiations with the US,” said Economy Minister Paulo Guedes after a meeting yesterday with Secretary of Commerce Wilbur Ross, who had previously met with President Jair Bolsonaro. According to Mr. Bolsonaro, Mr. Ross warned him about “traps” in the Mercosur-European Union agreement that could prevent an understanding between Brazil and the US. Brazilian officials say they want to keep negotiations with the US going even after specific issues, like ethanol and wheat trade, are solved. On the other hand, the agreement with the Europeans is seen as a key element to keep the pressure on the US. Valor has learned that all negotiations may bump into political uncertainties, with elections in Argentina this year and in the US in 2020.

Source: Valor Econômico


Why US-China trade war’s latest escalation could be good news for Brazil, Mexico and Vietnam

Brazil, Mexico and Vietnam are among the countries that could make marginal gains in areas such as manufacturing and agriculture should US-China tensions continue after they flared up again this week, analysts have said.

The trade war between Washington and Beijing has already caused shifts in global trade, and will continue to create winners and losers as businesses try to cope with increased uncertainty.

The United States officially raised tariffs on US$200 billion of Chinese goods from 10 to 25 per cent on Friday, in a new escalation of tensions even as China’s Vice-Premier Liu He visited Washington for talks.

Donald Trump had said last month that the two sides were “very close” to a deal that would end nearly a year of mutual tariff levies, but the introduction of new tariffs on Friday – as threatened by Trump last Sunday – may change the landscape.

Global trade networks have been rocked by the US-China tariff exchanges that began last July, but uncertainty for some has opened doors for others.

“So far, US-initiated tariffs have mainly hit lower-end and labour-intensive sectors,” said Rob Koepp, Hong Kong director of The Economist Corporate Network. “Economies that are well positioned on the sidelines, like

Vietnam and Brazil, then have an opportunity to jump in and offer goods that avoid the increasing tariffs.”

The latest official monthly figures from Vietnam for April showed a 29 per cent increase in US-bound exports year-on-year, while capital contributions from foreign investors were up 215 per cent, largely in manufacturing.

A study by The Economist Intelligence Unit late last year suggested that many countries around Asia could reap the benefits of filling China’s shoes in exports to the US. Malaysia and Vietnam were projected to be the biggest winners in IT equipment manufacturing, while Bangladesh, India and Vietnam were potentially able to enjoy a boost in exports of ready-made garments.

Tommy Wu, a senior economist at Oxford Economics, said: “Malaysia and Thailand could also be winners because they have relatively good infrastructure already in place and have a more business-friendly environment than places like the Philippines or Indonesia that have the advantage of lower wages but also poorer infrastructure.”

Wu warned, however, that renewed escalation of US-China trade tensions may generally have a negative effect on trade in Asia.

“There is some trade diversion where Asian economies have seen exports to the US rising, but that was not enough to offset the overall trade weakness.”

The Asian Development Bank downgraded its growth forecast for the Asian economy this year from 5.7 per cent to 5.6 per cent, citing US-China trade tensions as a factor along with other uncertainties such as Brexit.

US soybean growers expressed displeasure with Trump’s new tariffs, fearing that retaliatory tariffs placed by China on their beans last year may continue to cut sales to China. Brazil stepped in to deliver  record amounts of soybeans to China last year, along with an increase in other agricultural products.

US neighbour Mexico may also benefit from less US reliance on China and make a comeback in furniture, toys and textile manufacturing, in which it has lost out to China since China joined the World Trade Organisation, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“Even with the new Nafta [North American Free Trade Agreement] not signed, Mexico is moving up the rankings as a trading partner for the US,” he said. “The Mexican peso might be a beneficiary of the trade war.”

Source: South China Morning Post

Green lights for emerging markets get brighter

Emerging markets have started 2019 well due to a sharp U-turn in monetary policy around the globe and an easing of trade war tension between China and the US. The Fed and ECB’s change in monetary policy was initiated after the ‘blood bath’ in markets in December 2018. This shift has redirected flows from higher yield expectations across developed markets to yield hunting in emerging markets. Stabilisation in the USD in early 2019 versus its sharp strengthening in 2018 has been a big positive driving force for emerging markets despite lots of other persistent risky issues: the China-US trade deal has not been agreed yet, keeping intrigue for emerging markets sentiment; (geo)political turbulence is still in place for Hungary, India, Kazakhstan, Poland, Russia, Turkey and Ukraine. Many economic issues should be solved locally in 2019, for instance in Brazil and China.

In line with markets, we remain confident that the China-US trade deal will be agreed later in Q2 19. Any withdrawal from the current ‘trade talks journey’ by either counterparty would weigh immediately on emerging market sentiment. After US President Donald Trump has dealt with US-China trade, we could see his attention shifting to starting a trade war with the EU. If this happens in May 2019, the biggest losers would be the Central and Eastern European economies. Market expectations are still in favour of Germany’s economic pickup in Q2 19, which is fuelling the Czech, Hungarian and Polish economies, but Trump’s auto tariff idea would spoil the sentiment overnight.

Economic growth in emerging markets is set to slow down less than expected on easing monetary conditions. Given stabilisation in currencies across many emerging markets, accelerated inflation is set to calm down in H2 19, allowing emerging markets’ central banks to follow a change of monetary stance in developed countries. We have seen the first shoots of monetary easing in China and India in Q1 19. We also see tentative signs of a bottom in China (PMI, metals), which has eased concerns about a hard landing in the country. Other Asian economies are likely to follow the pattern very soon, while Russia, South Africa, Turkey and Brazil could join the cuts later in 2019, helping economic expansion in particular looking ahead to 2020.

We now see many yellow lights in the emerging market risks heat map becoming green, while the green lights are becoming even greener. However, there is still a risk that a possible new TRY crisis will put the brakes on the appetite for emerging markets in H1 19.