Week in Review

July 9, 2018

Global Roundup

Trump eyes even higher tariffs as trade war with China escalates. President Donald Trump threatened to impose tariffs on every single Chinese import into America as the world’s two largest economies exchanged the first blows in a trade war that isn’t set to end anytime soon. (Bloomberg)

Canada slaps retaliatory tariffs on US goods. Canada began imposing tariffs on July 1 on $12.6 billion in U.S. goods as retaliation for the Trump administration’s new taxes on steel and aluminum imported to the United States. (Business Mirror)

Mexico election may signal fiscal, energy policy shifts. Andres Manuel Lopez Obrador's victory in Mexico's presidential election could signal fiscal, economic and energy policy shifts, although the extent of change under the new government's policy and Congress remains uncertain. (Fitch)

The sobering reality of a tariff war. Tariff wars take on the dynamic of an arms race. Fully armed on both sides, countries most often back down or repeal the new tariffs quickly, given the possibility of mutually assured destruction. (Global Trade Magazine)

Success of EU-China summit in the air as trade differences remain. The EU and China are speeding up preparatory work for their bilateral summit in Beijing in mid-July. The two sides are trying to agree on a joint position despite differences on trade issues including subsidies and market access. (EurActiv)

China foreign minister slams trade protectionism as short-sighted, damaging. Chinese foreign minister Wang Yi said trade protectionism was “short-sighted” behaviour and would harm all sides, the country’s foreign ministry said in a statement on Friday, amid sharpening trade tensions between Washington and Beijing. (HSN)

China presses Europe for anti-Trump alliance on trade. China is putting pressure on the EU to issue a strong joint statement against U.S. President Donald Trump’s trade policies at a summit later this month but is facing resistance, European officials said. (EurActiv)

Growth in trade is already starting to slow. Even before a round of U.S. tariffs levied on China went into force Friday, there are signs that global trade is already cooling. (HSN)

France hopes for EU corporate tax deal by mid-2019. French Finance Minister Bruno Le Maire said on Thursday he wanted to get other EU countries to sign up to a Franco-German proposal to harmonize corporate tax rules by mid-2019. (HSN)

In crisis talks, Britain's May feels more Brexit pressure from EU. The European Union told Britain on Friday there were still too many unanswered questions over Brexit, increasing the pressure on Prime Minister Theresa May as she tries to unite her government over plans to leave the bloc. (Reuters)

What will Lopez Obrador do about Mexico's corruption? Lopez Obrador's big win, as well as the success of his party in Congress, gives him a mandate to tackle corruption, but he will find it easier to stamp out graft at the federal level than among lower-level officials. (Stratfor)

With US out, others reaffirm commitment to Iran nuclear deal. Five world powers agreed with Iran on Friday to forge ahead with negotiations with the country and maintain its ability to export gas and oil as they seek to preserve a nuclear deal with Tehran despite the withdrawal of the United States. (Associated Press)

Iran doubles down on major port expansion in face of new U.S. sanctions. With the recent re-imposition of U.S. sanctions on Iran, the government of the Islamic Republic has doubled down on development of the Chabahar Free Trade Zone. (Global Trade Magazine)

Italy asks EU to extend guarantee that helped banks cut bad debt. Italy has asked European regulators to extend a state loan-guarantee plan that has helped its banks put a dent in Europe’s biggest pile of non-performing loans. (HSN)

Ethiopia between risk and reform. On April 2, Ethiopia’s restless new Prime Minister Abiy Ahmed was sworn into power. Since then the Federal Republic of Ethiopia has found itself in a whirlwind of reform. Ethiopia is undergoing its most significant changes since 1991. The last two months have witnessed the realigning of Ethiopia’s economy and bilateral relations with previous foes such as Eritrea and Egypt. (Global Risk Insights)

Pyongyang’s promises. Immediately after the Singapore summit on June 12, U.S. President Donald Trump proclaimed that North Korea no longer posed a nuclear threat, and that the denuclearization process would follow in accordance with the two leaders’ joint statement. However, three weeks later, Kim Jong-un does not seem to be honoring his end of the deal. (Interpreter)

Germany’s economic outlook in six charts. Germany’s economic performance has been impressive, with growth rising to 2.5% in 2017. The current upswing presents a golden opportunity for bolder action to address the country’s medium-term challenges and shape a brighter future, said the IMF in its latest annual assessment of the economy. (IMF)

 

Election Calendar

Pakistan, National Assembly, July 25

Cambodia, National Assembly, July 29

Mali, President, July 29

Zimbabwe, National Assembly, President, Senate, July 30

Rwanda, Chamber of Deputies, Sept. 2

Sweden, Parliament, Sept. 9

Three AMLO Scenarios

Chris Kuehl, Ph.D.

Now that Andrés Manuel López Obrador (AMLO) has been elected Mexico’s new president with a majority that exceeds that of any president in the last four decades, there is an expectation in Mexico that will test the new regime. Not only did AMLO win by a landslide, it appears that his Morena party has won a majority in the legislature. The once-dominant Institutional Revolutionary Party (PRI) has lost so many seats that it is now smaller than the little parties that backed Morena as coalition allies. The issues dominating Mexican politics were abundantly clear throughout the campaign; however, addressing them will be an enormous task.

At the top of the list was corruption as the population became convinced that all of the PRI was corrupt beyond redemption. This pattern of abuse had robbed the country of the money needed to really address growth. The second major concern is the violence that has beset the country from the ongoing drug gang wars. The issues of the economy have also been important, but they have been less of a factor at least for the time being. It has also been pointed out that voters strongly supported the nationalism and populism of the AMLO campaign—especially as regards reaction to President Donald Trump and the United States. Each and every time Trump attacked Mexico and immigrants or mentioned the wall, the support of AMLO jumped. Efforts by Enrique Peña Nieto to be diplomatic with President Trump were considered weak. AMLO has talked a far more aggressive game.

Rooting out corruption and ending the drug war will not be something that can be accomplished quickly or easily. Many comparisons have been made between AMLO and the former President of Brazil, Luiz Inazio “Lula” da Silva. López Obrador has to hope that the comparisons do not include the political end of Lula. Like AMLO, the Brazilian was a firebrand leftist leader most of his career as he headed the Worker’s Party. During a period very similar to the one in Mexico today, he saw an opportunity to be more than a critic on the outside and metamorphosed to a candidate that centrists could support. He traded his Castro-style fatigues for suits and was elected. In the end, his party was no more immune to graft and corruption than were his predecessors. It all fell apart under his hand-picked successor—Dilma Rousseff. AMLO will need to keep a tight leash on his supporters, which is far easier said than done.

The country with the most pressing interest in the policies of AMLO will be the U.S. The negotiation of NAFTA has been essentially stalled as nobody wanted to cut a deal with a lame-duck leadership in Mexico, but now that AMLO and Morena are in charge, what can be expected as far as relations between the two nations?

Scenario one is the most commonly cited, but it has some elements of wishful thinking as well. Much has been made of the likely makeup of the new cabinet and the leadership in the Mexican legislature. Most of the economic positions have been filled by U.S.-trained economists and technocrats who have been vocal in support of free trade and NAFTA. The relationship with the business community in Mexico will be strained, but perhaps not as much as first thought. The most likely point of contention is AMLO’s push to raise wages dramatically in Mexico. This will not be popular with business, but it will be to the unions and the population as a whole. It is also likely to get the support of the Trump team because this has been one of the demands associated with NAFTA. The U.S. thinking is that companies leave the U.S. to set up in Mexico to exploit the cheap labor. This is the “transformed” AMLO—willing to work with all sides as Lula did at first in Brazil.

Scenario two holds that AMLO may not have wanted to see his party do quite this well. If he still had to mollify elements of the PRI and PAN to pursue his goals, he could point to these compromises as necessary for the greater good. Now that his party and some smaller members of the coalition are in the dominant position, he will have to respond to the more radical voices that will be in control of the legislative agenda. There is little sign of moderation in that group. This scenario holds that he will be more confrontational with the business community and with President Trump as the members of Morena despise the U.S. administration and certainly don’t trust the business elite.

The third scenario is that AMLO soon realizes that he will need a great deal of help to deliver on his promise, especially as regards the power of the drug gangs. The U.S. has been nominally involved with combating these gangs, but Mexico has been very sensitive regarding U.S. police and military engagement. As the most important of the left-wing leaders, it is conceivable that he can make this kind of overture. That may have the added bonus of getting more cooperation with the U.S. on trade issues as well.

Hans Belcsák: Risk is the Essence of Business

The trade credit world lost one of its strongest advocates. Economist Hans Belcsák, Ph.D., former president of S.J. Rundt & Associates, Inc., passed away February 21, 2018.

Belcsák envisioned trade credit managers as renaissance people. They have to “know an awful lot about an awful lot of things in order to be effective,” he pointed out at the 2001 NACM Credit Congress in Seattle, Washington. In addition to being analysts, accountants, lawyers, troubleshooters and persuaders, “they have to be psychologists because a lot of the forces they deal with are really perceptions than reality.” But above all, he said, “they have to be very good managers.”

However, he challenged international trade credit professionals to broaden the scope of how they viewed themselves—not as credit managers, and most definitely not as collection managers, “but as an investment manager—somebody who manages the company’s investment in receivables.

“If we do that successfully, we then can convey to our management what we are doing, how it is being done and what it means for the bottom line,” he said. “In the end, the entire profession will greatly benefit.”

Belcsák also challenged them to take advantage of networking opportunities. “The more you network, the more you find out about innovative ways in which sales can be financed, about innovative ways in which … credit can be protected and more and more you will find the ability to enable sales that otherwise simply would not take place.”

A credit manager’s key responsibility is to become facilitators and enablers of sales, he said. “Credit is an investment that a company makes in receivables, making the credit manager an investment manager.”

Belcsák viewed credit as neutral. “It is neither positive nor negative. It is furthermore relative. It is not an absolute value. It is a necessary business ingredient.” He went on to say, it is neutral because it includes danger and opportunity, which are inherently related. “You can get rid of all the danger, but then you also get rid of all of the opportunity. You cannot really define it or manage it unless in relation to the expected reward from the transaction and the policy in which this risk management has to take place.” Risk “is not just part of business, but it is the essence of business,” he noted.

Gary Gaudette, CCE, ICCE, CTP, a member of the FCIB Advisory Board and past NACM chairman, remembers Belcsák fondly. “[He] had an amazing depth of knowledge about political and economic aspects of countries around the world,” Gaudette said. “He often commented on, and provided solid supporting evidence on his statements, that were not aligned with more politically correct, agenda-focused commentators and economists.”

Even when his perspective aligned with others, he often “backed up his comments with information I didn’t see from others writing on the subject,” Gaudette added. “It was refreshing to have both a different perspective and the additional background he provided when you read his articles.”

While “listening to him in person, you not only gained lots of knowledge and information, you gained a respect for how much time he must have spent keeping up with everything going on around the globe,” Gaudette said. “It was especially impressive when audience members would ask him about doing business in countries that were clearly not significant markets and he would be able to respond with who the leader was, the political leanings of the government, the economic conditions and expectations, and advice on trading there. I really looked forward to attending one of his sessions whenever I had an opportunity to do so.”

Belcsák published Rundt's World Business Intelligence Briefs, Rundt's Financial Executive Country Risk Alert and FX-PRO Foreign Currency Forecasts. He held a doctorate in jurisprudence and political economics. He was a regular contributor of articles to international trade and financial publications, including Business Credit and had made extensive contributions on foreign exchange strategies and country risk assessment to several books on international finance. Belcsák was the chairman of the International Council for the American Management Association, a consultant for the Management Center Europe in Brussels and an advisor to a regional governor of the Russian Federation. He was a frequent lecturer and conference chairman for the American Management Association in North and South America, the Middle East, Eastern Europe and Asia. He also provided intelligence briefings for corporate CEOs worldwide as well as for FCIB and was a past member of the FCIB-NACM Board of Directors.

Credit Risk Increases During Recent Quarter, Eurozone Especially

Christie Citranglo, NACM editorial associate

The Q2 2018 raises several red flags pointing toward risk for the upcoming year, specifically in the eurozone. The risks of this quarter mirrored that of 2012-13 during the end of the European Debt Crisis, including similar signs of failure such as increased protectionism, change in oil prices, global trade falling and capital outflows from new countries. Italy, with political chaos and the election this year, contributed greatly to this economic downturn.

According to Coface, the height of world growth passed in Europe, the most explicit sign being the price of oil. As of June, a barrel of oil costs 75 USD, a significant drop from the 2012 price of 110 USD—before adjusting for inflation. Coface’s analysis was released June 21, before the EU released its migration deal June 29; oil prices have gone up since, now reaching around 79 USD per barrel, according to CNBC. This increase may not be enough for Europe to bounce back, however.

Italy spares no mercy in this economic downfall, with the yield of a 10-year Italian government bond is less than twice as the average high; political uncertainty does not help either. During Q2, Italy’s government shook after populist politicians were unsuccessful in forming a government. Investors fear Italy may consider stepping away from the European Union—like Britain—leading to a de-facto referendum on the euro. Radical parties may continue to gain more ground in the future, especially with an election coming up. Coface has officially ranked Italy as an “A4” following the governmental uncertainty.

Protectionism saw an increase this quarter, also contributing to the anxieties surrounding the future of the eurozone market. Credit risk continues to increase after confidence was down in the beginning of the year, leading to a spike in protectionism this quarter. Coface predicts a slowdown in growth—forecasts of 2.2% in 2018 and 2% in 2019 for the advanced economies and forecasts of 2.1% for 2018 and 1.8% in 2019 for the eurozone—moving forward.

In the midst of the fall this quarter in Europe, the U.S. saw the least amount of decrease, showing a growth forecast of 2.7% in 2018 compared to a 2.3% in 2017. This comes during a time of political upheaval in the U.S., especially with the constant threat of trade wars and tariffs with countries like China and Canada. Protectionism in the U.S. has become more intense with foreign imports to the country remaining the victim of the trade wars. Subsequently, the Chinese ICT sector has downgraded to “high risk,” according to Coface.

Upcoming elections in Italy will likely continue to be instrumental in the Eurozone’s market moving into the next quarter. The odds of credit risk increasing during Q3 seems probable.

 

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations