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Five lessons from last week's wild markets

It might be tempting to conclude that there are no lessons to draw from the wild ride in financial markets last week. After all, the Standard & Poor’s 500 Index closed 1 percent higher Friday, and the Dow Jones Industrial Average and the Nasdaq 100 Index ended up recording their best week in almost two months. And some might even dismiss the unusual volatility as the reflection of nothing more than a bout of market irrationality that is temporary, reversible and inconsequential. Such an approach would be inappropriate, much like concluding that crossing minefields isn’t dangerous just because we were able to do so once without harm. Many indicators confirm that last week was remarkable and historic. Record after record was set, including the largest daily move, the biggest intra-day reversal and the most harrowing intra-day air pocket. In all, the Dow traveled an unprecedented 10,000 points in just five trading sessions. The VIX, often referred to as the markets’ fear index, spiked to levels not seen since the worst of the 2008 global financial crisis. And, outside the U.S., emerging-market currencies crashed below the levels reached in the darkest days of that crisis. Destinations often matter more than journeys, so there is a natural inclination to believe that last week’s extreme volatility doesn’t have much predictive value. That would be a mistake, for at least five reasons: First, it now should be clear that the fundamental underpinnings of the financial markets are — at a minimum — somewhat fragile. As a result, there are legitimate questions about the robustness of the global economy, potentially creating uncertainty for market prices that already have been notably decoupled from fundamentals by central bank policies. Second, many retail investors seem unable to stomach such bouts of volatility, resulting in outsize disposals of equity mutual funds (with the majority of the sales seemingly taking place during the worst of the market overshoot and contagion). Third, the plumbing of the marketplace appears far from immune to dysfunction during periods of great price volatility. The manifestations include elusive liquidity or trading systems that get overwhelmed when too many investors rush for the exit at the same time. The impact is amplified by the popularity of exchange-traded funds, some of which struggled to function as promised when subjected to market discontinuities and circuit breakers. Fourth, during intense volatility, the good gets washed out with the bad. This is particularly true of widely held investment brands — such as Apple, GE and Google — that investors turn into ATMs when they are rushing to raise cash, whether as a precaution, for speculative reasons or to meet sudden obligations. When overleveraged and unhinged investors need to sell, careful selection of marquee-name assets and diversified portfolio allocations become much less of a shield. Finally, though policymakers are still eager to curtail spikes in market volatility, they already have expended a lot of ammunition via quantitative easing, floored interest rates and other unconventional policies. As a result, the series of monetary policy actions in China and the calming remarks from New York Fed President Bill Dudley last week could soon be tested by developments on the ground. Given that more roller coaster rides could be in store, investors would be well advised to immediately assess two things: whether they can stomach this kind of volatility again without being forced to sell at the worst possible time; and whether they have enough reserve investing firepower to pick up the bargains that inevitably emerge during these episodes of market craziness. Mohamed El-Erian is the chief economic adviser at Allianz, chairman of President Barack Obama’s Global Development Council and the former chief executive officer and co-chief investment officer of Pimco.

China Financial Markets-10

China pins market plunge on financial journalist, airs 'confession'

What’s roiling China’s stock market? A journalist, apparently. Wang Xiaolu, a reporter for a respected Chinese business magazine, “confessed” to causing chaos and panic in the markets, state media reported Sunday. In footage broadcast Monday morning on CCTV, China’s state broadcaster, a weary-looking Wang said he obtained information about China’s securities regulator “through private channels” and then added his “own subjective judgment” to the report. “During a sensitive period, I should not have published a report which had such a huge negative impact,” he said. The high-profile — and deeply problematic — forced apology came amid a broader crackdown as Chinese authorities struggle to cope with the fallout from the Tianjin blasts and the ongoing stock crisis. Wang is one of 197 people recently punished for spreading rumors, Xinhua reported. Since an epic stock boom went bust this summer, China’s government has struggled to contain the crisis, ordering the press to downplay the story, and periodically singling out scapegoats, from hostile foreign forces, to “malicious” short-sellers, to the U.S. Federal Reserve and now, the press. If “privately gathering information” and then adding a “subjective judgment” sounds a lot like good journalism, it is. Wang’s crime appears to be publishing accurate information on a matter of public interest — but without a go-ahead from the government. In July 20 story in Caijing, Wang wrote that the China Securities and Regulatory Commission (CSRC) was weighing whether to stop stabilizing share prices. The CSRC denied the report the day it was published, calling it “irresponsible.” More than a month later, with CSRC indeed taking a more hands-off approach, and Chinese markets experiencing another precipitous drop, Wang was detained for spreading “false information.” Reporters without Borders condemned Wang’s detention and called for his release. “Suggesting that a business journalist was responsible for the spectacular fall in share prices is a denial of reality, “said Christophe Deloire, the group’s secretary-general, according to a statement published on their Web site. “Blaming the stock market crisis on a lone reporter is beyond absurd.” Washington Post correspondent Gu Jinglu reported from Beijing.

