Week in Review

What We're Reading:

March 1, 2021

UK companies say Brexit paperwork is biggest headache. British companies say new customs forms required following Brexit are the biggest hurdle to trading with the rest of the world, official data shows. (AJOT)

US drops demand for 'safe harbor' regime in global tax talks. U.S. Treasury Secretary Janet Yellen on Feb. 26 told G20 finance officials that Washington was dropping the former Trump administration’s demand for a “safe harbor” clause in talks to reform global taxation rules, a Treasury official said. (Reuters)

EU-US data flows could face ‘massive disruption’. One of the European Union’s most powerful data regulators has warned companies may yet face massive disruption to transatlantic data flows as a result of an EU court ruling last year, despite efforts by policymakers to avoid that outcome. (HSN)

Chip shortage exposes vulnerable supply chains. The world is running low on semiconductor chips, and automakers aren’t the only ones who should worry. (Bloomberg)

Trinidad businesses forced to seek USD on black market. The limited availability of foreign exchange has meant that individuals and business have had to turn to the black market for U.S. dollars. (Guardian)

Coronavirus conundrum: Containers still in short supply. Demand for freight container transport has been soaring for about six months—despite or because of the pandemic. The same can be said of cargo rates and the profits made by shipowners. (DW)

Vaccine delays leave Latin America and Caribbean economies sinking. Latin America and the Caribbean, the region where the coronavirus outbreak caused the worst economic destruction and more than a quarter of the world’s deaths, is now falling victim to a slow inoculation campaign. (Business Mirror)

CETA and Ireland explained. Ireland is edging towards a vote to ratify CETA, between Canada and the European Union. CETA has been implemented provisionally since September 2017, but needs final approval by all EU parliaments before full implementation. (EurActiv)

Drop in goods trade less severe than predicted, WTO says. In its most recent goods trade barometer, the WTO says growth in trade volumes remained strong in the fourth quarter of 2020 after a stronger-than-anticipated rebound during the third quarter. (Global Trade Review)

Afghanistan: To leave or not to leave. Under the Doha deal, U.S. forces are meant to be out of the country in mere weeks. Either way, peace appears far off. (Interpreter)

There are kinks in Biden’s plan to strengthen America’s supply chain. China’s share of Asia-Pacific export goods has mostly held up throughout the COVID-19 crisis, suggesting that a supply chain shift away from China hasn’t yet materialized. (Quartz)

Calls to shift Xinjiang supply chains met with warnings of forced labour risks across Asia. Pressure is growing for U.K. and U.S. companies to move supply chains out of Xinjiang following recent measures by both governments to crack down on imports of goods linked to the Chinese region. (Global Trade Review)

FX hedging strategies for 2021 and beyond. As new processes and technologies are called upon to help businesses navigate turbulent waters post COVID-19, foreign exchange hedging strategies will need to change too. (TMI)

Libya letter of credit system abused for ‘rampant fraud,’ report claims. The Libyan central bank’s letter of credit (LC) system may have been exploited for “fraud on a large scale”, researchers believe, after finding LC-based transaction volumes were far higher than actual imports. (Global Trade Review)

Some people have asserted that U.S. President Joe Biden would be a pushover when it came to relations with China. That was a theme touted by his opponent in the election, but it ignored his history and the traditional stance taken by the Democrats over the years.

China has always been problematic to more liberal members of Congress due to the history of human rights abuse, weak labor laws, a callous attitude toward environmental issues and the treatment of minorities such as the Tibetans, Uighurs and others.

Usually, the GOP has defended doing business with China because there was a great deal of money to be made engaging in China trade and investment. In truth, the Republicans had their fair share of issues with China over its geopolitical actions, but engagement was generally the preferred position. Former U.S. President Donald Trump reversed that trend and took an overtly hostile position towards China—urged on by advisors such as Peter Navarro.

Now that Biden is setting new China policy, there are questions regarding what this will look like. At this point, it would appear that little has changed; and if anything, the relationship will likely worsen.

The Chinese have been slow to comment and seem to have adopted a “wait and see” position. That may be changing by the day. The first official speech on the subject was about 10% request and 90% threat. There was a request for the U.S. to remove or reduce tariffs that have been imposed on China. In the same speech, however, there was a long and pointed harangue regarding “meddling.”

The assertion is that the U.S. should not criticize China policy on minorities or military engagement in the South China Sea, or technological espionage, unfair trade practices or support for nations the U.S. is hostile toward. In the bluntest of terms, the U.S. should allow China to do whatever it wishes to do and anywhere it wishes to do it. Biden’s response has been cold and direct. The first discussion between Xi Jinping and Biden was supposed to deal with trade and the tariffs, but Biden kept the talks focused on what he referred to as genocide against the Uighur population.

The upshot is that tariffs will remain in place against many Chinese goods. This has had some impact on Chinese exports to the U.S. but not nearly as much as intended. There are many ways to get around tariffs, and nations employ them all. Goods are shipped to a third country for minor modification and then come to the U.S. as having been made elsewhere than China.

Goods are redesigned so they no longer fit the description of a product with a tariff on it. Tariffs on products such as steel or aluminum are thwarted by simply making something out of that steel and shipping to the U.S. In many cases, the Chinese seller absorbs the tariff by lowering its price so it can hang on to market share. Beyond all this, there is the fact that a tariff is a tax on the person or business that buys that product.

At this point, it appears that Biden’s policy will emphasize doing more business with Chinese rivals such as Vietnam, India and others, placing greater emphasis on getting U.S. products into world markets.

After a tumultuous year, the global economy is gearing up for a recovery in 2021, but not without significant obstacles. The forecast for the year includes both challenge and opportunity, hinging on the success of a large-scale vaccine rollout and the continuation of government support packages.

The first quarter of 2021 will be difficult as vaccination programs begin to be administered and the spread of the virus slows. According to Atradius' latest report, once that happens—likely in mid-2021—the true recovery will kick off, with global GDP expected to recover by 5% for the year. This outlook, however, comes with major downside risks, including another wave of global infections that could reduce GDP growth this year and delay real recovery until 2022.

Industry Outlook

For industries such as healthcare, pharmaceuticals and online retail, the challenge this year will be managing post-pandemic demand while keeping investments afloat. On the other hand, businesses in transport, tourism, travel and hospitality that survived 2020 will have to keep a close eye on their balance sheet as they rebuild this year.

Over time, these sectors will likely resurrect; before that happens, government stimulus packages will likely thin out, which may lead to a rise in insolvencies and unemployment.

Trade Relations Simmer Down

Surprisingly, global trade did not contract to the depressing levels expected in 2020, and a rebound of 6-7% is expected in 2021.

Trade can finally expect a boost, provided the new U.S. administration takes a collaborative, rather than combative, stance in international trade. Atradius forecasts that under the new Biden presidency, China and the U.S. will gradually ease some, but not all, of the tariffs built up during the Trump presidency. The U.S. trade policy is expected to return to normalcy, reducing trade policy uncertainty and spurring on a trade recovery. Also, aiding global trade is an end to Brexit uncertainty. Altogether, these developments should help stabilize global markets.

Where Businesses Find Support

During a uniquely difficult year, governments have played a significant role in supporting businesses. They have kept firms afloat by providing liquidity via fiscal support such as wage subsidies and tax deferrals. This stance is expected to continue as long as necessary and will gradually tighten during the recovery, which Atradius predicts will run well into 2022.

However, the unprecedented fiscal response will obviously have to be paid for. In 2020, government spending, coupled with sharp declines in GDP, has raised deficits and public debt to their highest levels ever. In advanced economies, deficits soared, especially in Italy, Spain, the U.K. and the U.S. Conversely, the emerging economies were somewhat more restrained, especially China. Brazil is an exception to emerging economy restraint; its 2020 deficit ballooned to 17%.

Apart from government support, businesses worldwide have also found assistance via credit insurance, which saw a steep increase in demand in 2020. Credit insurance received support from local governments in many countries, providing support to businesses and potentially helping the flow of supplier credits in a period where businesses were under severe pressure. This can result in a decreased risk during a tumultuous year. Nevertheless, insolvencies are expected to rise during 2021. In many countries, they were kept artificially low by government support and the suspension of insolvency legislation. This created a backlog of insolvencies that will come to the surface in 2021 as support and suspension fades, causing a rise of more than 13% in the United States and over 35% in Europe.

Finding a Silver Lining

Evidence suggests that the Covid-19 pandemic and its ensuing consequences were the result of a ‘black swan event,’ one that is talked about but can never be predicted. Despite that, firms can take steps to mitigate their risk for future ‘black swans’ by carefully looking at costs and reducing wherever possible, including in-office space and business travel. This has already become a common approach with increased appetite for remote work worldwide, made possible by sophisticated digital tools. Recognizing these benefits allows firms to save costs on a structural basis (offices, business travel), which in turn may help them to survive a challenging period.

John Lorié is chief economist at Atradius and a researcher at the University of Amsterdam.

Most C-suite and other executives (84.6%) who responded to a Deloitte poll feel confident in their organizations’ abilities to manage cash and liquidity. But as uncertainty persists, it’s important for organizations to improve and strengthen their cash and liquidity management abilities to avoid having a false sense of security.

“Liquidity management plays an integral role in an organizations’ operations and growth—being a primary driver for business decisions,” said Anthony Jackson, a principal with Deloitte Transactions and Business Analytics LLP. “With increased disruption from the pandemic, it’s important for executives to build long-term, sustainable strategies for liquidity versus focusing on short-term fixes which can provide a false sense of security. Bettering processes like forecasting can help give better visibility into cash-flows which in turn can help attain liquidity objectives.”

While forecasting can help give organizations better visibility into their financials, doing so has been difficult for many organizations amid the pandemic. Respondents stated that forecasting was either their top challenge (13.8%) or among their top challenges (54%) with liquidity and cash management during COVID-19.

“The pandemic has shifted executives’ focus from long-term planning to addressing more immediate business concerns—putting forecasting capabilities into the spotlight, which has shown weak points in these efforts,” Jackson said. “Gaining better visibility into forecasting to fully understand the liquidity impacts in their business is critical in navigating a path forward.”

Few Taking Advantage of Advanced Technologies

With forecasting challenging executives, especially in a time of increased disruption, leveraging advanced technologies can help. However, only 13.5% of respondents stated they are currently doing so and 18.8% of respondents plan to implement in the next 12 months. Almost half of respondents (46.8%) stated that they have no plans to use advanced technology in their liquidity management efforts.

“Utilizing technologies like advanced analytics can help executives save time and gain valuable insight that might not have otherwise been available—identifying trends and issues throughout areas like forecasting efforts,” Jackson added. “Ultimately, advanced technologies can help executives evaluate the most strategic ways to strengthen their liquidity.”

Through Disruption, Organizations Update Liquidity Management Efforts

Executives stated that their organizations are updating cash flow and liquidity management plans in a regular cadence. Nearly a third (31.4%) of respondents are updating their plans monthly and nearly a quarter (24.5%) are updating their plans on a weekly basis. Only 7.2% of respondents stated they were not making changes to their cash flow and liquidity management plans.

“Efforts in managing cash flow and liquidity have usually been reserved for companies in distress,” Jackson said. “However, with the pandemic and increased disruption, these efforts are now relevant for almost every organization. Executives should recognize that now is the time to act by updating or creating better processes, gaining visibility and enhancing capabilities to make proactive and informed decisions that affect liquidity.”

More than 1,800 C-suite and executives were polled online during a Deloitte webcast titled, “Improving liquidity management: Scenario-based cash forecasting,” on Oct. 15, 2020. Answer rates differed by question.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations