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Hello and welcome to World Business Report from the BBC World Service.
I'm David Harper and on this edition, in a week where President Trump made moves to remove a governor from the fed we're asking what it might mean if politicians can wade in more easily on monetary policy And with the Fed chair position up for grabs next year, one former regional Fed president says he's up for the role.
I'll take the job as long as it's set up for success.
I'm the most experienced person We're also looking at the impact of scrapping the de minimis rules, meaning duty is now payable on hundreds of millions of low-value US imports.
And is the golden era for the Chinese property market well and truly over?
Evergrande kept expanding by using newly borrowed money to pay off old debts.
The survival of the business hinged on housing prices rising forever and that there is always liquidity in the market.
Before all of that though the relationship between the White House and the Federal Reserve has been far from smooth in recent months.
President Trump and Chair Jerome Powell have clashed repeatedly over interest rate decisions.
This week, the stakes were raised further still as the president made an attempt to remove Governor Lisa Cook.
He has made allegations that she committed mortgage fraud, which she has strongly denied.
It's now being challenged in the courts and the outcome could have a significant impact on the ability of politicians to control the Fed.
Michelle Fleury, our business reporter in New York, has been across this case for us and explains what one of the main sticking points here is.
The way the Federal Reserve is set up, the president can only fire someone. if there is cause.
And so there's a lot of questioning about what does that mean?
What does that look like? Now, the kind of grounds, if you like, under which Lisa Cook's lawyers are challenging all of this is to say, at this point, these are allegations.
She has not been found guilty of anything.
She has also not been given a chance to, she wasn't given advance notice and she wasn't given a chance to respond.
So they're saying her due process has also been removed.
These obviously will be decided in court.
But in the meantime, it's just what happens whilst that process plays out.
Will be decided but haven't been decided yet.
Today a court in Washington has been considering a request from Cook for a temporary order declaring President Trump's attempt to sack her as unlawful. which would allow her to carry on for now, at least.
That session closed without a ruling, so we'll have to wait until Tuesday at the earliest to hear more on this.
Jim Bullard is Dean of the Mitch Daniels School of Business at Purdue University and is a former president of the Federal Reserve Bank of St.
Louis. He's a man who's been on the inside of these decision-making processes and has ambitions for the top job.
A little earlier I asked him what the impact this current case is having on the markets.
People have been commenting that the market impact hasn't been as much as they would have thought.
Markets feel that as this current case winds through the courts... in the US that ultimately the Supreme Court will back the intention, I think, of the Congress, which was to make it very hard to change personnel at the central bank based on political whim and so they're going to set a high standard on the for-cause feature of the Federal Reserve Act.
And so we'll see how it all comes out, but I think markets are betting that the Supreme Court will sort of back the independence to the extent it's in the Federal Reserve Act.
When we look at that conflict between the Fed and the White House, it leaves everything in a slightly unenviable situation.
You've been talked about as a potential... for the list of Fed chair replacements in the past.
Is it something that you would take on again?
Yeah, I haven't had my interview yet, but I'll take the job as long as it's set up for success, I think.
If you want to set up the job for failure, then you should go with someone else.
I'm the most experienced. person, been on the FOMC for 15 years before I left the St.
Louis Fed. So I think we need to protect the reserve currency status of the dollar.
We need to be aiming for low and stable inflation.
And we need to protect the independence of the central bank.
So as long as those conditions are in place, I might be a good choice.
You know, we'll see. Like I say, I would bring a lot of credibility to this position.
Do you think you'll be able to manage that relationship with the White House?
Absolutely. Do you think we're in a situation where whoever does take that job can be fully independent of the political system, given the situation we're in at the moment?
Yeah, even though we've been using the term even right here of central bank independence, I try to steer away from that a little bit and say that the central bank is arm's length from politics. day-to-day politics.
The Fed has political appointees on it and lives under the Federal Reserve Act, which is So the Fed is a creature of Congress.
And so you have to keep in mind that, of course, there are political factors around central banking.
But what you don't want is... The day-to-day fray in the political maelstrom of inside the beltway politics, you don't want that to feed into volatility in politics. actual financial market pricing because that volatility would be unnecessary.
So by keeping the central bank at arm's length from politics, you avoid some of that let's talk about interest rates i believe you've said that you expect there to be a modest cut in september is that something you still believe Yeah, markets are pricing high probability of a 25 basis point reduction in the policy rate at the September meeting.
I agree with that. And... I think the main issue will be how the committee sets up the rest of this year and the first half of 2026.
Let's just look a little bit about the factors leading into that.
To what extent has the current tariff situation had a bearing on this?
Well, it's had a huge bearing on it because as the new administration came in, they have pursued a much more aggressive tariff policy than what we've seen. historically, even in Trump 1.0.
And so markets have been adjusting to that and the committee has wanted to see, kind of wait and see what would happen.
But now they've had about... six or seven months of information on how this is going to proceed.
And you can't wait forever. So they have to get on with it.
We've spoken many times about the conflict between Donald Trump and Jerome Powell over the subject of interest rates.
If we do see a modest cut in September, do you think that will take some of the pressure off?
I don't know if it will or not, but the committee has felt like the policy rate is a little bit too high for for the situation.
Inflation is still above target in the US, but not that far above target to warrant the level of the policy rate that they have.
And now you've had somewhat weaker growth in jobs and that's a major concern and preoccupation of the committee and so those two things together I think are leading the committee to think that they might have room to maneuver down in the coming meetings.
Well, here we are, Jim Bullard speaking to me a little earlier.
We're joined on World Business Report today by Chris Lowe, Chief Economist at FHN Financial in New York.
Hello to you, Chris. We touched a little bit... a little bit on the market reaction to the current conflict between the Fed and the White House.
How significant has it been? Yeah, David, thank you.
I think Jim's right. You know, the market's been remarkably calm about it.
And I think there's a couple of reasons. that explain that.
The first is the fact that Trump in his first term appointed four governors, four out of seven.
And they didn't necessarily follow the course he wanted them to follow.
And the second reason is there's a history of that.
In fact, since John Kennedy was president, Every U.S. president has appointed at least four governors except G.W.
Bush. The rest of them all did. And There's a history.
Once they land on the board, they tend to act independently.
And I think the Fed's independence is a lot safer. than the press makes out.
Jim made it very clear that he is throwing his hat in the ring for the top job.
How would he be received by people in Wall Street?
Well, you know, traders loved him when he was on the Open Market Committee.
And the reason is... He was very open about what he thought the Fed should do.
And he backed that up with models that were built on the latest Fed research. which is exactly the kind of approach we like to see.
It was informed. It was free of emotion.
It was. based on science to the extent that economics can be a science.
I think it would be really beneficial for the Fed to have him back.
That's an interesting point, though, isn't it?
Because President Trump is not somebody who always appoints based on science and figures.
Well, and that's the other point Jim made, I think, is that if the president wants a Fed chair, who is going to pursue low inflation, effectively pursue the Fed's mandate, then Jim Bullard is the guy.
If he wants someone who's just going to lower interest rates willy-nilly, he probably should look elsewhere.
We shall sit on that one for a moment. We'll be back with you, Chris, in just a couple of moments because we want to look at another reason why we've had a...
Significant day in the US, in fact, many other trading partners around the world, because we've seen the end of de minimis rules on low value imports.
Put simply. and we've been hearing about it a lot on this programme, but de minimis meant that shipments valued at $800 or less were exempt from import duty, the thinking behind it being... that it just wasn't cost-effective to collect such small amounts of duty.
The rule has been in place with some changes to the thresholds since 1938.
To give you an idea of how significant it is, last year it applied to 1.4 billion packages.
Imports from China and Hong Kong have already seen this rule scrapped back in May and it now applies to everywhere else in the world as well.
It's obviously going to affect a lot of businesses, not least those selling cut-price goods online to US consumers.
Deborah Elms is a trade and industry policy expert at the Heinrich Foundation in Singapore.
And contrary to what you might think, she believes that the suspension of the de minimis rules for the rest of the world might actually prove an advantage to companies such as Timu and Xi'an, who are based in China.
Yeah, there's a couple of reasons for that.
I think the most important is that they have a scale and a platform that provides a lot of services in general.
And they've had time to get organized. And as a result of that, they are actually well positioned to deal with the end of de minimis, which is the full payment of tariffs and customs paperwork for every package into the United States starting today.
They're in a position to be able to deal with that where many firms, including firms that work on other platforms, are really not prepared enough. or what that looks like in terms of having to pay and remit tariffs and deal with paperwork. which requires you, among other things, to have a 10 digit code for every item that you send.
That's not something that especially small businesses are used to keeping track of.
You say they're prepared for it in an administrative sense, but it doesn't change the fact that it is introducing extra charges.
And there are a lot of consumers in the United States. that have got used to buying some very, very reasonably priced goods from China, those prices are going to have to increase.
They are, but if you think about what are the prices of a lot of goods on Xi'an and Timu in particular, they're very low.
So, you know, if you had a T-shirt or a handbag or whatever, that was $3.
And it has a crazy amount of... Tariffs now applied to it, the price goes to, what, $5?
I mean, the point is that you are not... jumping up so high in price that many consumers will simply say, no, I can't afford that anymore.
They may buy a bit less from even from Shein and Teemu, but they're not likely to stop buying altogether from these two companies because their price points are low. and because they have a fairly seamless process in place for you to get goods.
Now compare that again to other firms in other areas or other firms that are trying to work with different platforms.
Their prices to begin with are higher. And then when you add tariffs on top of that, those tariffs can be quite substantial.
And they're having increasingly now these firms are going to have to pay someone to help them with their paperwork and remit their tariffs.
And that's going to add to the cost overall.
And the net result of that is either they sell nothing to the United States or they sell significantly less to the United States.
Does anybody gain from this? Clearly, customs brokers are going to do very well.
And in fact, there's one company now that has been put in charge of all postal service operations. for Canada, Australia, and New Zealand, one private company.
But for the rest of us or for the rest of consumers and especially for small businesses, it mostly is about higher prices ahead and an additional tax on American buyers and American consumers.
Presumably, American consumers haven't yet felt the effect of this.
There's going to be a change over the next weeks and months.
There was some discussion early on when de minimis was removed about showing consumers the cost of tariffs.
And that was quickly shot down by the Trump administration and many firms backpedaled and then stopped providing information about tariff costs.
But now that De Minimis has gone globally, increasingly firms globally are putting out de minimis and tariff numbers for their customers so that they understand why the prices have suddenly gone up.
So the suggestion is, when you go and check out from a website, having bought something online, you're going to see a screen that says, we are charging you $20...
The remaining $7, $10 is going to the Trump administration.
Basically, retailers distancing themselves from the price increase.
I think they're gonna have to. And especially those firms that are shipping via postal services, will have to contract with somebody in order to be able to ship by post at all.
And so they will be quite keenly aware of exactly how much their product pricing is going up. when they send the package.
And those prices are going to have to be accommodated somehow in the pricing for the end consumer because otherwise the firm is simply going to go bankrupt.
They can't afford these incredible changes in tariffs unless they change their pricing accordingly.
Deborah Elms there from the Heinrich Foundation in Singapore.
Chris Lowe from FHN Financial in New York is still with us.
That point that Deborah made, that these are low-value shipments, some of them very low-value shipments, and therefore the... the tariff payable on top is also going to be quite low.
Does that hold water? Does that mean it's not really going to have that much of an effect on industry?
I think for the most part that's right. You know, the thing I thought of when Deborah made that point, I've talked to businesses. one of whom sells a ton of stuff made in China on Amazon.
And he said... The actual cost of the product, which is what the tariff would be applied to, is about 15 percent of the retail costs. shipping, Amazon fees, and so on.
So when you're talking about... The average tariff right now is 11%.
Applied to 15% of the retail price, it's even smaller.
I think... This is not nearly as big a deal as some of the bigger tariffs on things like autos.
We'll have to wait and see exactly how it pans out.
Chris, we'll be back with you again in a moment.
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This is World Business Report from the BBC World Service.
Now, staying with North America, Canada this time, though, because today...
We saw their latest GDP figures and the economy shrank a lot more than expected.
The quarter to the end of June slowed 1.6%, the first quarterly slowdown in seven quarters. and the previous quarter was also revised down to show growth of 2%.
Andrew DiCapua is Principal Economist at the Canadian Chamber of Commerce and joins us live on the programme now.
Thank you very much for being with us, Andrew.
Let's just jump straight into this, because people are bound to immediately link these figures to US tariffs.
How big a part do you think that has played?
Hey, David. Yeah, it's great to be with you.
I mean, the US tariffs have everything to do with the really weak GDP numbers that we got.
And, you know, the further revisions, as you mentioned, in our first quarter, which really, you know, is where a lot of that economic activity got pushed up. as businesses down south try to stockpile Canadian goods. to get ahead of those tariffs, the fact that those numbers were revised down also points to just a weaker economic situation in Canada.
But this is entirely really foreign driven, right?
Of course, Canada being a small open economy, we rely on trade.
When you look at the domestic picture though, so when we look at the investment side as well as household spending, That was a little bit of a silver lining in a sense that household consumption has been quite resilient.
We're seeing a little bit of pickup in the housing market.
And we're seeing a little bit on the investment side.
It's still concentrated on residential. Business investment in non-residential has been quite weak for some time and businesses are really on hold.
I was going to ask about that and what you're seeing from businesses who are actually on the ground in Canada.
Do the figures, are they reflected in what people are seeing?
Well, businesses have been signaling in various surveys, whether it's from Statistics Canada or the Bank of Canada or even when we survey our members, businesses have said we are on hold.
Businesses are not investing. And that's because of just the drastic amount of uncertainty coming out of down south and how things change day to day.
And so the fact that the Q2 GDP numbers kind of have reinforced that in a sense that business investment really is – flat or in some cases negative, just reinforces how much of a precarious situation we are. here in Canada when it comes to investment.
And so what businesses are telling us are that they're on hold.
Now, there are some sectors that are disproportionately impacted.
I'm thinking autos, you know, metals like steel and aluminum, you know, our woods product producers.
These are sectors that are really caught in the crosshairs with the US administration where they have put on sectoral tariffs that have really led to job losses and layoffs.
And they're really feeling the disproportionate brunt of the tariff.
So, you know, as this evolves and, you know, as we kind of hope to keep our trade agreement intact with the United States and that they honor some of our shipments down south.
That's really going to be a key indicator as to how much the economy stays afloat or if we dip into a recession in the third quarter.
Yeah, I was going to ask a little bit more about that, because you mentioned the uncertainty of this.
Following Donald Trump coming back into the White House, the months kind of leading up to and through this quarter, we've seen a lot of sort of roller coaster ride of what's going to happen tariff wise.
If things do settle down and we do have more of a dependable situation, if it beds in...
Could we see an improvement? Is this just a blip potentially?
Well, I think the reality is that a lot of companies are having to make really difficult decisions.
Some companies may have to relocate manufacturing.
Some companies may choose to just bite the cost. and stay uh in canada if tariffs do persist so there's a lot of scenarios that could play out but the bottom line is that the really the resilience of the domestic economy in Canada has been keeping us afloat so far but that is going to erode over time. um you know i i think about where the bank of canada is right now in terms of interest rates there's a lot of chill in the housing market even though activity is still picking back up And with the latest GDP numbers, we got a sense of how, you know, households disposable income grew.
And that was pretty flat. The savings rate declined a full percent on the quarter.
And so the purchasing power of the average Canadian is eroding. as spending is outpacing income.
And so that's a worrying sign. as we head into the second part of the year.
Sorry to interrupt. Let me just bring Chris Lowe back in a moment because We've also seen GDP results in the US.
And by contrast, we've seen figures revised up there.
That's right. Thanks, David. And listen, also.
The current quarter, the Atlanta Fed's GDP tracking model, after we got a ton of data today, on income, consumption, inflation, foreign trade, and so forth, they revised their current quarter estimate from 2.25% to 3.25%.
The US economy looks like it is finally shaking off the funk that was caused by the tariffs.
Hmm. Chris, Andrew, thank you very much for picking over some of those figures for us.
Let's move away from North America for a moment because this week Chinese property giant Evergrande shares were taken off the Hong Kong stock market after more than a decade and a half of trading.
It marks a grim milestone because let's not forget the company was once China's biggest real estate firm with a stock market valuation of more than $50 billion.
That was before its spectacular collapse under the weight of the huge debts that had powered its meteoric rise.
Jennifer Pak in Shanghai has been looking at where this leaves China's property market.
Evergrande started in 1996, when the golden era of China's real estate market was getting underway, says financial writer Chen Qi.
Evergrande seized the moment when China was urbanizing and had explosive demand for housing.
But Evergrande's success, he says, was based on a vicious cycle.
Evergrande kept expanding by using newly borrowed money to pay off old debts.
The survival of the business hinged on housing prices rising forever and that there is always liquidity in the market.
Other developers followed suit. At its peak, real estate accounted for 20 to 25 percent of China's GDP.
Not many people said, hang on a minute. Because speculative homebuyers, investors, and overseas bondholders were all making money, says Deloitte's Asia-Pacific contingency planning and insolvency leader,
Glenn Ho. Being greedy, then they lost their independent critical thinking.
Everyone sobered up in 2021 when housing sales slowed and Beijing capped borrowing capacity.
Evergrande couldn't pay, not suppliers, creditors or staff, leading to protests.
Developers also abandoned construction of pre-sold homes.
Yan Yuejing is with the Real Estate Research Institute e-house in Shanghai.
There was a lot of panic in the market a couple years ago because of the unfinished homes and plummeting home prices.
So why wasn't there a Lehman moment? Well, local governments across the country contained the fallout. by completing millions of homes themselves, though property prices, says Yan Yuejing, are another thing.
From its peak in 2021 till now, housing prices have dropped by 35%.
This makes Chinese homeowners feel poorer.
They spend less. And that affects both the Chinese and global economy.
Because if Chinese consumption is sluggish at home, companies are going abroad.
It's causing trade tensions. The U.S. and Europe accuse Chinese firms of dumping their excess stock.
As for Evergrande, its debt is so big, restructuring doesn't seem possible, says Hou.
The golden average is gone. Gone are the days when property values only went up, he says.
People should learn that prices can also come down.
Jennifer Pack reporting from Shanghai. Let me bring something breaking to you, because while we've been on air, it's been reported that the US Appeals Court has found that President Trump's global tariffs are illegal, but the appeals court has ruled that Trump's tariffs can remain in place through to October 14th.
Chris Lowe is still with us. Absolutely.
You know, the ruling was expected because... during the questioning by the appeals panel, they made it clear they were skeptical the president has the right to impose such sweeping tariffs.
It will have to be decided by the Supreme Court, and it's not clear which way they will decide.
If they rule out the tariffs, then we're talking about, I think, the biggest impact from an economic standpoint anyway. is the loss of $300 billion to $400 billion a year in revenue.
It will dramatically change the budget picture here.
Chris, thank you very much. Chris Lowe from FHN Financial.
More on that online, 24 hours a day. That's been World Business Report.