Federal employees

Federal workers on track to get 1.3 percent pay hike in January

WASHINGTON — Federal employees are on track for a 1.3 percent pay raise in January, following a decision by President Obama to set that figure by default if Congress continues to follow its strategy of action by inaction on the raise. A letter sent to Congress Friday stating that intent is a routine step that is required when Congress has not set a raise for the upcoming year by the end of August. It prevents what would be a much higher raise from being paid under the complex laws governing federal pay raises should no raise number be enacted into law by the end of the year. Congress could yet set a different figure, but the appropriations bills for 2016 so far have been silent on a raise. That continues a pattern that resulted in 1 percent raises being paid by default in January 2014 and 2015. Several federal employee organizations, with support from some Democrats in Congress, are pushing for a 3.8 percent increase. The National Treasury Employees Union “will continue to push for a more meaningful raise for the federal workforce, one that would help the government stay competitive with private-sector employers and help employees cope with rising costs for everything from housing to tuition to food,” NTEU president Tony Reardon said in a statement. The pay setting arrangement technically applies only to employees paid under the General Schedule system for most white-collar jobs. But under long-standing practice, the raise paid in a local area under that system also is paid to blue-collar employees, who are under a separate pay system. Raises for GS employees are designed to have two components — one paid across the board and the other variable by locality. The past two raises have been paid entirely across the board. Obama’s intent for 2016 is to pay 1 percentage point in that way and divide the money for the remainder as locality pay. That would result in raises slightly above 1.3 percent in some city areas and slightly below it in others. Currently there are 31 metro areas, with Alaska and Hawaii being localities in their entirety and catchall “rest of the U.S.” locality elsewhere. Thirteen more city zones are planned for 2016, along with expansion of some of the existing localities. Rules to make those changes still need to be finalized. Raise amounts by locality reflect Labor Department data on how federal and private-sector salaries compare. Those figures are presented to an advisory body each fall and the increases are finalized in a late-year presidential order. The figures reported last fall indicated that federal salaries lag on average by 35 percent, with the largest gaps in San Francisco, San Diego, Washington-Baltimore, Los Angeles and New York. Other pay studies using different methods and different sets of data have reached widely varying conclusions, including some indicating that federal employees are paid more on average. Many federal employees also may be eligible for raises on advancing up the steps of their pay grades based on longevity as long as their performance is acceptable. Those raises, worth about 3 percent, are paid every one, two or three years until an employee reaches the top step of a grade. Senior executives and certain other high-level federal employees receive raises based on their performance. The general raise would increase the pay caps applying to them, however. The spending bills for 2016 further would continue the pattern of denying a raise to political appointees and to members of Congress.

Fed Rates

Fed Vice Chair Fischer keeps open possibility of Sept. hike

WASHINGTON — Federal Reserve Vice Chairman Stanley Fischer left the door open Saturday for a Fed rate increase in September, saying the factors that have kept inflation below the central bank’s target level have likely begun to fade. Fischer said there’s “good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” He said, for example, that some effects of a stronger dollar and a plunge in oil prices — key factors in holding down inflation — have already started to diminish. The vice chairman’s remarks came in a speech at an annual economic conference in Jackson Hole, Wyoming. Investors have been trying to determine whether the Fed might still be on course to raise interest rates after its Sept. 16-17 meeting given the recent turbulence in financial markets and worries about China’s economy, which had raised doubts. In addition, inflation has remained persistently below the Fed’s 2 percent target rate. Fischer’s comment that there was “good reason” to think inflation would increase followed his remark Friday in an interview that “my level of confidence is pretty high” that inflation will return to the Fed’s 2 percent target — a condition the Fed has set for raising rates. Michael Hanson, senior economist at Bank of America Merrill Lynch, saw Fischer’s remarks as an explanation of why the Fed might not wait for inflation to move closer to 2 percent before raising rates. “The bottom line here is, the Fed does expect inflation to pick up,” Hanson said. “The door is definitely open” to an increase in September. John Silvia, chief economist at Wells Fargo, said that based on Fischer’s comments, he thinks the first rate hike will come next month if the August jobs report that will arrive Friday is strong and financial markets settle down. In his speech Saturday, Fischer said Fed officials are closely monitoring developments in China and studying the latest data on the U.S. economy. He repeated the guidelines the Fed is using to determine when to raise its key short-term rate, which has been held near zero since 2008 and has helped keep borrowing rates low throughout the economy. Fischer said the Fed wants to see further job market gains and to be “reasonably confident” that inflation will rise back up to its target level. Inflation by the Fed’s preferred measure has been running below 2 percent for three years. When inflation remains too low, many people postpone purchases and collectively slow consumer spending, the economy’s main fuel. Too-low inflation also makes the inflation-adjusted cost of loans more expensive. “In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it came,” Fischer said in his remarks, which were released in Washington. “We need to consider the overall state of the U.S. economy as well as the influence of foreign economies on the U.S. economy.” With Fed Chair Janet Yellen having decided to skip this year’s Jackson Hole meeting, Fischer’s speech on the closing day of the conference drew top attention at the high-profile event, with his words parsed for any signals about the Fed’s timetable for a rate hike. In an interview Friday with CNBC, Fischer said that before the recent turbulence in global financial markets, “there was a pretty strong case” for a rate hike at the Sept. 16-17 meeting, though it wasn’t conclusive. Now, the issue is hazier because the Fed needs to assess the economic impact of events in China and on Wall Street. Fischer and Yellen have sought to reassure investors that when the Fed begins to raise rates, it plans to do so very gradually. Other Fed officials who have spoken since the market turmoil hit with force have hinted at a delay in a rate hike. But they haven’t ruled out an increase in September. William Dudley, president of the New York Federal Reserve, helped ignite a Wall Street rally this week when he told reporters that the case for raising rates in September was “less compelling to me” that it had been a few weeks ago, before sudden fears about China’s economy upset global markets. But Dudley added that the notion of a rate hike “could become more compelling by the time of the meeting as we get additional information” about the economy. Officials who want to raise rates can point to a consistently solid U.S. economy. The government estimated Thursday that the economy grew at a healthy 3.7 percent annual rate in the April-June quarter. And the unemployment rate is at a seven-year low of 5.3 percent. But others worry that the economy remains vulnerable to shocks, such as a major slowdown in China, and point to the still-lower-than-optimal inflation.

National Business

tracy bunner taxes.jpg

Upcoming extension deadline

The business or trust extension deadline is fast approaching. If you have a Corporation, S-Corporation, Partnership or Trust and filed for an extension the deadline to file the tax return is September 15. If the business has shareholders (S-Corporation) or partners (Partnership), the penalty for failing to file a tax return by the due date including extensions is $195 per month or part of a month times the number of partners or shareholders. This can be a very costly amount. In addition, if the business is required to provide a K-1 to its members, there is a fee of $100 per K-1 that is not made available by the due date. A corporation that does not pay the tax when due generally may be penalized ½ of 1 percent of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25 percent of the unpaid tax. Unless a reasonable cause is determined abating the penalty is difficult. Failure to file a trust return can subject the trust to a penalty of 5 percent of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25 percent of the tax due (15 percent for each month, or part of a month, up to a maximum of 75 percent if the failure to file is fraudulent). If the return is more than 60 days late, the minimum penalty is the smaller of $135 or the tax due. Utah allows an automatic extension to file a tax return for businesses. However, if there are taxes due, the tax must be paid by the original due date. For example, if a corporation has a tax due of $600, this amount must be paid by March 15 (the original due date for a corporation). As stated, failing to file a business or trust return can be costly. There is no extension past September 15. Gather the business or trust information and file the tax return to avoid large penalties. Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at tracy.bunner@hrblock.com.

Arctic Offshore Drilling

Arctic nations joust but North Pole payoff may be years away

WASHINGTON — Even as melting Arctic glaciers threaten to swamp shorelines, nations from Russia to the United States are betting that warming temperatures also will unlock trillions of dollars in new wealth. “It is potentially the biggest strategic opportunity in America since the Louisiana Purchase in 1803,” said Scott Borgerson, a former Coast Guard officer and now an adviser at Catalyst Maritime. President Barack Obama begins a three-day Alaska trip on Monday to underscore the urgency of combating climate change. His visit comes as the Arctic’s potential for oil and gas production and shorter trade routes when the ice melts puts it at the crossroads of economics and geopolitics. Already, the polar economic dawn includes server farms for companies such as Facebook and Google, which enjoy lower cooling costs in the north. Possible future rewards include an estimated 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas that await discovery in the Arctic, with the vast majority located offshore, according to a 2008 U.S. Geological Survey report. Any big financial payoff, however, is probably decades away. Falling commodity prices are discouraging exploration for Arctic oil and gas, while new trade routes across the top of the world are falling short of expectations. “Arctic development is a lot slower than people thought,” says Malte Humpert, executive director of the Arctic Institute, a Washington-based policy group. “The hype is wearing off. It’ll be many, many years before we see the development people have been talking about.” That hasn’t deterred Russia, which has been the most assertive, and theatrical, in advancing its claims. In 2007, a pair of Russian mini-subs descended more than two miles below the polar icecap to plant a titanium flagpole on the North Pole’s seabed, a purely symbolic gesture. Russia, which boasts half the Arctic coastline and depends on the region for roughly a fifth of its national economic output, is expanding its Northern Fleet, upgrading regional facilities and staging unannounced military exercises. “The Arctic’s incredibly important to Russia,” says Heather Conley, a former State Department official now at the Center for Strategic and International Studies in Washington. “They’re basing their future economic development on it.” Russia’s not alone. Canada and Norway are preparing their militaries to defend territorial claims and forestall a 19th century-style resource grab. The cash-strapped U.S. Navy is concentrating for now on improving its ability to operate in the unforgiving north. Preoccupied by Islamic State and the rise of China, the United States has been an Arctic laggard. On April 24, however, the U.S. assumed the rotating two-year chairmanship of the Arctic Council, the eight-nation body responsible for environmental, maritime and emergency preparedness policies. The council, which operates by consensus, has agreed on procedures for dealing with oil spills and conducting maritime search and rescue despite rising tensions between Russia and other members over Ukraine. Obama will be the first sitting president to visit Alaska, and is set to address an international Arctic conference on Monday. The gathering, meant to draw attention to climate challenges facing the Arctic, will end with a joint statement that U.S. officials hope will add momentum to the United Nations Climate Change Conference set for December in Paris, said a U.S. official who briefed reporters Friday on the condition of anonymity. The climatic thaw that’s bringing the Arctic new prominence is unmistakable. Temperatures above the Arctic Circle are rising twice as fast as elsewhere, according to the Arctic Council. As a young Coast Guard officer in July, 1976, Robert Papp gazed from the town of Kotzebue and saw unbroken ice from the shore to the horizon. When he returned 34 years later as Coast Guard commandant, Admiral Papp scanned the sea again. “There was no ice to be seen whatsoever,” Papp, who’s retired and now the administration’s special representative for the Arctic, told a Washington audience this month. Nevertheless, the Arctic gold rush pales alongside the Klondike stampede that drew 100,000 prospectors north between 1896 and 1899. Oil prices below $50 per barrel — less than half the price a year ago — discourage exploration efforts that incur high costs in the harsh Arctic climate. One exception is Royal Dutch Shell, which is spending more than $1 billion annually on Arctic exploration. On August 18, the company won U.S. approval to drill in Arctic waters for the first time since 2012 after its efforts were derailed by the grounding of a drilling rig. “Shell is a bit of an outlier,” James Henderson, senior research fellow at the Oxford Institute of Energy Studies, said in an email. “Other companies have taken a much more cautious approach, for environmental and cost reasons, and this caution will only be further underlined in a low oil-price environment.” The increasingly ice-free Arctic seas have opened a shortcut between Europe and Asia for ships bearing cargoes such as diesel fuel and iron ore. The sailing distance from Rotterdam to Yokohama via a northern route that hugs the Russian coastline is almost 40 percent shorter than the one through the Suez Canal, the Indian Ocean and the South China Sea. Yet only 31 vessels transited that route last year, down from 71 the year before, according to the Northern Sea Route Information Office in Murmansk, Russia. Those dozens are dwarfed by the more than 17,000 ships that passed through Egypt’s Suez Canal in 2014. “We cannot compare the volumes of cargo transported through the Suez Canal to the volumes transported through the NSR,” said Sergey Balmasov, head of the information office. A second polar route — the fabled Northwest Passage sought for centuries by mariners such as Henry Hudson — has seen only a handful of vessels. Submerged ice formations that rise from the seabed and complex channels discourage traffic. Despite the thaw, the northern route is still open only four-and-a-half months each year. Even then, the possibility of encountering ice makes it poorly suited for container cargo ships, which require precise scheduling. Shallow waters and a lack of navigational aids further complicate the journey. While the route makes sense for trade between ports such as Japan’s Yokohama and Rotterdam in the Netherlands, many major export hubs in Vietnam and Indonesia are too far south, says Sverre Bjorn Svenning, research director at ship brokers Fearnleys in Oslo. “If you go south of Hong Kong or south of Rotterdam, it’s cheaper on the traditional route,” he said. Much of the activity on the Northern Sea Route involves the export of natural resources or voyages between Russian ports such as Murmansk and Vladivostok, Balmasov said. In June, Russian Prime Minister Dmitri Medvedev conceded that the Arctic route’s traffic to date was “nothing to shout about.” Still, some analysts say the U.S. hasn’t done enough to position itself for the region’s emerging opportunities. Borgerson, the former Coast Guard officer, says the Obama administration is beginning to recognize the Arctic’s significance but needs to do much more. The nearest U.S. deepwater port to the Arctic is in Dutch Harbor in the Aleutian Islands, almost 1,000 miles from the Chukchi Sea that separates Alaska and Russia. Two of the Coast Guard’s three polar icebreakers already are beyond their 30-year operational lifespans, even as Russia plans a trio of new nuclear-powered vessels by 2020. New satellite communication networks, navigation aids, runways and modern maritime charts also are needed. Political infighting in Washington that’s prevented the U.S. from joining the United Nations Convention on the Law of the Sea means the U.S. — unlike every other Arctic nation — is unable to file territorial claims for the region’s contested resources. Russia submitted a revised claim to 1.2 million square kilometers (463 million square miles) of the Arctic continental shelf on Aug. 4, arguing that the territory is a natural continuation of the Russian continental shelf. The UN rejected a similar submission in 2002, though Russia says it has conducted extensive research since then to gather supporting data. Though not an Arctic nation, China also is hedging its bets by cozying up to Iceland. In 2013, the island nation became the first European country to recognize China as a market economy, and the two nations signed a free trade agreement.

GOP 2016 Trump-7

Trump wants to raise his own taxes, but would he kill the 1031 real estate break?

Billionaire Donald Trump, who built his fortune in real estate, told Bloomberg Politics this week that he wants to raise his own taxes. One way to do it is a bipartisan proposal that would blow up one of the real estate industry’s favorite tax breaks. The break, known as the like-kind exchange or “1031” for the tax code section it comes from, lets real estate owners sell one piece of property and buy a new one soon afterward without paying any capital gains taxes on the profits from the sale. The result is an ever-increasing pile of deferred capital gains, taxed only whenever there is a final sale or, better yet, never taxed as income at all upon death. “It was originally meant to really cover a narrow set of transactions,” said Lily Batchelder, a former aide to Senate Finance Committee Democrats and to President Barack Obama. “It’s grown into this huge loophole, especially for wealthy real estate investors.” Obama has proposed curbing the tax break, arguing that the justification for the 94-year-old provision is outdated because each piece of real estate can be easily valued and then taxed when sold. His plan would limit the benefit to $1 million per taxpayer per year, raising nearly $20 billion for the government over the next decade, according to the Treasury Department. (That’s more money, by the way, than the carried interest tax break that’s gotten much more public attention and criticism from Trump and leading Democrats.) Former top lawmakers in Congress-Republican Dave Camp and Democrat Max Baucus-went even further than Obama, proposing full repeal of like-kind exchanges for real estate as part of their broader plans to revamp the tax code. The break distorts economic decision-making by making real estate transactions different from others, but it’s been a central part of deals for so long that getting rid of it would be disruptive, both to real estate investors and the industry of intermediaries that exists to facilitate property exchanges. Unsurprisingly, the real-estate industry has spent the past two years building alobbying campaign to justify the break and warn of dire economic consequences if it vanishes. The hand-to-hand combat has occurred mostly behind the scenes in Washington, as lobbyists try to shape a mega-bill on taxes that’s going nowhere until 2017 at the earliest. Trump and his company aren’t part of the Real Estate Like-Kind Exchange Coalition, according to Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable. “Our tax code is clearly in need of an overhaul, but it should not come at the expense of provisions that fuel economic growth on Main Street,” Daniel Goodwin, chief executive officer of Inland Real Estate Group of Companies Inc., said in a statement that called the provision a “core catalyst” for domestic real estate. “A 1031 exchange, for example, enables a business or investor to defer-not dodge-the capital gains tax on an asset sale.” In 2011, U.S. taxpayers deferred more than $33 billionin capital gains through exchanges, according to Internal Revenue Service data. Without the break, they would be more likely to hold onto property, locking themselves into investments for more time to avoid paying the capital gains tax, said Brad Borden, an expert on real estate and taxes at Brooklyn Law School. Property owners would also be more willing to move their investments outside of real estate, because the tax costs of selling for cash and swapping buildings would become equal. As for Trump, who is leading in polls for the Republican presidential nomination, it’s not at all clear what he pays in taxes or how much he benefits from section 1031, because he hasn’t released his tax returns. He tends to make long-term real-estate investments, and a good chunk of his income comes from licensing deals that pay him for the use of his name, not necessarily ownership stakes where like-kind exchanges would be an effective strategy. Borden said he’d be “shocked” if some of Trump’s entities hadn’t used the break. Still, section 1031 supports the entire real-estate industry, encouraging frequent transactions and creating the environment where Trump thrives. In some cases, it may keep prices lower, because it makes property owners more willing to put their buildings on the market. An industry-backed study released earlier this year said exchanges under section 1031 lead to less debt and that 88 percent of the properties that are exchanged are later sold in taxable transactions. An earlier industry-backed studysaid repeal would lead to more borrowing and reduce gross domestic product by 0.04 percent. DeBoer said in an emailed response to questions that repealing like-kind exchanges would lower real estate values by reducing liquidity and increasing friction in real estate transactions. “Rather than distorting economic decisions, like- kind exchanges remove artificial tax considerations from real estate investments,” he said. “Section 1031 prevents the taxation of phantom income. Any taxable gain must be used to acquire the replacement property, otherwise it is taxed immediately.” The real estate industry’s power in Washington-just think of how well the mortgage interest deduction has survived-will make the tax break tough to dislodge. “It would take some gumption, but it’s the right policy call and it’s a way to treat different investments fairly and in the same manner,” said Batchelder, who now teaches at New York University’s law school. Trump will release more details on his tax plan over the next few weeks, Hope Hicks, a campaign spokeswoman, said in an email. She didn’t say whether Trump has used like-kind exchanges. Of course, there are other, more straightforward ways that Trump can raise his own taxes. He can increase marginal tax rates. He can adopt a favorite Republican proposal and end the tax deduction for state and local income and property taxes, which disproportionately benefits residents of high-tax states such as New York. He could also raise estate taxes or limit the maneuvers the wealthiest few can use to minimize that tax. But Trump thrives on drama, and none of those options would be nearly as dramatic as attacking his own industry.

GOP 2016 Rubio-2

Big sugar fighting to protect a sweet deal with lawmakers

WASHINGTON — A sweet deal for American sugar farmers is compounding delays in a proposed trade agreement affecting 40 percent of the world’s economy. The commodity has become a sticky subject in talks over the Trans-Pacific Partnership, potentially the biggest trade deal in history and a key goal of the Obama administration. TPP, as it’s known, would link a dozen countries and, its proponents say, make it easier for U.S. companies to sell goods around the world. But the trade deal may also weaken protections for the sugar industry dating back to the Great Depression should negotiators heed the calls of Australia and other nations for the U.S. to loosen a quota system that protects domestic suppliers while making the product more expensive for consumers. As they have for decades, sugar lobbyists are fighting to keep it that way by using their clout with lawmakers. In Washington, that means one thing: money. Sugar accounts for a small fraction of U.S. farm output, but the industry contributes more to congressional campaign coffers than any other commodity producer. Between 2007 and 2014, growers donated $18.5 million, according to the Center for Responsive Politics. “The sugar lobby is one of the strongest in the country,” said James Cassidy, global head of sugar derivatives at Societe Generale in New York. Sugar isn’t the only thing snarling the trade talks, which broke off in July and are expected to resume as early as September. Other issues include dairy products, cars and intellectual property rights. But sugar occupies a special place in U.S. politics. The commodity has been a source of controversy since before the American Revolution. Import protections have artificially inflated domestic costs for decades. Nowhere is the industry’s clout felt more than in Florida, base of the nation’s most powerful sugar barons, the Fanjul brothers. Between them, the Fanjuls — Alfonso, Jose, Alexander and Andres — have long-standing ties to at least three U.S. presidential candidates: Sen. Marco Rubio, Republican of Florida; former Florida Gov. Jeb Bush, another Republican; and Hillary Rodham Clinton, the Democratic frontrunner. Rubio recently defended the U.S. sugar program at an event organized by major Republican donors Charles and David Koch. Bush wants to phase it out, according to a spokesman. The Clinton campaign didn’t respond to requests for comment. Major sugar-users like PepsiCo and Hershey have complained about the sugar program for years, saying it needlessly raises costs, both for them and for consumers. While a global production surplus has driven world sugar prices to their lowest levels since 2008, U.S. prices are much higher than elsewhere. A pound of domestic sugar fetched 24.45 cents yesterday on ICE Futures U.S., compared with 10.94 cents for a global counterpart. This week, the gap between the two was the widest since November 2011. “The issue of sugar is one that is sensitive,” U.S. Trade Representative Michael Froman told Bloomberg this week. “We made clear that we won’t do anything that undermines our sugar program, but just as we are asking every other country to put everything on the table, we are also talking about what other steps we can take on the sugar area as well.” Other sugar producers, led by Australia, say the U.S. must roll back support for its sugar industry for a TPP deal to get done. Other countries, notably Indonesia and Japan, also regulate the sugar trade. The National Foreign Trade Council, a pro-trade group that includes Coca-Cola Co. and Wal-Mart Stores, and the Sweetener Users Association, a collection of sugar-buyers, is holding a conference call with Australian sugar producers Monday to promote expanded U.S. access for foreign suppliers. The American Sugar Alliance, the industry’s lobbying group, says other countries are making unreasonable demands, particularly given that the U.S. has already made some concessions. The TPP talks haven’t been held up by sugar, according to the group, which spent almost $2.2 million lobbying last year. “Sugar clearly was not a sticking point,” the group said in a statement. The Fanjul’s Florida Crystals didn’t return phone calls or an e-mail seeking comment. American Crystal, a Minnesota-based cooperative, and other sugar groups and growers referred inquiries to the American Sugar Alliance. Rep. Collin Peterson of Minnesota, the top Democratic lawmaker on the House Agriculture Committee and the leading recipient of sugar donations in his party, said international complaints about U.S. sugar are nothing new. “Australia has wanted the U.S. to open up its market forever,” Peterson said. “I don’t think anything will make them happy.” Perez reported from New York. Contributors: Jennifer Epstein in New York and Michael C. Bender in Washington.