Category Archives: Buttonwood’s notebook

The changing face of global trade

TRADE has changed a lot in the last 25 years. Indeed, we are still struggling to understand why trade growth was so rapid before the 2008 crisis, and has been relatively sluggish since. Richard Baldwin's new book "The Great Convergence: Information Technology and the New Globalization" was reviewed in last week's issue (and here are the thoughts of the FT's Martin Wolf). But the book is so important that it is worth looking again at some of its insights.

The first is that we tend to think of competitiveness of individual states (particularly in an era of populist nationalism) - the US is competing against China and Germany. But goods are no longer assembled entirely within the bounds of one factory in one country. Instead, many goods are assembled in "global value chains" in which products are designed in one country, but made from parts built in several countries and assembled in another country. As Mr Baldwin...Continue reading

Rethinking central bank independence

CENTRAL bankers are under fire. In America, President-elect Donald Trump said that the Federal Reserve chair Janet Yellen should be "ashamed of herself" for keeping rates too low; in Britain, Mark Carney of the Bank of England has been criticised for his views on the economic risks of Brexit; and in Europe, Mario Draghi has faced attacks from critics in Germany (for being too lax) and Greece (for being too tight).

In a new paper Ed Balls, who played an influential role in making the Bank of England independent, has teamed up with James Howat and Anna Stansbury to try to think through the role and wider responsibilities of the central bank. It is very much worth a read and here are my first thoughts (colleagues will doubtless chip in later).

As the paper points out, central bank power has increased in the wake of the 2007-08 crisis, extending well beyond the narrow pre-crisis focus on using interest rate policy to meet inflation targets. But the worry is that

Absolutist interpretations of complete central bank...Continue reading

Brexit means…a lot of complex trade decisions

POLITICIANS campaign in soundbites but reality deals in awkward paragraphs. For all the sloganeering (Brexit means Brexit) and the prevarication, the British government must finally decide what kind of trade-offs it is willing to accept when it leaves the EU. The UK trade policy observatory at the University of Sussex has an excellent new paper out on the choices facing the country, which was the subject of a lunchtime seminar today.

The British government seems to have four red lines. It wants to stop free movement of labour; to be allowed to pursue an independent trade policy; not to contribute to the EU Budget; and to break away from legal oversight by the European Court of Justice. (All of these can be summed up by the slogan "taking back control"). The EU's sole red line seems to be that Britain cannot benefit from "cherry picking" - for example, benefiting from membership of the single market in terms of goods trade, but not allowing free labour movement.

To understand the trade-offs, we must first understand the terms. The single market is an...Continue reading

Markets are hoping for Bush 3.0

CONVENTIONAL wisdom gets turned on its head quickly in the financial markets. Although many on Wall Street were gloomy about the prospects under a Trump presidency, the markets have performed a sharp U-turn after the overnight decline on election day.

So many people (including The Economist) had warned of the crazy policies of Donald Trump that there was always going to be a market for contrarians to say that he won’t be that bad after all. Especially among white, prosperous financial commentators there is a willingness to “normalise” Mr Trump—to tell the groups he has insulted and threatened to get over their fears. What Mr Trump does in office will be different from what he said on the campaign, they think. (If you want to see what minority groups have to put up with from Mr Trump’s supporters, look here.) 

What investors clearly hope is that Mr Trump will get to implement some of his policies but not all—in particular the tax cuts for the wealthy and for business, increased military spending and financial...Continue reading

Donald Trump’s surprise early success causes a sell-off in equities and the Mexican peso

FINANCIAL markets went into the election night both favouring and expecting a Clinton victory. And the early results seemed to point to success for the Democrat candidate. But as the night wore on, Donald Trump’s position steadily improved and investors started to lose their nerve.

The Mexican peso was the most sensitive emerging-market currency to the election news, given Donald Trump’s promises to build a wall on the border and his talk of renegotiating the Nafta free trade agreement. During the day, the peso was around 18.5/$ and it reached as high as 18.18/$ in early polling. But as the key state of Florida moved from a Clinton to a Trump lead, the peso plunged to more than 20 to the dollar. In contrast, the dollar lost ground against other major currencies, falling 3% against the yen.

A similar reaction was seen in equities. On November 7th, when Clinton’s lead in the polls was strengthening, the Dow...Continue reading