YCLOAK

President Donald Trump used questionable tax dodges and outright fraud to greatly increase his fortune that started with money from his parents, The New York Times reported Tuesday.

Trump likes to portray himself as a self-made man, saying he started with a relatively modest $1 million loan from his father and built his riches through investments and deals.

But in an extensive and detailed 40,000-word story, the Times reports Trump received about $413 million from his father, Fred Trump, a New York real estate mogul.

Fred Trump began funneling money to Donald Trump and his siblings when they were young children, and the newspaper said they are still getting money from the real estate empire today.

Improper deductions alleged

The newspaper reported that Trump helped his father build up his fortune by dodging taxes, including what the paper called improper tax deductions.

The report alleged Donald Trump schemed to underestimate the value of Trump real estate holdings to sharply reduce the tax bill.

The Times also reported that Donald Trump and his siblings set up a fake corporation to hide large cash gifts from their father.

According to the newspaper, tax records show the Trump family paid just a small fraction of the taxes they were obligated to pay to the federal government under the tax code.

The newspaper based its story on interviews with Fred Trump’s former employees and more than 100,000 pages of documents, including the elder Trump’s personal tax returns.

Apparently, none of the president’s tax returns were used to write the Times report. The president refused to release his tax returns, breaking with recent White House practices.

A Trump lawyer, Charles Harder, said in a statement Tuesday that the Times’ allegations of fraud and tax evasion “are 100 percent false and highly defamatory. There was no fraud or tax evasion by anyone. The facts upon which the Times bases its false allegations are extremely inaccurate.”

A statement from Trump’s brother, Robert, pointed out that Fred Trump died in June 1999, and he said the Internal Revenue Service closed his estate two years later. He said the Trump family had no further comment on the allegations and appealed to everyone to let Fred and Mary Anne Trump rest in peace.

The Times said that according to tax experts, Trump was unlikely to face criminal prosecution for tax fraud because the alleged crimes took place too long ago.

But the experts told the Times he could still face civil penalties and fines.
…

Federal Reserve Chairman Jerome Powell said Tuesday that he sees no need to drop the central bank’s current gradual approach to raising interest rates.

Powell said the combination of steady, low inflation and very low unemployment shows the country is going through “extraordinary times.”

The central bank is trying to make sure it doesn’t raise rates too quickly and push the country into a recession, or move too slowly and set off higher inflation, he said. He added that the Fed’s goal of gradual increases in interest rates is an effort to balance those risks and extend the current expansion, now the second longest in U.S. history.

Powell’s comments, delivered to the annual conference of the National Association of Business Economics, came a week after the central bank approved a third quarter-point hike in its benchmark policy rate, pushing it to a level of 2 percent to 2.25 percent.

It marked the third rate hike this year and the eighth increase. The Fed began gradually raising rates in December 2015 after a period of seven years in which it kept its policy rate at a record low near zero to try to lift the economy out of a deep recession.

During a question and answer session, Powell discussed how the Fed might respond to the next economic downturn.

He said the Fed expects to turn to similar tactics it used during the last recession as needed. The central bank cut rates and purchased billions of dollars of bonds to push long-term rates lower, efforts that brought criticism from some in Congress that it had been too aggressive in its efforts.

“We will use the tools we used in the financial crisis to the extent that we have to,” Powell said. Last year the Fed examined potential responses to the next recession and plans to further study the issue in the coming year.

Powell noted in his speech that the unemployment rate stands near a 20-year low of 3.9 percent, while inflation has risen close to the Fed’s 2 percent target for annual increases in inflation.

The Fed’s economic forecast is in line with many others that show unemployment remaining below 4 percent through the end of 2020, with inflation staying near the 2 percent target over the same period, he said.

He was asked by a reporter at his news conference last week whether this forecast was too good to be true. He called that “a reasonable question” given that since 1950, the country has never experienced such a long period of low, stable inflation and very low unemployment for such an extended period.

He said it runs counter to an economic theory known as the “Phillips curve,” which argues that low unemployment forces employers to push up wages to compete for scarce workers, triggering more inflation.

Powell said he did not think the Phillips curve is dead. But various changes in the economy, including better conduct of monetary policy by the Fed, had “greatly reduced, but not eliminated, the effects that tight labor markets have on inflation,” he said.

He said these developments support the Fed’s current cautious approach in raising interest rates even as unemployment keeps moving to lows not seen in 50 years. But he said there were risks to the Fed’s current gradual approach to raising rate hikes. For that reason, central bank officials will be prepared quickly to change policy if conditions warrant such a change.
…

Can ex-convicts completely turn their lives around? A program called “Homeboy Industries” believes so. It provides training, classes and support to former gang members and people just out of prison. The aim: make them productive citizens and leave a life of crime behind. Angelina Bagdasaryan has the story.
…

About half of young Americans expect to be financially better off than their parents, according to a new poll, a sign that the dream of upward mobility is alive but somewhat tempered.

The poll, by The Associated Press-NORC Center for Public Affairs Research and MTV, found that half of 15- to 26-year-olds said they thought they would be better off than their parents in terms of household finances. About 29 percent expected to do as well as their parents, and 20 percent expected to be worse off. 

Parents were slightly more optimistic: Sixty percent said they thought their children would do better than they did, a view that held true for parents across all income groups. Overall, only 12 percent of parents said that they felt their children might do worse.

It’s no longer a guarantee that children will achieve upward income mobility. About half of the Americans born in 1984 earned more at age 30 than their parents, down from 92 percent in 1940, according to the study by famed economist Raj Chetty and others that was released in 2016.

Jennifer Narvaez, 23, is among those who expect their financial futures to be brighter than those of their parents. The Miami resident said she expected to have more opportunities as a college graduate to get a job and own a home than her parents, who grew up in Nicaragua and immigrated to the United States. Narvaez holds an undergraduate degree in biology and is planning on attending medical school to become a cardiologist. 

‘A weird time’

Narvaez is less certain about the prospects of the U.S. economy, particularly as the nation appears to be marching into a trade war with China.

“It’s a weird time,” she said. “I feel like it’s hard to predict what will happen because of the kind of administration we have.”

Alex Barner, 20, also felt optimistic that he might fare better than his mother, who had him at age 18 and raised him as a single mother. He is attending college in New Mexico and is considering a career in business management.

While Barner is hopeful he will do well in life, he also has some concerns about the trajectory of the nation and its economy. Like Narvaez, he’s concerned by the trade policy of President Donald Trump’s administration.

Barner also said he felt politicians needed to focus more on matters that affect people in the here and now, such as health care and student loan relief. 

Respondents were divided about how they expected the nation’s economy would fare in the year ahead. About 29 percent of young people expected the economy to improve, 30 percent expected it would get worse and 41 thought it would stay the same. Similarly, 35 percent of parents expected improvement, 27 percent expected conditions to get worse and 38 percent expected the economy to stay as is.

The Youth Political Pulse poll was conducted Aug. 23-Sept. 10 by the AP-NORC Center and MTV. The poll was conducted using NORC’s probability-based AmeriSpeak panel, which is designed to be representative of the U.S. population. It includes 580 young people ages 15-26 and 591 parents of children in the same age group. The margin of sampling error for all young people is plus or minus 6.6 percentage points and for parents plus or minus 7.5 percentage points.
…

Auto parts output in Mexico will jump about 10 percent over the next three years as automakers scramble to adhere to stricter content rules laid out in a new North American trade deal, a top industry executive said on Monday.

The United States and Canada reached an agreement on Sunday after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement (NAFTA). Mexico and the United States first brokered a bilateral accord in late August.

The new trilateral deal, called the United States-Mexico-Canada Agreement (USMCA), will raise the minimum North American content threshold for cars needed to qualify for duty-free market access to 75 percent from 62.5 percent.

“Carmakers, especially Asian and European carmakers, will have to invest more in tools, in North American components to comply with the new content rules,” Oscar Albin, head of Mexican auto parts industry association INA, said in an interview.

The so-called rules of origin dictate what percentage of a car needs to be built in North America in order to avoid tariffs in the trade deal.

General Motors Co., Ford Motor Co., Fiat Chrysler Automobiles Germany’s Volkswagen AG, Japan’s Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. all build autos in Mexico.

“The American carmakers already have a very well-established footprint in the United States and Mexico” and will more easily adhere to the stricter content rules, Albin told Reuters.

The new rules should boost auto parts production from about $90 billion annually at present to “around $100 billion” over the next three years, he added. In the course of that period, the sector should add about 80,000 new jobs, Albin said.

Stocks in auto parts firms were lifted by the deal.

Shares in Nemak, the auto parts unit of Mexican industrial conglomerate Alfa, closed up by more than 8.5 percent. Stock in Mexican auto parts maker Rassini rose by more than 4.5 percent.

“The United States and Canada will also grow since the three countries will benefit (from the new agreement),” said Albin.

The deal set a five-year transition period once the accord enters into force to meet the new content requirements.

That looked like a tough deadline, Albin said.

“I think (time) is a bit short because any adjustment or change of the supply (chain) for cars already being assembled is practically impossible,” he said.

U.S. President Donald Trump had put creating more manufacturing jobs at the heart of his desire to rework NAFTA.
…

American dairy farmers get more access to the Canadian market. U.S. drug companies can fend off generic competition for a few more years. Automakers are under pressure to build more cars where workers earn decent wages.

The North American trade agreement hammered out late Sunday between the United States and Canada, following an earlier U.S.-Mexico deal, shakes up — but likely won’t revolutionize — the way businesses operate within the three-country trade bloc.

The new United States-Mexico-Canada Agreement replaces the 24-year-old North American Free Trade Agreement, which tore down trade barriers between the three countries. But NAFTA encouraged factories to move to Mexico to take advantage of low-wage labor in what President Donald Trump called a job-killing “disaster” for the United States.

Sunday’s agreement is meant to bring manufacturing back to the United States. The president, never known for understatement, said the new deal would “transform North America back into a manufacturing powerhouse.”

But America had to make some concessions, too. For example, it agreed to retain a NAFTA dispute-resolution process that it wanted to jettison but Canada insisted on keeping.

Overall, financial markets were relieved the countries reached a deal. For a time, it had looked like Trump might pull out of a regional free trade pact altogether — or strike one without Canada, America’s No. 2 trading partner. At noon Monday, the Dow Jones industrial average was up more than 240 points.

Economists, trade attorneys and businesses are still parsing the agreement. But here’s an early look at what it means for different players.

How dairy farmers are affected

Trump has raged about Canada’s tariffs on dairy imports, which can approach 300 percent. American dairy farmers have also complained about Canadian policies that priced the U.S. out of the market for some dairy powders and allowed Canada to flood world markets with its own versions.

The new agreement ends the discriminatory pricing and restricts Canadian exports of dairy powders.

It also expands U.S. access to up to 3.75 percent of the Canadian dairy market (versus 3.25 percent in the Trans-Pacific Partnership agreement the Obama administration negotiated but Trump nixed his first week in office). Above that level, U.S. dairy farmers will still face Canada’s punishing tariffs. And the “supply management” system Canada uses to protect its farmers is still largely in place.

Still, trade attorney Daniel Ujczo of the Dickinson Wright law firm said that “the U.S. dairy industry seems happy … for now.”

Shaking things up for automakers

NAFTA remade the North American auto market. Automakers built complicated supply chains that straddled NAFTA borders. In doing so, they took advantage of each country’s strengths — cheap labor in Mexico, and skilled workers and proximity to customers in the United States and Canada.

The new agreement changes things up. For one thing, the percentage of a car’s content that must be built within the trade bloc to qualify for duty-free status rises to 75 percent from 62.5 percent. A bolder provision requires that 40 percent to 45 percent of a car’s content be built where workers earn $16 an hour. That is meant to bring production back to the United States or Canada and away from Mexico (and perhaps to put some upward pressure on Mexican wages).

The provisions could drive up car prices for consumers.

The new deal also provides some protection to Canada and Mexico if Trump goes ahead with his threat to slap 20 percent to 25 percent taxes on imported cars, trucks and auto parts. It would exclude from the proposed tariffs 2.6 million passenger vehicles from both Canada and Mexico.

The impact on multinational companies  

Like other U.S. trade agreements, NAFTA allowed multinational companies to go to private tribunals to challenge national laws they said discriminated against them and violated the terms of the trade agreement. Critics charged the process gave companies a way to get around environmental and labor laws and regulations they didn’t like, overruling democratically elected governments in the process.

U.S. Trade Rep. Robert Lighthizer, who negotiated the new deal, had another complaint: The tribunals took some of the risk out of investing in unstable or corrupt countries such as Mexico. Why, Lighthizer argued, should the United States negotiate deals that encourage investment in other countries?

The new pact scales back provisions protecting foreign investment. Lori Wallach, director of Public Citizen’s Global Trade Watch and a sharp critic of NAFTA, praised the new agreement for reining in what she called NAFTA’s “outrageous” tribunal system that had allowed big companies to launch “attacks on environmental and health policies.”

Windfall for drug companies

The new trade pact delivers a windfall to pharmaceutical companies that make biologics — ultra-expensive drugs produced in living cells. It gives them 10 years of protection from generic competition, up from eight the Obama administration had negotiated in the TPP.

But good news for the pharmaceutical industry could be bad news for users of the drugs and for government policymakers trying to hold down health-care costs.

“New monopoly privileges for pharmaceutical firms … could undermine reforms needed to make medicine more affordable here and increase prices in Mexico and Canada, limiting access to lifesaving medicines,” Wallach said.

Some retailers benefit, other do not

The United States pressured Canada and Mexico to raise the dollar amount that shipments must reach before they become subject to import duties. Canada, for instance, will allow tax- and duty-free shipments worth up to 40 Canadian dollars (about $31), up from 20 Canadian dollars ($16) under NAFTA.

The change makes U.S. products more competitive in Canada because they will be subject to less tax at the border — and delivers savings to Canadians who shop online. However, trade attorney Ujczo notes, the higher threshold poses a threat to Canadian retailers. 
…

General Electric ousted its CEO, took a $23 billion charge and said it would fall short of profit forecasts this year, further signs that the century-old industrial conglomerate is struggling to turn around its vastly shrunken business.

H. Lawrence Culp Jr. will take over immediately as chairman and CEO from John Flannery, who had been on the job for just over a year. Flannery began a restructuring of GE in August 2017, when he replaced Jeffrey Immelt, whose efforts to create a higher-tech version of GE proved unsuccessful.

However, in Flannery’s short time, GE’s value has dipped below $100 billion and shares are down more than 35 percent this year, following a 45 percent decline in 2017.

The company was booted from the Dow Jones Industrial Average this summer and, last month, shares tumbled to a nine-year low after revealing a flaw in its marquee gas turbines, which caused the metal blades to weaken and forced the shutdown of a pair of power plants where they were in use.

GE warned Monday that it will miss its profit forecasts this year and it’s taking a $23 billion charge related to its power business.

The 55-year-old Culp was CEO and president of Danaher Corp. from 2000 to 2014. During that time, Danaher’s market capitalization and revenues grew five-fold. He’s already a member of GE’s board.

It’s a track record that GE appears to need after a series of notable changes under Flannery failed to gain momentum immediately, although some analysts wonder whether Culp’s history of accomplishments will be enough to reverse the direction of the company.

The challenges GE faces — including the power sector’s cyclical, structural and operational challenges — are not easily or quickly fixable, but “GE should be commended for selecting a credible, seasoned GE outsider as chairman/CEO who is likely to more candidly and quickly identify how bad things may be and what needs to be done about it,” said Gautam Khanna, an analyst at Cowen Inc., in a note to investors.

Investors will want Culp to “clean house, and fast,” said Scott Davis, founding partner of Melius Research, in a research note where he compared GE’s recent history to a slow but fatal train wreck.

“If I’m a GE employee today, I’m happy for the turnaround, but expectations are about to get a whole lot higher…GE employees will either step up or will be replaced,” Davis said.

Flannery faced a titanic task in redirecting General Electric, which was founded in 1892 in Schenectady, New York.

Just six months after taking over as CEO, Flannery said the company would be forced to pay $15 billion to make up for the miscalculations of an insurance subsidiary. While Wall Street was aware of the issues at GE’s North American Life & Health, the size of the hit caught many off guard.

Flannery on the same day said that GE might take the radical step of splitting up the main company’s three main components — aviation, health care and power — into separate businesses.

In June GE said it would spin off its health-care business and sell its interest in Baker Hughes, a massive oil services company. It’s been selling off assets and trying to sharpen its focus since the recession, when it’s finance division was hammered.

“GE still has too much debt and plenty to fix, but at least we have an outsider with an accelerated mandate to fix it,” Davis said.

Flannery vowed to give GE more of a high-tech and industrial focus by honing in on aviation, power and renewable energy — businesses with big growth potential. The shift is historic for a company that defined the phrase “household name.”

GE traces its roots to Thomas Edison and the invention of the light bulb, and the company grew with the American economy. At the start of the global financial crisis in 2008, it was one of the nation’s biggest lenders, its appliances were sold by the millions to homeowners around the world and it oversaw a multinational media powerhouse including NBC television.

But the economic crises revealed how unwieldy General Electric had become, with broad exposure damage during economic downturns.

Shares of General Electric Co., based in Boston, surged 11 percent in midday trading.

Massachusetts Gov. Charlie Baker, who helped lure GE to Boston from Connecticut in 2016 with incentives like state grants and property tax relief, said he’s not too concerned about GE’s latest travails. He noted that the company is still worth about $100 billion and has what he called a “huge footprint” in Massachusetts in health care, green technology, and renewable energy.

He said the state “did not write a big check to GE based on job projections or anything like that.”
…

Fresh from clinching an updated North American commerce pact, U.S. President Donald Trump on Monday criticized Indian and Brazilian trade tactics, describing the latter as being “maybe the toughest in the world” in terms of protectionism.

Addressing reporters at a White House event to celebrate the agreement of an updated trilateral trade deal between the United States, Mexico and Canada, Trump added India and Brazil to a growing list of countries that, he argues, treat the world’s top economy unfairly in terms of commerce.

“India charges us tremendous tariffs. When we send Harley Davidson motorcycles, other things to India, they charge very, very high tariffs,” Trump said, adding that he had brought up the issue with Indian Prime Minster Narendra Modi, who he said was “going to reduce them very substantially.”

Modi’s office could not immediately be reached for a request for comment. India’s government has become more protectionist in recent months, raising import tariffs on a growing number of goods as it promotes its ‘Make in India’ program.

After criticizing India, Trump turned to Brazil, the second-largest economy in the Americas behind the United States.

“Brazil’s another one. That’s a beauty. They charge us whatever they want,” he said. “If you ask some of the companies, they say Brazil is among the toughest in the world – maybe the toughest in the world.”

Brazil is one of the world’s most closed major economies, and in recent months has tussled with the Trump administration over trade in sectors such as ethanol and steel.

After Trump’s comments, Brazil’s Foreign Trade Minister, Abrão Neto, defended the relationship, saying it was “very positive.” He added that over the last 10 years, the United States has enjoyed a trade surplus with Brazil of $90 billion in goods, and of $250 billion in goods and services.

Neto pointed out that the United States was Brazil’s second-largest trading partner, behind China, and that the two countries had a “complementary and strategic” commercial relationship that could, nonetheless, be improved.

Trump’s “America First” trade policies, particularly his escalating trade war with China, are aimed at boosting U.S. manufacturing, but they have spooked investors who worry that supply lines could be fractured and global growth derailed.

There are now U.S. tariffs active on $250 billion worth of Chinese goods, with threats on additional goods worth $267 billion.
…

The economy should grow at a healthy pace this year and next, though the Trump administration’s trade policy will likely act as a drag, a group of business economists said. 

Growth should reach 2.9 percent this year, according to a survey of 51 economists by the National Association for Business Economics, released Monday. That would be up from just 2.3 percent in 2017. And growth is forecast to be 2.7 percent in 2019, the survey found. 

Overall, the economists are slightly more optimistic than they were when last surveyed three months ago. Buoyed by solid consumer spending and a healthy increase in business investment, the survey respondents expect the economy will overcome any negative impacts from higher tariffs. 

Just over half of the respondents expect that the next recession won’t arrive until 2020 at the earliest, while one-third said it wouldn’t occur until 2021. 

Inflation should remain in check, the survey found, rising to just 2.5 percent this year from 2.1 percent last year. Yet price gains will then likely moderate to 2.3 percent in 2019, the survey said. 

Still, worries over trade policy have darkened the outlook for many. Nearly 80 percent of the economists surveyed cut their growth forecasts for next year by up to one-half a percentage point, the NABE said, because of trade concerns. The Trump administration has slapped tariffs on most steel and aluminum imports and on nearly half the imports from China.

And one-half of the respondents have increased their inflation forecasts because of the import taxes.

More economists cited “trade policy” as the greatest risk to future growth, the NABE said, than any other issue. Higher interest rates and a large drop in the stock market were tied as the second-most likely risk, while just a few economists cited rising inflation and “labor shortages” as risks to growth. 

 
…

After less than two years and a precipitous decline in the share price at General Electric, John Flannery is being ousted as chairman and CEO.

Flannery took over for longtime CEO Jeff Immelt in June 2017 with the company trying to re-establish its industrial roots, albeit a high-tech version of itself.

However, as Flannery has restructured the multinational conglomerate, its value has dipped below $100 billion and shares are down more than 35 percent this year.

GE warned Monday that it will miss its profit forecasts this year and it’s taking a $23 billion charge.

The company said Monday that H. Lawrence Culp Jr. will take over as chairman and CEO immediately.

Shares of General Electric Co., based in Boston, surged 9 percent before the opening bell.

 
…

After intense last-minute discussions ahead of a self-imposed midnight deadline, U.S. and Canadian officials announced late Sunday they reached a trade deal, allowing a modified three-way pact with Mexico to replace the nearly quarter-century old North American Free Trade Agreement. 

The U.S.-Mexico-Canada Agreement (USMCA) — underpinning $1.2 trillion in annual trade — is expected to be signed in 60 days by President Donald Trump and his Canadian and Mexican counterparts. 

Trump hailed the “wonderful new Trade Deal” on Monday and calling it a “great deal for all three countries” that “solves the many deficiencies and mistakes in NAFTA.”

 
Trump had made criticism of the North American Free Trade Agreement (NAFTA) a centerpiece of his successful 2016 election campaign. 

“The worst trade deal maybe ever signed anywhere, but certainly ever signed in this country,” Trump had termed NAFTA, blaming it for the loss of American manufacturing jobs since it went into effect in 1994. 

The U.S. Congress is likely to act on USMCA next year. Its fate in the hands of American lawmakers remains far from certain, especially if the Democrats would take back control of the House of Representatives in the November midterm elections. 

“USMCA will give our workers, farmers, ranchers and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” said U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland in a joint statement. “It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”

The U.S. agreement with Ottawa will boost American access to Canada’s dairy market — with some concessions on its heavily protected supply management system — while shielding the Canadians from possible U.S. auto tariffs. 

Steel and aluminum tariffs imposed by Washington, will remain, however. Canada had demanded protection from Trump’s tariffs on imported steel and aluminum.

The metal tariffs discussions are on a “completely separate track,” according to a senior U.S. official. 

In a big victory for Canada, NAFTA’s Chapter 19 dispute resolution system will remain intact. 

Leaving a Sunday night 75-minute Cabinet meeting, Canadian Prime Minister Justin Trudeau only said it was “a good day for Canada.”

The Trump administration had imposed a midnight Sunday deadline for Trudeau’s government to reach agreement on an updated NAFTA, or face exclusion from the treaty.

“This deadline was real,” according to a senior U.S. official. “We ended up in a good place that we ultimately think is a good deal for all three countries.” 

U.S. officials, in recent weeks, had been adamant that the text for a new deal — whether it would only be with Mexico or also include Canada — to be released by September 30 to meet congressional notification requirements and to allow outgoing Mexican President Enrique Pena Nieto to be able to sign the deal before he is succeeded by Andres Manuel Lopez Obrador, a left-wing populist. 

Canada’s government had faced strong opposition to elements of the revised pact from the country’s dairy farmers. Voters in Quebec, home to 354,000 dairy cows – the most of any province — head to the polls for provincial elections Monday, which cast a shadow over the last-minute negotiations. 

The National Association of Manufacturers (NAM) in the United States declared itself “extremely encouraged” by initial details of the new three-way pact. 

“As we review the agreement text, we will be looking to ensure that this deal opens markets, raises standards, provides enforcement and modernizes trade rules so that manufacturers across the United States can grow our economy,” said NAM President and Chief Executive Officer Jay Timmons. 

“This administration is committed to strong and effective enforcement of this agreement,” a senior U.S. official told reporters. “This is not going to just be words on paper. This is real.” 
…

After lengthy delays, an $8.2 billion revamp of a colonial-era rail line snaking from the Arabian Sea to the foothills of the Hindu Kush has become a test of Pakistan’s ability to rethink signature Chinese “Silk Road” projects due to debt concerns.

The rail megaproject linking the coastal metropolis of Karachi to the northwestern city of Peshawar is China’s biggest Belt and Road Initiative (BRI) project in Pakistan, but Islamabad has balked at the cost and financing terms.

Resistance has stiffened under the new government of populist Prime Minister Imran Khan, who has voiced alarm about rising debt levels and says the country must wean itself off foreign loans.

“We are seeing how to develop a model so the government of Pakistan wouldn’t have all the risk,” Khusro Bakhtyar, minister in Pakistan’s planning ministry, told reporters recently.

The cooling of enthusiasm for China’s investments mirrors the unease of incoming governments in Sri Lanka, Malaysia and Maldives, where new administrations have come to power wary of Chinese deals struck by their predecessors.

Pakistan’s new government had wanted to review all BRI contracts. Officials say there are concerns the deals were badly negotiated, too expensive or overly favored China.

But to Islamabad’s frustration, Beijing is only willing to review projects that have not yet begun, three senior government officials have told Reuters.

China’s Foreign Ministry said, in a statement in response to questions faxed by Reuters, that both sides were committed to pressing forward with BRI projects, “to ensure those projects that are already built operate as normal, and those which are being built proceed smoothly.”

Pakistani officials say they remain committed to Chinese investment but want to push harder on price and affordability, while re-orientating the China-Pakistan Economic Corridor (CPEC) — for which Beijing has pledged about $60 billion in infrastructure funds — to focus on projects that deliver social development in line with Khan’s election platform.

China’s Ambassador to Pakistan, Yao Jing, told Reuters that Beijing was open to changes proposed by the new government and “we will definitely follow their agenda” to work out a roadmap for BRI projects based on “mutual consultation.”

“It constitutes a process of discussion with each other about this kind of model, about this kind of roadmap for the future,” Yao said.

Beijing would only proceed with projects that Pakistan wanted, he added. “This is Pakistan’s economy, this is their society,” Yao said.

Islamabad’s efforts to recalibrate CPEC are made trickier by its dependence on Chinese loans to prop up its vulnerable economy.

Growing fissures in relations with Pakistan’s historic ally the United States have also weakened the country’s negotiating hand, as has a current account crisis likely to lead to a bailout by the International Monetary Fund, which may demand spending cuts.

“We have reservations, but no other country is investing in Pakistan. What can we do?” one Pakistani minister told Reuters.

Crumbling railways

The ML-1 rail line is the spine of country’s dilapidated rail network, which has in recent years been edging toward collapse as passenger numbers plunge, train lines close and the vital freight business nosedives.

Khan’s government has vowed to make the 1,872 km (1,163 mile) line a priority CPEC project, saying it will help the poor travel across the vast South Asian nation.

But Islamabad is exploring funding options for CPEC projects that depart from the traditional BRI lending model — whereby host nations take on Chinese debt to finance construction of infrastructure – and has invited Saudi Arabia and other countries to invest.

One option for ML-1, according to Pakistani officials, is the build-operate-transfer (BOT) model, which would see investors or companies finance and build the project and recoup their investment from cashflows generated mainly by the rail freight business, before returning it to Pakistan in a few decades time.

Yao, the Chinese envoy, said Beijing was open to BOT and would “encourage” its companies to invest.

Rail mega-projects under China’s BRI umbrella have run into problems elsewhere in Asia. A line linking Thailand and Laos has been beset by delays over financing, while Malaysia’s new Prime Minister Mahathir Mohamad outright cancelled the Chinese-funded $20 billion East Coast Rail Link (ECRL).

Beijing is happy to offer loans, but reticent to invest in the Pakistan venture as such projects are seldom profitable, according to Andrew Small, author of a book on China-Pakistan relations.

“The problem is that the Chinese don’t think they can make money on this project and are not keen on BOT,” said Small.

Off-book debts

During President Xi Jinping’s visit to Pakistan in 2015, the ML-1 line was placed among a list of “early harvest” CPEC projects that would be prioritized, along with power plants urgently needed to end crippling electricity shortages.

But while many other projects from that list have now been completed the rail scheme has been stuck.

Pakistani officials say they became wary of how early BRI contracts were awarded to Chinese firms, and are pushing for a public tender for ML-1.

Partly to help with price discovery, Pakistan asked the Asian Development Bank (ADB) to finance a chunk of the rail project through tendering. The ADB began discussions on a $1.5-2 billion loan, but China insisted the project was “too strategic”, and Islamabad kicked out the ADB under pressure from Beijing in early 2017, according to Pakistani and ADB officials.

“If it’s such a strategic project then it should be a viable project for them to finance on very concessional terms or invest in?” said one senior Pakistani official familiar with the project, referring to the BOT model.

China’s foreign ministry said Beijing was engaged in “friendly consultations” with Pakistan on the rail project.

Chinese companies participated in BRI projects in an open and transparent way, “pooling benefits and sharing risks,” it said.

Analysts say Pakistan will struggle to attract non-Chinese investors into the project, which may force it to choose between piling on Chinese debt or walking away from the project. In 2017, Pakistan turned down Chinese funding for a $14 billion mega-dam project in the Himalayas due to cost concerns and worries Beijing could end up owning a vital national asset if Pakistan could not repay loans, as occurred with a Sri Lankan port.

Khan’s government chafes at several Chinese intercity mass transport projects in Punjab, the voter heartland of the previous government, which now need hundreds of millions of dollars in subsidies every year.

They also fume about the risk of accumulating off-books sovereign debt through power contracts, where annual profits of above 20 percent, in dollar terms, were guaranteed by the previous administration.

With the ML-1 line, there are also those who harbor doubts closer to home, including the previous government’s finance minister, Miftah Ismail, who said his ministry had always had concerns about its viability.

“When people say it’s a project of national importance, that usually means it makes no sense financially,” he said.
…