What We're Reading:

EU launches WTO case against China over Lithuania mistreatment: The European Union on Thursday announced it had lodged a complaint with the World Trade Organization (WTO) over China's behavior toward EU member state Lithuania, a move Beijing has dismissed as "groundless and inconsistent." (DW)

Hong Kong’s economic gains face swift reversal on Omicron threat: Hong Kong’s economic performance in the fourth quarter may provide little consolation as the city struggles to bring the Omicron wave under control, putting pressure on the government to dole out more stimulus for hard-hit sectors like retail. (BusinessMirror)

China prioritizes stable growth; continued scrutiny of private capital: The shift of China’s top economic goal in 2022 to stabilize growth is likely to moderate concerns over regulatory shocks in the corporate sector as the government refines industry policies to avoid economic disruptions, says Fitch Ratings. (Fitch)

Britain and India aim to finalize FTA agreement by yearend: Britain and India formally launched free trade agreement talks in New Delhi on Thursday (13 January) with the aim of wrapping up a deal by the end of the year that could boost annual bilateral trade by billions of pounds. (Euractiv)

Beleaguered UK steel sector welcomes US tariff talks but pleads for wider government support: UK steel industry groups are calling for swift action to remove tariffs on exports to the US after the two governments opened talks, though wider concerns remain about Westminster’s lack of engagement with the troubled sector. (GTR)

The EU-China comprehensive agreement on Investments (CAI): a piece of the puzzle: The EU-China CAI is an investment agreement which does not include trade issues and is mainly based on existing obligations under WTO law. (GRI)

There's more to the gas crisis between Iran and Turkey than meets the eye: Iran has announced that it stopped the flow of natural gas to Turkey for ten days, starting from 20 January, due to a "technical failure". (MEM)

High Inflation to stick this year, denting global growth: Reuters poll: Persistently high inflation will haunt the world economy this year, according to a Reuters poll of economists who trimmed their global growth outlook on worries of slowing demand and the risk interest rates would rise faster than assumed so far. (U.S. News)

Supply-chain fragility sends tin soaring to new highs: Andy Home: A New Year and a new record high for the tin price. London Metal Exchange (LME) three-month tin CMSN3 hit its latest milestone of $44,200 per tonne on Jan. 21 before suffering a bout of vertigo at the start of this week. (HSN)

Shades of blue: painting a picture for global trade in 2022: Just how fragile parts of global trade supply chains have been, and continue to be, has been a surprise to many during the pandemic. (TXF)

Fewest bankruptcies since 1966 fuel fears of Japan ‘zombie’ firms: Japan last year had the fewest bankruptcies in a half century. That’s how well the government’s response to the pandemic has worked in keeping businesses afloat and people employed. But economists warn there may be a darker side. (BusinessMirror)

Protecting national security, cybersecurity and privacy while ensuring competition: Are the tech platforms—Facebook, Apple, Amazon and Google—that play such a central role in our everyday lives too big and powerful? (Lawfare)

The pandemic created a domino effect of issues—from supply-chain woes to political disruptions, said Christiane von Berg, economist for Coface (Northern Europe) during FCIB’s January Global Expert Briefing. These issues further exacerbate economic inequality between advanced economies and emerging markets.

“The pandemic affects supply chains, supply-chain issues bring inflation, inflation causes central banks to react, which then leads to emerging countries experiencing an outflow of capital,” von Berg said. Because this is the first time the world came to a standstill at once and each country established its own rules, more uncertainty exists around global trade.

For example, Germany requires unvaccinated people to remain in lockdown procedures, which is hard to monitor; China is still in complete lockdown; and Sweden just implemented its first lockdown measures.

“It is hard to predict because—in general—global trade means you are not dependent on your own country—you are dependent on what is going on in other countries,” von Berg said. With China expected to remain in lockdown throughout the Winter Olympics, supply-chain troubles will likely persist, she continued.

As countries reopened last year, demand for input materials skyrocketed. Orders are so backlogged that stops for new orders are being established in the automotive sector, von Berg said. “The problem is people are not getting the input goods they are waiting for—especially for computer chips, but also other materials like commodities. Even if the input goods are being produced, the goods need to be delivered from one country to the other, and we all know this is a problem too.”

Transport costs and commodity prices are high in the wake of these issues. Metals such as steel, copper and aluminum bolts have increased in price, and the costs to transport them are very high, von Berg said. Traffic jams that occurred in the Suez Canal last year have migrated to the coasts of the U.S.

“Ships are waiting for a long time because the infrastructure in the U.S. is not as good as Europe or China,” von Berg said. “It does not have many automatic cargo suppliers, and there is a lack of truck drivers.” This continues to drive prices up, and high prices for producers mean high prices for consumers, von Berg said. “Even in Japan, where deflation has been programmed for decades, there is inflation.”

High inflation numbers affect central banks, causing the banks to rethink expanisve monetary policy and transition back to a more restrictive policy, von Berg said. For example, Japan wants to reduce pandemic purchasing programs; Northern Europe wants to increase interest rates; and Southern Europe does not want to change anything for fear of going bankrupt, she continued.

“Global investors want to invest in countries that have the highest interest rates,” von Berg said. “Emerging markets are offering higher interest rates so global investors put their money into these countries, and hopefully obtain a profit if everything goes smoothly.”

However, if the U.S. were to offer higher interest rates without the risk, global investors would take their money out of the emerging market country and go there, von Berg said. Emerging countries also are experiencing high inflation rates to the point where they cannot afford food—resulting in more social tension.

“When there is high inequality between populations that have lower poverty rates and those with a very high poverty index, this could bring a major revolution,” von Berg said. “We have tons of conflicts coming up like Russia versus Ukraine, Russia versus the West, and China versus Taiwan as well.”

Although these tensions are building, we still will not be able to understand the full effect it will have until they are settled, von Berg said.

In a move to protect U.S. investors, roughly 200 Chinese companies are at risk of being kicked off U.S. stock exchanges because they used China-based auditors whose work can’t be inspected by U.S. regulators, according to a recent Wall Street Journal report.

More than 130 U.S. companies use those same China-based auditors that put the Chinese companies at risk, says a study by three accounting professors on foreign component auditors in U.S. multinational audits. According to their research, U.S. businesses that use China-based auditors face higher risks of accounting problems. 

“Issues can be compounded if lead auditors put undue trust in audit work performed by component auditors in countries with significant cultural differences and, as a result, rely on work that contains errors or is not performed in accordance with auditing standards,” the study reads.

If audit work cannot be inspected by U.S. regulators (like in the case of most China-based auditors), those companies are at risk of being delisted starting in 2024 in accordance with the 2020 Holding Foreign Companies Accountable Act.

“The delisting threat, which affects companies whose stocks are valued at roughly $2 trillion globally, follows escalating political tensions between the U.S. and China,” the WSJ article reads. “Accounting scandals at Chinese companies that were listed on U.S. exchanges … have highlighted the risks posed to investors from this gap in oversight.”

Roughly one-third of U.S. companies use overseas accounting firms for at least 5% of their audits, the accounting professors’ study says. The risk of accounting issues increases as the portion of auditing work done by countries with a “weak rule of law,” like China, increases.

“If rule of law is weak relative to the U.S., a component auditor may be more likely to cut corners when following the lead auditors’ instructions as well as adhering to professional standards, and it may be difficult to trust their work,” the study finds.

For example, using such an auditor for 15% of the work increased the risk of a restatement by 32% and of a late filing by 39%, compared with not using an auditor from a weak-rule-of-law country, the WSJ article reads.

The European economy could face major losses if tensions between Russia and Ukraine continue to escalate, Lithuanian Central Bank Governor and member of the European Central Bank Governing Council Gediminas Simkus told Bloomberg.

“The situation adds uncertainty; if it escalates, it will obviously have an impact on our economies, on the Lithuanian economy, on the euro-area economy,” Simkus told the news outlet. “We, Europe and the others need to find, a decision leading to de-escalation, as further escalation means huge loss, and not only in terms of economic wealth but also losses in terms of lives.”

Russia has moved an estimated 100,000 soldiers near the Ukrainian border, raising concerns about the possibility of an invasion. Moscow denies any plans to invade; however, the U.S. and its NATO allies are preparing.

Russia demands that Ukraine and other ex-Soviet nations never be allowed to join NATO and that the alliance will pull back troop deployments in former Soviet bloc nations, according to the Associated Press (AP). NATO has said both requests are non-negotiable, and the U.S. wrote a letter to Russian officials reportedly offering alternative solutions.

“All told, it sets out a serious diplomatic path forward, should Russia choose it,” Secretary of State Antony Blinken told the AP. “The document we’ve delivered includes concerns of the United States and our allies and partners about Russia’s actions that undermine security, a principled and pragmatic evaluation of the concerns that Russia has raised, and our own proposals for areas where we may be able to find common ground.”

President Vladimir Putin has yet to respond, but according to the AP, Kremlin spokesman Dmitry Peskov said the response from the U.S. and NATO left “little ground for optimism.” Russian officials have warned of “retaliatory measures” in recent weeks if the U.S. and NATO denied its main demands. If the situation fails to de-escalate, the U.S. is considering several different sanctions as a next step.

The U.S., along with NATO allies, are working on a plan to ban exports to Russia on technology products commonly used in aerospace, artificial intelligence, defense and quantum computing, NPR reports. These bans would be in addition to more traditional sanctions aimed at damaging the Russian economy.

The U.S. also could cut Russia off from the dollar, which dominates financial transactions. “Biden indicated to reporters that cutting off Russia’s and Russians’ ability to deal in dollars was one of the options the U.S. was studying,” an AP news report reads. “Many Russians and Russian companies would be stymied in carrying out even the most routine transactions, like making payroll or buying things, because they would have no access to the U.S. banking system.”

In response to Western sections, Russia could decide to cut off its crude oil or natural gas exports to Europe as retaliation. But officials have said suppliers from North Africa, the Middle East, Asia and the United States would temporarily provide oil.

Oil prices are climbing as a result of the heightening Russia—Ukraine tensions. Brent oil surged above $90 a barrel, its highest price in seven years, Bloomberg reports.

“How the sanctions would impact Russian oil production getting into the market is the concern,” Rob Thummel, Tortoise portfolio manager told the news outlet. “In a global oil market that’s having a hard time with supply keeping up with the demand, less Russian oil supply would temporarily push up prices.”

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations