Week in Review

July 16, 2018

Global Roundup

Mnuchin: U.S. would re-open trade talks if China makes major changes. The United States and China could reopen talks on trade but only if Beijing is willing to make significant changes, U.S. Treasury Secretary Steven Mnuchin said on July 12. (Reuters)

U.K. releases long-awaited and already derided Brexit plan. The British government released detailed plans July 12 for what it called a "principled pragmatic and ambitious" Brexit—plans that already triggered the resignation of two top ministers, split the governing Conservative Party and face likely resistance from the European Union. (Associated Press)

Israeli minister calls for 'immediate closure' of country's embassy in Ireland. Israel’s defense minister has called for the closure of the embassy in Dublin following the passage of a bill blocking the import of Israeli goods produced in occupied Palestinian territories. (Independent.ie)

Venezuela’s defunct National Assembly attempts to privatize oil industry. Venezuela’s National Assembly (AN) has approved a controversial legal reform which may open up the country’s sizeable state oil firm to privatization. (VEAnalysis)

Trade war kills currency volatility, leaves forex analysts confounded. Foreign-exchange traders are struggling to know which way to lean when it comes to betting on the escalating global trade war. (Business Mirror)

Global regulators push for faster transition away from Libor. Global regulators made a coordinated push July 12 urging banks and traders to hasten their transition away from using the scandal-plagued London interbank offered rate. (HSN)

First four banks go live on we.trade blockchain platform. The we.trade blockchain platform is now live across 11 European countries, with four banks closing seven trade transactions. The pilot transactions, which took place over July 9-13, were carried out by 10 companies across five countries. (Global Trade Review)

The future of the U.S.-China trade war. What is the effect of the new U.S.-China trade war on the two economies and where does this all end? (Brookings)

Mexican President-elect lays out legislative priorities. President-elect Andres Manuel Lopez Obrador has set his legislative priorities, including creating a Public Security Secretariat as a law enforcement institution, revoking legislation on the 2013 education reforms, removing obstacles to popular referendums and creating an austerity plan without layoffs. (Stratfor)

Burdens and threats at NATO summit. Donald Trump’s theatrics about military spending will distract the alliance from a focus on pressing threats. (Interpreter)

U.K. Brexit plan faces major political, negotiating hurdles. The Brexit plan formulated by the Conservative cabinet on July 6 would position the U.K. for a relatively soft exit from the EU, but it faces significant challenges. (Fitch)

The latest 6,031 Chinese products targeted by U.S. retaliatory tariffs in one giant table. Responding to China’s $50 billion worth of tariffs, the Office of the United States Trade Representative proposed an additional list of $200 billion worth of goods subject to a 10% tax. The list of 6,031 Chinese products impacted by the retaliatory tariffs are reproduced here. (Quartz)

Possible Brexit Outcomes

Chris Kuehl, Ph.D.

The universe of possibility when it comes to the Brexit deal has started to narrow a little bit. Analysts now assert there are five options that appear most likely to develop. These range from one extreme to the other. It would seem logical to assume that one of the middle ways would be preferred, but there is no guarantee that cooler heads will prevail as this has become a highly emotional debate with serious economic implications.

There is the total failure option. It seems to revolve around what happens with Northern Ireland. This has been close to a solution before, but at the last minute, the two sides harden their stance and the issue remains. Either the U.K. or the EU will have to give way on this one or the whole process collapses. The British want all of Ireland treated as a single entity with common rules and regulations that apply to Ireland and Northern Ireland, but the EU wants specific rules for just Northern Ireland. That would mean a hard border between the two Irelands. The U.K. fears that such a hard border will provoke another round of separatism for the region. The EU fears that leaving the Irelands united in the EU gives the British a way to escape the penalties for deciding on Brexit in the first place.

The second scenario is a deal similar to what the Canadians have with Europe, but with perhaps a carve-out for transportation. This is a hard exit and one where the British are refusing to enter into a customs union. This is the harshest reaction from the EU and is definitely opposed by the business community in both the U.K. and EU. This scenario also puts pressure on the Irish border. The customs union is setting the British relationship with Europe back by several decades.

Scenario three is a customs union after the transition—one that protects the Northern Irish from isolation from Ireland. The U.K. withdraws from the EU, but Northern Ireland stays in. The British assure the EU that they will pull out completely once there is a way to create the hybrid system that can’t be pulled together right now. The political issues get solved this way, but the business community is still left somewhat in the lurch.

The fourth option is for the EU to sign on with Prime Minister Theresa May’s plan. This provides nearly unfettered goods access between the EU and the U.K. The option leaves much of the current business community untouched in both the U.K. and EU. There are even hints that there will be some mobility for EU citizens wanting access to the U.K. This has been rejected repeatedly by the Europeans, but as they see an even harder position emerging in the U.K., they may want to do a deal with May before there are no good options at all.

The fifth scenario is the Norway model where the British withdraw with some assurances of concessions to Northern Ireland. Once this has been negotiated, there is an immediate effort for working out a deal along the lines Norway enjoys—membership in some key areas but strict limits. This has worked for Norway as it has the oil that many in Europe covet. It is not certain, however, that the U.K. has the same lure and attraction Norway has been able to exploit.

FCIB Survey Examines Payment Delays in Four South American Countries

Payment delays increased in Argentina and Colombia yet decreased in Peru and Brazil, according to the latest FCIB International Credit & Collections Survey, which surveyed those four countries. Many of the reasons for payment delays boiled down to cash flow, while also citing political unrest and regulatory issues in other countries.

In Argentina, 15% of responders said payment delays increased. Similarly, respondents in Colombia saw a 26% increase. Unlike the other countries surveyed, about a third of respondents said the main cause for payment delays was related to regulatory issues, with the other three country’s respondents favoring cash flow.

A mixture of reasons account for the payment delays, such as cultural, exchange and importation aspects as well as central bank and the ability to pay issues, said one respondent on the Argentina survey.

Like the rest of the countries surveyed, Colombia saw the majority of respondents (40%) attribute late payments to cash flow issues. Colombia also has longer payment terms than the other countries surveyed; the majority of terms falling between 31-60 days and 61-90 days—9% even said payment terms can exceed 91 days. One respondent elaborated, saying issues revolve around “unwillingness to pay according to terms” and “competitive pressures.”

Peru saw the greatest decrease in payment delays, where only 5% noted an increase and 21% noted a decrease. While still on the lower end of the spectrum but not quite as drastic, Brazil only saw 17% of respondents claiming an increase in payment delays, which is lower than December 2017’s 20% and April 2017’s 31%.

Cash flow issues were the main reasons for payment delays. These countries have a majority of their payment terms falling in the 31-60 day range.

Even though Peru’s payment delays seem minimal, one respondent noted the political issues within the country. Politics have been dividing the country recently, which can likely contribute to delays.

“Protests over the former president’s corruption have stalled commerce,” the respondent said. “Business is beginning to rally, and the slow payments seem to be starting to turn around.”

A common thread of advice was reflected in all the countries—knowing your customer and keeping up with current politics.

“Know your customer; go slow if offering credit limits,” a respondent on the Argentina survey said. “Follow international news on the country.”

FCIB members can access the full results of the July survey online via the Knowledge Center on the association's website, www.fcibglobal.com. The next survey opens July 26 and will look at payment behavior in Greece, Poland, the Netherlands and Spain. The monthly FCIB International & Credit Survey is open to all credit and risk management professionals who can share their real-time business experiences, and both members and nonmembers will receive the results of the survey in which they participate. Members, however, have full access to historical benchmarks in the survey archives.

US, China Continue Trade War

The back-and-forth game of chess between the United States and the rest of the world continued last week as yet another round of tariffs was threatened. The U.S., on July 10, announced a 10% tariff on $200 billion in Chinese imports, which will go under review during hearings in August. This is on top of the $34 billion tariffs that went into effect earlier this month.

According to Fitch Ratings, rated corporates in the U.S. and China are not likely to be impacted by the initial rounds of this escalating trade war. This is due in part by low direct exposure or the strong global economy, said the credit ratings agency. Nevertheless, a prolonged “tit-for-tat” dispute between the two countries could weaken GDP growth as well as increase inflation and currency volatility, resulting in “wider rating implications” and higher credit risk.

Fitch reviewed U.S. and Chinese firms based on operating sectors and trade dependency to identify their susceptibility to the previously announced and potential trade tariffs. Among the U.S. sectors facing the most trade-related revenue risk are technology, aerospace and automotive. Telephones, motor vehicle parts and computers were among the largest categories hit by the tariffs announced last week. “Manufacturers may also be exposed to rising costs if suppliers are procuring inputs from China subject to a tariff. The imposition of tariffs on a range of manufacturing inputs could have a negative effect on cost structures and margins,” added Fitch Ratings.

Another potential impact of the trade war is on trade credit insurance. This “could eventually result in reduced capacity and higher rates in the political risk and trade credit insurance market,” said a Business Insurance article. However, it is too soon to know the exact outcome the tariffs and trade war will have on the market. “There’s a real lag in how long this is going to take to cycle through,” said Marc Wagman, managing director, trade credit and political risk practice group with Arthur J. Gallagher & Co., in the article. “We’re not going to see it until … at the earliest, one year from now.”

The future of the trade war is still impacting the present. According to Reuters, China’s trade surplus with the U.S. hit a monthly record in June, dating back to 2008, as exporters rushed shipments prior to tariffs going into effect. This is expected to be a one-time deal and will begin to balance out as the year continues.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations