Weekend reading links

1. The US Government under Donald Trump is rapidly degenerating into a lawless one. Sample this from the happenings in the Treasury Department. 

Treasury Secretary Scott Bessent gave representatives of the so-called Department of Government Efficiency full access to the federal payment system... The new authority follows a standoff this week with a top Treasury official who had resisted allowing Mr. Musk’s lieutenants into the department’s payment system, which sends out money on behalf of the entire federal government. The official, a career civil servant named David Lebryk, was put on leave and then suddenly retired on Friday after the dispute, according to people familiar with his exit. The system could give the Trump administration another mechanism to attempt to unilaterally restrict disbursement of money approved for specific purposes by Congress, a push that has faced legal roadblocks... Mr. Bessent granted access to the payments system to a handful of staff members affiliated with DOGE, including Tom Krause, the chief executive of a Silicon Valley company, Cloud Software Group, according to one of the people familiar with the change. Access to the system has historically been closely held because it includes sensitive personal information about the millions of Americans who receive Social Security checks, tax refunds and other payments from the federal government... In a process typically run by civil servants, the Treasury Department carries out payments submitted by agencies across the government, disbursing more than $5 trillion in fiscal year 2023.

Besides, this also poses serious conflicts of interest since it will allow Musk to access the details of payments being made to his competitors and in theory even control it.

With the likes of Robert Kennedy Jr heading the Health Department, Pete Hegseth leading the Defence Department, and Kashyap Patel heading the FBI, it's hard to not feel that the US government has become a banana republic where the President selects his Cabinet based purely on loyalty with no concern for any merit. 

Crony capitalism without any pretensions is invading US with vengeance, in a manner that would put to shame even those developing countries that Americans once scorned upon.

America’s largest companies are cutting deals with Elon Musk’s businesses or touting links with the world’s richest man as he solidifies his power within Donald Trump’s administration and begins to radically restructure the US government. A rush of announcements in recent days included Visa finalising a payments processing deal with Musk’s social media site X and United Airlines accelerating a plan to use Musk’s Starlink satellites for in-flight WiFi. Amazon has also boosted marketing spending on X... On Monday, Apple updated its iPhone operating system, allowing T-Mobile users in the US to connect to Musk’s Starlink satellites. Boeing’s chief executive Kelly Ortberg said he had been working with Musk... to accelerate delivery of two Air Force One planes that are over budget and years late. Oracle, the enterprise software company run by Trump supporter Larry Ellison, also announced a Starlink collaboration, while Intel touted a “growing media partnership” with X before broadcasting a live event together with Microsoft on the platform. Separately this week, roughly $3bn of debt tied to Musk’s purchase of X, held by banks including Morgan Stanley for more than two years, began to move, with investors including Apollo interested in a tranche... Following Trump’s win in November, JPMorgan dropped a three-year lawsuit against Tesla, in which it was seeking $162mn over alleged breaches of a stock warrants contract... Since the election, Musk has been a near-constant presence at the president’s side and been involved in everything from cabinet appointments to AI, defence and economic policy discussions.

State capture by plutocrats. 

2. Mexico, China, and Canada made up 42% of US imports in 2024.

These are the main imports of the US from the three countries. 

President Trump has signed executive orders imposing tariffs on the three largest US trade partners - 25% each on Canada and Mexico (though only 10% of Canadian oil exports), and 10% on China. It covers all US imports from these three countries.

Collectively, EU has the largest share of US imports

The FT has an editorial pointing to the absurdity of the trade war.

The harm to American diplomatic power is no less profound. From the 1980s, both Canada and Mexico set aside decades of scepticism to make a strategic bet on free trade with the US, culminating in the Nafta deal of 1994. The economic benefits, especially to Canada, have been plentiful. Both were coerced by Trump in his first term to renegotiate that deal. That the president is now riding roughshod even over the revised deal, the USMCA, sends a message America’s word cannot be trusted.

Janan Ganesh makes some important observations of the Trump era of deal making, describing it as one of "aggressive soft touch".

Because Trump is so quick to quarrel, people tend to miss that he is also quick to settle. He almost never drives as hard a bargain as his belligerent manner seems to promise. In 2020, China bought some peace with a vague and hard-to-enforce pledge to cut the two countries’ trade imbalance... Likewise, he didn’t abandon Nafta so much as pass off a revised version of it as a personal coup. Being an egoist, not a fanatic, what he cares about is his reputation as a maker of deals. To keep it going, he needs a regular flow of them. And so their content becomes secondary. We can mock, but the lesson here for countries faced with Trump is an encouraging one: give him something that he can call victory. The concession needn’t be huge, and he will in fact co-operate in talking up its significance. 

Nor does he seem to mind all that much which coin he is paid in. Trump is open to what Henry Kissinger called “linkage”. If he is upset about one thing, he can be mollified with a gesture on something apparently unrelated. Want to avoid a trade war, Europe? Spend more on defence. Want to prevent the betrayal of Ukraine? Soften the regulation of the tech sector. It is hard to know what is more telling about Trump’s truce with his northern and southern counterparts: the smallness of their concessions (Justin Trudeau is appointing a fentanyl “czar”) or the fact that economics and drug policy are mixed up like this in the first place. So yes, Trump threatens to displace industrial investment from Europe to the US. But Europe is spoilt for things to offer him, precisely because his grievances are so numerous. In that sense, he might be easier to defang than Joe Biden, who didn’t think Nato was a club of free-riders or the EU a conspiracy against Silicon Valley. There was nothing Europe could offer him on those fronts that would make him ease up on the America First industrial plan. With Trump, there might be. The very paranoia of his worldview — in which the US is being ripped off by almost everyone, almost all the time — means there are lots of entry points for a negotiation.

3. Alan Beattie makes an important point about the possible unintended effects of Trump's policies.

Currently, as trade has recovered from the initial shock of the Ukraine war, US imports have increased far faster than the world as a whole, while Chinese import growth has fallen... As for other sources of final demand, emerging economies themselves, particularly in Asia, have been consuming more as they get richer. But east Asian countries are typically net exporters: Malaysia, Singapore, Thailand and the Philippines have generally run current account surpluses since the Asian financial crisis in 1997-98, as have South Korea and Japan. Meanwhile, the EU, struggling to raise growth while Germany remains obsessed with exports, is also unlikely to pick up the consumption baton. This may add up to trouble ahead for countries exporting to the US, especially heavily exposed economies like Canada and Mexico.

Trump’s economic policies will encourage a wider US trade deficit, the opposite of what he wants. His planned sweeping tax cuts will increase consumer demand and suck in imports. His tariffs will make US exporters less competitive by strengthening the dollar, which import taxes tend to do. It will not be pretty if Trump starts deploying tariffs all round to stop the US being a consumer of last resort while implementing policies that will ensure it remains so. Exporters will be hunting round the world for scarce demand. As I’ve said before, the real threat to the global economy is not the rejigging of supply chains. It’s the danger that the most reliable market for global exports decides to crunch economic growth to get its trade deficit down and there’s not enough demand elsewhere to replace it.

The article has an important snippet that conveys the extent of China's predatory trade policy.

In terms of volume, Chinese exports rose at an annual rate of 13 per cent in the third quarter of last year, far faster than world import growth at less than 1.5 per cent.

It has a graphic on the estimates of trade growth between various categories of countries. 

4. Trump effect on US-China trade

One sector where the impact will be concentrated and immediate will be in the agriculture sector and in the US mid-west.

The opening salvo of a new trade war has sent a chill through the Midwest. Canada, Mexico and China together account for half of all American agricultural exports. Just last year, the US sold more than $30bn in farm products to Mexico, $29bn to Canada and $26bn to China, according to American Farm Bureau statistics. Suddenly, farmers were facing the spectre of retaliatory tariffs and the prospect of a full-scale conflict that some fear could decimate America’s rural heartland. Farmers in an area of the country that has become a bedrock of support for Trump now worry that the president’s tariffs, though suspended at the last minute, have permanently damaged the image of the US in the eyes of its most important trading partners...

Few US states better embody the agricultural wealth of the Midwest than Iowa. It is a land of vast corn fields stretching as far as the eye can see, the landscape broken by the occasional grain silo, hay bale or low-slung barn. Hogs outnumber people more than seven to one. It is also Trump country. Although Iowa voted for Democratic presidents Bill Clinton and Barack Obama, it backed Trump in 2016, 2020 and 2024 in ever greater numbers. More than a fifth of Iowa’s economy — or $53.1bn — is tied to agriculture, from crop and livestock production to food processing and manufacturing. It is the country’s largest producer of corn, hogs, eggs and ethanol and a top-three grower of soyabeans. That makes it particularly vulnerable to any downturn in agricultural exports. 

This article explains how the tariffs will impact automobile imports into the US.

5. Bloomberg reports that China's muted and largely symbolic response to Trump's 10% tariff on $525 bn of Chinese exports is a reflection of China's weak bargaining hand. China exports to the US three times as much as the US does to China. 

Apart from retaining the 10% tariff on China, for at least now, Trump has also scrapped the "de minimis" rules exempting shipments under $800 from duties. This loophole had been a major contributor to the growth of Chinese online sellers Temu and Shein. This will sharply increase the cost of the 4 million parcels a day arriving in the US under this exemption, of which 30% come from the two ecommerce groups. 

6. Richard Baldwin points to a possible four stage trade war scenario arising from Trump tariffs. 

American cars are not really made in America. They are assembled in America from parts produced in the US, Canada, and Mexico. I coined the phrase “Factory North America” 14 years ago to describe the tightness of the industrial integration. Nowadays, production processes are so interwoven that an engine could cross US-Canada and US-Mexico borders seven times before it ends up in a finished, US-made car. With each border crossing into the US, a 25% tariff will be applied, so the cost of the engine will soar. And costs will jump for all the other parts from Mexico and Canada and China. That’s step 1: The tariffs will raise the cost of US-made cars.

All cars made in Factory North America will become less attractive to US buyers. That will trigger Step 2. Before Trump’s tariffs, about half the cars sold in the US were imported. Mexico and Canada were big suppliers, but their competitiveness will be hobbled by the 25% tariffs. About half of US imported cars come from Japan, Germany, and Korea. They have not been subjected to the 25% tariffs... Cars made in the US, Canada, and Mexico will get more expensive inside the US, but German, Japanese and Korean cars will not... Almost surely, many US buyers will switch to German, Japanese and Korean cars that the tariffs made relatively cheaper. That’s step 2: A flood of imports from Germany, Japan and Korea. 

And how do you think President Trump will react to this import surge? My guess is that the US president will view it as unfair competition that he has to counter. He has a couple of time-honored options. He could lay a 25% tariff blanket on all imported cars, or negotiate “voluntary” export restrictions with Japan, Germany, and Korea. Given his love of tariffs, I’ll put my chips on option 1. Soon, it’ll be the “presidential all-you-can-eat tariff buffet.” That’s step 3: The US expands its war on trade to include its main trade partners in Asia and Europe... These US trade partners will retaliate against US exports. That’s step 4: The main US trade partners retaliate against US exports... When he sees US exports hit with new tariffs, which he will surely blame someone else for, he is very likely to impose counter retaliation tariffs. And that, ladies and gentlemen is how future historians will say that the World Trade War started.

7. A natural experiment in the works from the Indian government's Income Tax policy change of increasing the limit for tax rebates from Rs 7 lakh to Rs 12 lakh. 

While those earning up to Rs 12 lakh a year will have zero tax liability under NTR, the tax outgo would shoot up to Rs 61,500 if the taxable income breaches Rs 12 lakh by just Rs 10,000. Thus, an employee having an annual taxable income of Rs 12.1 lakh would actually take home Rs 51,500 less than the one earning Rs 12 lakh. A back-of-the-envelope calculation shows that parity is achieved only at the income level of Rs 12.71 lakh in terms of take-home salary. At Rs 12.71 lakh, the tax is Rs 70,500, which means the take-home salary at that level would be almost equal to Rs12 lakh.

8. Paul Krugman makes an important under-appreciated point about the value of FTAs in bringing predictability that in turn promotes business investments. He points to the example of NAFTA which did not as much as lower tariffs (which were already low when it kicked into effect in 1994) as it reduced uncertainties and allowed businesses do long-term planning and investments. 

9. Airline reward points 

In 1987... American Airlines partnered with Citibank to launch a co-branded credit card offering users air miles for every dollar spent. This scheme of selling frequent-flyer points to financial institutions transformed mileage programmes into complex but highly profitable businesses in their own right. In theory at least, it seems like a near-perfect business model: airlines can create as many points as they like out of thin air, and then sell them on to banks and credit card companies. They can also sell miles to partner hotels, car rental companies or shops, in effect becoming the central banks of a lightly regulated financial ecosystem. While airlines can enjoy instant revenue from selling air miles to banks and other third parties, the cost of customers redeeming their points through booking seats is deferred into the future, says John Grant, an executive at airline data company OAG.

Many never spend them at all. In 2018, the consultancy McKinsey estimated there were 30tn unredeemed air miles in passenger accounts, enough for almost every airline passenger in the world to take a free one-way flight. These asset-light businesses are particularly attractive to airlines. The actual work of operating flights is capital intensive, exposed to economic downturns and has high fixed costs, some of which such as fuel are out of airlines’ control. The reliance of airlines on their loyalty businesses became clear during the pandemic, when the four biggest US carriers put up their customer loyalty schemes as collateral to help them raise new debt. At the time, the valuations put on the loyalty schemes far exceeded the market capitalisations of the ailing airlines, suggesting they were worth more than the flight operations. Even at the height of the disruption in July 2020, American Express paid £750mn to extend its partnership with BA owner International Airlines Group, a significant part of which was to pre-purchase Avios frequent-flyer points. IAG Loyalty, the home of Avios, reported an operating profit of €321mn in 2023, more than Aer Lingus, one of the group’s airlines, and up by 14 per cent from the previous year. Its operating margin in 2023 — 21 per cent — was more than double that of Aer Lingus or BA.

10. DeepSeek has thrown egg at the faces of everyone, including the Chinese government.

DeepSeek’s achievements did not emerge from one of China’s myriad government-backed research institutes or state-controlled companies. Mr Liang seems to control most of the shares in DeepSeek, and has steered clear of China’s state-dominated venture-capital industry.

11. India's tariffs

India’s average import tariff stands at 17 per cent, while the trade-weighted rate is lower at 12 per cent, according to the World Trade Organization’s 2024 report.

12. FT has a good read on Paul Kagame's support for the Tutsi militia M23 in Eastern Congo. After its successful takeover of Goma last month, the rebels have been conquering other towns in the mining rich Eastern part of Congo. Rwandan troops are reportedly providing ground support for the invasion. Kagame argues that he's only providing protection for Tutsis against the DRC-backed Hutu FDLR militia who have been terrorising Tutsis in the area. The UN has reported that in a single year, 150 tonnes of coltan, used in electronics were fraudulently exported to Rwanda and mixed with Rwandan production, thereby benefiting Rwanda at least $1 billion. 

13. The fourth quarter results of Big Tech companies point to spending on CapEx to top $300 bn in 2025.

Microsoft, Alphabet, Amazon and Meta have reported combined capital expenditure of $246bn in 2024, up from $151bn in 2023. They forecast spending could exceed $320bn this year as they compete to build data centres and fill them with clusters of specialised chips to remain at the forefront of AI large language model research... On Tuesday, Google’s Sundar Pichai said in defence of his plan to spend $75bn in 2025 — up 42 per cent from $53bn last year... Microsoft’s Satya Nadella said... going to spend $80bn building out Azure... And on Thursday, Amazon CEO Andy Jassy topped Google and Microsoft by forecasting more than $100bn in capital expenditure this year, up from $77bn in 2024 and more than double the $48bn of the previous year. The vast majority will go towards data centres and servers for Amazon Web Services... Meta... pledged to spend “hundreds of billions” more on AI, on top of the $40bn invested in 2024.

Such spending is opening up a widening gulf between the Big Tech and the rest.

Spending among the “Magnificent Seven” — which also includes Apple, Nvidia and Tesla — dwarfs the rest of the US benchmark S&P 500. Their capital spending rose 40 per cent in 2024 compared with 3.5 per cent among the remaining 493 companies, according to Société Générale. Profits among the elite group soared by a third in the same period, versus 5 per cent among the rest.

14. In another reflection of the issues with US capitalism, it's being pointed out that US defence contractors are spending their surpluses on share buybacks instead of modernising their weapon sytems.

In 2023, Lockheed Martin and RTX spent a combined total of $18.9 billion on stock buybacks, compared with just $4.1 billion on capital expenditures, according to data compiled by Bloomberg.

15. In a reflection of the problems with climate transition, NYT reports that US "utilities have extended the life of nearly a third of coal units with planned retirement dates, either through delays or by reversing course and canceling retirements entirely, between 2017 and today".