Week in Review

June 11, 2018

Global Roundup

Mixed global credit impact of U.S. metal tariffs, reprisals. Corporate credit implications from the U.S. expansion of steel and aluminum tariffs on imports from the EU, Canada, and Mexico will be mixed, according to a new report. (Fitch)

Despite tensions, trade finance demand in Asia soars. Global trade tensions have not put the brakes on trade finance in Asia, with deal flow much improved on previous years. (Global Trade Review)

China's willing to boost imports if U.S. meets half-way on trade. China reiterated that it is willing to expand imports from the U.S. if the world’s two largest economies “meet half-way” in trade negotiations. (Bloomberg)

Italy can expect the full Brexit treatment. Italy’s new prime minister Giuseppe Conte is eager to talk to the European Commission about running a higher deficit, he told his country’s parliament this week. He’s about to find out that the rest of the EU isn’t ready to listen. (HSN)

Putin heads to China to bolster ties. Just a month after beginning his new term in office, Russian President Vladimir Putin is heading to China for a state visit, underscoring how mounting United States pressure is drawing the two countries increasingly close. (Business Mirror)

North Korea: Beyond an all-or-nothing ultimatum. Unsurprisingly, North Korea played a major role at the Shangri-La Dialogue in Singapore June 2-3, as the focus of the event’s second main panel, and cropped up in discussion throughout. (Interpreter)

China: Buying friends through dollar diplomacy. May was a tough month for Taiwan’s international presence. The troubles began when the Dominican Republic ended its alliance with Taipei in favor of Beijing, then Burkina Faso followed suit. The Chinese-claimed territory struggles to maintain international support and acknowledgement as an independent country. Beijing’s ‘dollar diplomacy’ will continue to chip away at Taipei’s legitimacy. (Global Risk Insights)

Thailand's economic outlook in six charts. Thailand’s economic outlook is improving. Growth is estimated at 3.9% in 2017—the fastest pace on an annual basis since 2013—but it has yet to become broad-based. To secure growth that benefits everyone, the country will need to implement key reforms to raise domestic demand and prepare for the impact of an aging population. (IMF)

Ethiopia's PM says ending war, expanding economic links with Eritrea key for regional stability. Ethiopia’s prime minister said on June 6 that ending war and expanding economic ties with neighboring Eritrea is critical for stability and development in the impoverished Horn of Africa region. (Reuters)

Macron, Trudeau support ‘strong multilateralism’ ahead of G7 summit. French President Emmanuel Macron and Canadian Prime Minister Justin Trudeau expressed support for “strong multilateralism” in Ottawa June 6 before the G7 summit, where U.S. President Donald Trump’s aggressive trade policies are sure to raise hackles. (EurActiv)

What to expect at the G-7 summit. On June 4, the Brookings Foreign Policy program held an on-the-record media briefing ahead of the G-7 summit in Quebec on June 8-9. Here are the five scholars’ remarks on that issue, edited for clarity. (Brookings)

Trump threatens more tariffs, heats up G-7 summit in Canada. Tension rose among the richest countries in the world on June 8 as U.S. President Donald Trump threatened to impose more tariffs on European and Canadian products ahead of a G7 meeting in Canada. (EurActiv)

Trump will be standing alone at G7. President Donald Trump is likely to get an earful at the G7 summit June 8 in Quebec from the Canadians and Europeans who are upset about the steel and aluminum tariffs he imposed on their exports. (Global Trade Magazine)

Second-biggest Arab economy quickens steps to boost growth. Dubai announced measures aimed at curbing rising costs that have reduced the city’s appeal to expatriates and investors alike. (Bloomberg)

Blockchain: Still in the testing stage, but here to stay. Blockchain gurus believe that the technology will revamp payment systems and even the capital markets. But for corporate treasury professionals, the biggest impact may be in more mundane activities, such as record keeping and information sharing. (AFP)

Bitcoin trading in Venezuela is skyrocketing amid 14,000% inflation. Venezuela’s government, struggling to contain its extreme, world-leading inflation rate, is devaluing its currency by removing three zeros from the bolivar. Local citizens may be taking a different approach: As price increases run rampant, bitcoin transactions denominated in the nation’s currency have skyrocketed. (Quartz)

The Shifting World of Trade

Chris Kuehl, Ph.D.

At first blush, it seems that the idea of trade deficits and/or surplus would be pretty simple. If a nation buys more than it sells in the global market, it will run a deficit. If it sells more than it buys, it will have a surplus. It would also seem pretty easy to determine which of these a nation would like to have—isn’t it always better to sell more and buy less? Unfortunately, simple is not usually accurate.

There is a lot more to the issue of trade deficit and surplus than meets the eye. This is especially true when looking at a very complex economy like that of the U.S. Just in the last few years, there have been several developments as far as trade is concerned that have altered the way the U.S. interacts with the global market.

One of the most important changes has been the mix of what the U.S. buys and sells. For decades, the U.S. imported a significant amount of the crude oil needed to run the economy. As recently as 15 years ago, the U.S. had to import 60% of the oil needed. This had been the case since the 1970s. Remember when every politician running for any office felt compelled to mention the need for energy independence?

The latest trade numbers show that the U.S. has seen a reduction in its overall deficit for the second-straight month. The main reason the U.S. is starting to chip away at that deficit is that oil is now something the U.S. exports. Last month saw a record amount of crude sold overseas as well as refined fuel. It was just a few years ago that oil exports were not allowed as the U.S. was carefully guarding the oil it had. Now, the U.S. is exporting four times more oil per month than was the case 10 years ago. This last month saw almost $20 billion worth of oil and fuel exported. Not only is the U.S. energy independent, but it can make significant amounts of money from that commodity.

The trade deficit is still high at $46 billion; it has gotten more expansive in the last year. This should give people a clue as to what can drive the deficit from one year to the next. What about the last year would make the deficit bigger despite all those threats of trade wars and tariffs? The simple answer is that the U.S. economy is growing and the majority of that growth can be attributed to the actions of the consumer.

With unemployment at record lows and consumer confidence up, there are many more consumers feeling good about their financial position. When that happens, there is more spending—the U.S. has, after all, the most dedicated consumers in the world. What is it that consumers want? That is pretty simple as well. They want value for their money. That attracts them to goods that are imported as these are often less expensive.

It is a pretty simple equation. The period when the U.S. trade deficit was at its lowest ebb was during the recession as people had less money to spend and were more concerned about the future. For all the bombast and threat that revolves around trade wars and tariffs, the fastest way to reduce imports is to have an economic downturn. It is also the fastest way to reduce levels of immigration. The number of people trying to enter the U.S. legally and illegally fell to the lowest levels in decades during the recession. If one is risking it all to enter the U.S. for work—it helps if there is work available. During the recession, this was not the case.

A third point to make regarding trade deficits is that governments and companies do not approach things from the same perspective. The majority of the business community looks at a global market—global consumers, global supply chains. They sell all over the world and they pull parts and commodities from all over the world. Countries still pay attention to borders and nationalities. A car company just wants to build a vehicle that is priced at a point the consumer can afford. That means watching costs carefully and sourcing from anywhere a quality part can be obtained at a good price. Over the last 50 plus years, the carmakers have created a true North American market with operations distributed between Canada, U.S. and Mexico. The U.S. looks at every part that comes from Mexico or Canada as an import, but the carmaker just sees this as part of a seamless system pulling from all over the world to deliver a quality product at a price that consumers can afford. Not that it is wrong for governments to worry about the jobs for their own citizens, but there also has to be a recognition that business competes globally.

World Bank: Global Economy Robust in 2018, Slower Growth Ahead

Despite recent softening, global economic growth will remain robust at 3.1% in 2018 before slowing gradually over the next two years, as advanced-economy growth decelerates and the recovery in major commodity-exporting emerging markets and developing economies levels off, the World Bank said last week.

Activity in advanced economies is expected to grow 2.2% in 2018 before easing to a 2% rate of expansion next year, as central banks gradually remove monetary stimulus, the June 2018 Global Economic Prospects states. Growth in emerging market and developing economies overall is projected to strengthen to 4.5% in 2018, before reaching 4.7% in 2019 as the recovery for commodity exporters matures and commodity prices level off following this year’s increase.

This outlook is subject to considerable downside risks. The possibility of disorderly financial market volatility has increased, and the vulnerability of some emerging market and developing economies to such disruption has risen. Trade protectionist sentiment has also mounted, while policy uncertainty and geopolitical risks remain elevated.

A special focus section in the June 2018 Economic Prospects report cautions that, over the long run, the anticipated slowdown in global commodity demand could put a cap on commodity price prospects and thus on future growth in commodity-exporting countries. It also states that major emerging markets have accounted for a substantial share of the increase in global consumption of metals and energy over the past two decades, but growth of their demand for most commodities is expected to decelerate.

Another special focus section finds that elevated corporate debt can heighten financial stability concerns and weigh on investment. Corporate debt—and, in some countries, foreign currency debt—has risen rapidly since the global financial crisis, making them more vulnerable to rising borrowing costs.

After many years of downgrades, consensus forecasts for long-term growth have stabilized, a possible signal the global economy is finally emerging from the shadow of the financial crisis a decade ago. However, long-term consensus forecasts are historically overly optimistic and may have overlooked weakening potential growth and structural drags on economic activity, the report cautions.

The report urges policymakers to implement reforms that lift long-term growth prospects. A rapidly changing technological landscape highlights the importance of supporting skill acquisition and boosting competitiveness and trade openness. Improving basic numeracy and literacy could yield substantial development dividends. Finally, promoting comprehensive trade agreements can bolster growth prospects.

If You Must Use a Letter of Credit—Get It Right!

Roy Becker

Too often exporters receive a letter of credit and then become frustrated with the terms the issuing bank has provided.

They ask, “Why would a bank issue a letter of credit with terms and conditions like this?” The issuing bank does not arbitrarily set the terms.

Setting the Terms of a Letter of Credit
Many exporters have learned that they can set the terms of the letter of credit. Several proactive techniques can accomplish this:

• Provide a detailed proforma invoice that gives sufficient information to the buyer for opening a letter of credit.
• Provide detailed instructions to the buyer for opening the letter of credit. At a minimum, a bullet-point list of criteria will go a long way.
• Ask buyers to fax a copy of the completed application for a letter of credit before they take it to their bank. This allows for feedback, revisions and agreement before the bank issues the letter of credit and will save time and money.
• If the buyer’s bank is willing, it may provide a draft of the SWIFT letter of credit prior to issuance.

Most buyers appreciate getting the information needed to issue a letter of credit. Of course, following these recommendations is not fail-proof, but doing so increases the odds of receiving an acceptable letter of credit.

Reprinted with permission from ShipppingSolutions.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations