Week in Review

May 14 2018

Global Roundup

China’s exports climb; trade surplus with U.S. increases. China’s overseas shipments exceeded estimates while imports surged, as the global economy continued to support demand, the customs administration said on May 8. (Business Mirror)

Mahathir to form new Malaysian government after shocking win. Mahathir Mohamad appeared set to become Malaysia’s prime minister once again after dealing Najib Razak’s ruling coalition a stunning defeat, cementing the country’s first transfer of power in six decades. (Bloomberg)

Hezbollah, allies gain seats in Lebanon parliament vote. Hezbollah and its allies have won a small majority of seats in Lebanon’s first parliamentary election in nearly a decade, boosting its influence and giving its patron Iran greater sway over the country. (WSJ)

Iran vows to restart nuclear program if deal collapses. Iran says it is ready to restart its nuclear program on an "industrial scale" in the wake of the decision by U.S. President Donald Trump to abandon the deal that curbs the country's nuclear ambitions. (CNN)

U.S.'s Iran move raises Middle East risks. The U.S.'s withdrawal from the Iran nuclear deal is likely to further increase geopolitical risk in the Middle East, Fitch Ratings says. However, the full impact depends on the severity of U.S. sanctions snapback and the responses from Iran, the other parties to the deal, and major regional powers. (Fitch)

China, Japan, South Korea leaders’ summit tackles North Korea concerns. As Japanese Prime Minister Shinzo Abe welcomed top leaders from both China and South Korea to Tokyo for the first time in seven years, he was forced to tackle an awkward agenda item: North Korea. (Business Mirror)

Forget tariffs, tech will be the key battleground in trade war. Economists at National Australia Bank (NAB) have downplayed the impact of trade tariffs between the U.S. and China, saying instead that the key battleground will be technology and intellectual property (IP). (Global Trade Review)

NYSE to establish trading platform for Bitcoin derivatives. The New York Times reports that Intercontinental Exchange (ICE), the parent company of the NYSE, is on the verge of evolving a trading platform for cryptocurrency derivatives. (EconoTimes)

Terminating NAFTA. A new report prepared by Trade Partnership Worldwide, finds that a termination of NAFTA would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination. (Global Trade Magazine)

Germany’s tightening labor market might spell more trade trouble. Germany is facing a trade hurdle of its own to add to the global protectionist spats burdening Europe’s largest economy. (HSN)

"Get on with it": British PM May under pressure on EU customs decision. A row over Britain’s future customs arrangements with the European Union has left the opposing Brexit camps more deeply entrenched than ever and Prime Minister Theresa May facing one of her toughest decisions yet. (Reuters)

Iran Nuclear Deal Questioned

Chris Kuehl, Ph.D.

The decision by President Donald Trump to withdraw the U.S. from the nuclear deal with Iran has created a tremendous level of uncertainty and outright distress. Europe has vowed to stay with the agreement despite the fact the U.S. can exert pressure on the European states and companies if they violate the sanction policies the U.S. is now permitted to re-impose.

The leaders of the EU have reacted with everything from disappointment to outright anger. The U.S. is rapidly losing its status as an ally as far as some in Europe are concerned. Others see the points the U.S. made, but they think there were better ways to address the weaknesses.

It is probably useful to review what this agreement was supposed to accomplish and what it was trying to address. The Iranians had been committed to building nuclear weapons capability. This effort had been a high priority of Mahmoud Ahmadinejad and some of the conservative clerics who dominate the Council of Guardians. With his defeat by Hossan Rouhani, the Iranians began to look closely at the plan and seemed amenable to backing away from it.

The fear was that Iran was only a year or two away from having offensive weapons that would threaten all of its neighbors. The most worried have been Israel and Saudi Arabia because there is no love lost between these states and the Iranians. Analysts concluded that neither Israel nor Saudi Arabia would tolerate the full development of these weapons and would carry out preemptive strikes on Iran. This would most certainly start a regional war. It would be the kind of conflict that drags other states into a wider war as has been the case with Syria. Russia, the U.S. and Europe have now all been pulled into that mess.

The nuclear deal was not seen as the best possible outcome; Trump has been pointing out the weaknesses since the campaign last year. Iran can continue building ballistic missiles, and it continues to be very active in supporting insurgency groups and terrorist organizations. The U.S. wants these issues addressed right now before it would agree to lift sanctions. The Europeans and others assert that the nuclear deal is a start and could be followed up later. Everyone (including Trump) acknowledges that Iran has complied with all aspects of this current deal, but there has been no reduction in missile development or support for those radical groups. The fact is that Iran continues to be a major threat to the region regardless of the status of those nuclear weapons. The missiles it already has can hit targets all over the Middle East. Also, the insurgent groups that have been receiving Iranian support are actively fighting in Lebanon, Syria, Yemen and Palestinian territory in Israel.

A great deal of the calculation as regards Iran comes down to whether there is faith in the reform elements in Iran. The current leader walks a very narrow tightrope between the conservative clerics that run the country in very fundamental ways and the greater population that seeks economic and social progress. Rouhani has been focused on economic reform. That has meant opening up to the western states—primarily through selling them oil and inviting their investment. His population is now overwhelmingly under the age of 30 and demanding reforms. The recent wave of strikes that have swept through the country has been motivated by people who continue to struggle for the most basic survival and resent the billions of dollars spent on various foreign ventures and weapons programs. As a reformer, Rouhani walks on eggshells; he can summarily be removed from office by the clerics who are not motivated by economic progress and remain entirely engaged in virulently anti-western rhetoric and invective.

If one believes that Rouhani and other reform elements can gain the upper hand and use this nuclear deal to counter the influence of Ayatollah Khamenei and the other clerics, there is impeccable logic in place to continue the deal in hopes the next steps will include deals on those missiles and the insurgent support. If one concludes that Rouhani and others are too weak to counter the clerics and the politicians that support them, the nuclear deal is not going to change much. It will not be followed up by more concessions. In fact, it is very likely that Iran will try to cheat the current deal. This is extremely high-stakes diplomacy and an area where the U.S. and Europe lack leverage. How does the Western world assist reform in Iran when the very fact that reformers working with the U.S. or Europe would be exposed to intense attack at home?

Fast-Approaching GDPR: U.S., U.K. Compliance Is Almost Split

Andrew Michaels, NACM editorial associate

Businesses in the United States and United Kingdom are scrambling to comply with the upcoming Global Data Protection Regulation (GDPR) that will take effect in two weeks. GDPR will give European citizens complete control of their businesses’ personal storage and processing data. Data controllers and processors that do not comply will face “stiff fines” after the May 25 deadline, noted the regulation’s website.

According to the latest GDPR compliance survey, almost half of U.S. and U.K. businesses say they won’t be compliant by the deadline. The survey, released April 30, was sponsored by international law firm McDermott Will & Emery and conducted by independent data protection researcher Ponemon Institute. More than 1,000 companies participated in The Race to GDPR report, 90% of whom said they will be subject to the new regulation.

“Companies are required to comply with GDPR if they offer goods or services or track data subjects in the EU,” the report stated.

After businesses were asked when they expected to be in compliance with GDPR, 40% of respondents said they would be ready after the deadline—this fell just below the 42% that reported compliance by May 25. The remaining respondents said they were already compliant (10%) or were unsure when they would be compliant (8%). Among the nine industries that participated in the study, financial services was the most prepared at about 63%, while retail was on the lower end of the spectrum at almost 43%.

“Smaller companies and very large companies see themselves as less likely to be in compliance with GDPR by the effective date than do mid-size companies,” the report states. “Companies are concerned about the risk of noncompliance with certain GDPR obligations.”

At the height of their concerns are the financial ramifications. The GDPR website clarifies fines at the lower and upper levels, which are determined by the nature of the infringement. At the lower level, companies can be fined up to 10 million euros or 2% of the worldwide annual revenue of the prior financial year, whichever is higher. This pertains to infringements of controllers and processors as well as the certification and monitoring bodies.

Fines of up to 20 million euros or 4% of the worldwide annual revenue of the prior financial year, again, whichever is higher, come at the upper level with additional infringements of basic principles for processing and data subjects’ rights. The Race to GDPR showed 72% of respondents were most concerned with these penalties, followed by 43% who are worried about new data breach reporting obligations. Only 13% expressed no concerns.

Failure to comply would impact organizations’ global business, according to 71% of respondents, with 92% saying they have appointed a data protection officer (DPO). Under the GDPR obligations, a DPO is required by “controllers and processors whose core activities consist of processing operations that require regular and systematic monitoring of data subjects on a large scale or of special categories of data or data relating to criminal convictions and offenses.”

Other obligations include the following:

• Notification if there’s a personal data breach
• A subject’s right to access personal data
• A subject’s right to be forgotten
• Data portability
• Privacy by design

To learn more about GDPR, go to www.gdpreu.org.

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Mild Increase in World Import Tariffs Expected

Euler Hermes

Last March, Donald Trump decided to drag age-old protectionism out of the past, imposing tariffs on U.S. imports. Retaliation from China—the main target—followed; fears of a trade war resurfaced.

Beyond the fact that initial threats from the U.S. were generally followed by negotiations and exemptions, the magnitude of the exports at risk, and the risks to derail the economic upswing sound like good reasons to take markets’ anxiety with a pinch of salt.

Recently, global trade has actually done well: In volume, it rose by an estimated 4.8% in 2017, while protectionist measures continued to pile up (489 new measures in 2017 compared with 2016). The acceleration of global growth was strong enough to more than offset the dampening effects of new protectionist measures and push many countries to open up again to benefit from the synchronized acceleration in growth.

On a forward-looking basis, Euler Hermes’ latest analysis on protectionism, Trade Games, Trade Feud or Trade War?, evaluates the impact of higher U.S. tariffs on global trade in 2018 and 2019. It defines three scenarios based on the rise of the average U.S. import tariff and different levels of retaliation among major trade partners.

First, our baseline scenario, called Trade Games, corresponds to a mild increase of the average tariff by 0.5 percentage points (pp) from 3.5% today for the U.S., with negligible retaliation. This is the unfolding situation, following the announcements, and the scenario we consider to be the most likely.

This scenario represents USD30bn per year of combined export losses for the U.S. and China, i.e., less than 0.1% of global trade of goods and services.

For the U.S., expected impacts on growth, inflation and trade are negligible (plus or minus 0.1pp max) as well as on business insolvencies (less than 1pp), but twin deficits could increase by 0.6 (trade) and 1.1pp (fiscal).

Electronic, electric, machinery and equipment and automotive are the most at-risk industries according to our protectionism tracker, based on the analysis of major contributors to U.S. trade deficit. On a bilateral basis, imports of electronic, electric and textile from China are the largest contributors to the U.S. trade deficit; they correspond to the list of Chinese products targeted: industrial and electrical machinery, optical equipment, vehicles (railway, aircraft), chemicals (including pharmaceuticals) and metals (steel and aluminum mainly). Conversely, to track retaliation by China, agri-food (where import tariffs have been increased on EUR3bn products) ran the largest deficit. The recent Chinese retaliatory measures have targeted aircraft, cars, chemicals and agri-food products (of which soybeans, cereals and beef) outside China, Mexico, Germany, Japan and Canada are the largest contributors to U.S. trade deficits) with automotive, machinery and equipment, electrical and electronic equipment.

Our second scenario, Trade Feud, is unlikely and corresponds to an increase of 2.5pp for the U.S. and rest-of-the-world import tariffs bumping them to 6% for the U.S. and 8% globally (substantial retaliation).

Last, our Trade War scenario (very unlikely) corresponds to an increase of tariffs globally by 8.5pp, i.e., to 12% in the U.S. and 14% globally. The bilateral version of this scenario would mean a 45% tariff on all Chinese imported products, which echoes what President Trump used to say on the campaign trail. This situation has not happened since the mid-60s.

“While less tweeted about, other forms of protectionism (financial, regulatory, data, currency, environmental, sanitary, security and intellectual property) could be even more disruptive,” said Alexis Garatti, head of macroeconomic research at Euler Hermes. “On the financial risks side, capital controls and currency manipulation should be monitored should tensions escalate between the U.S. and China.”

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations