Week in Review

September 24, 2018

Global Roundup

NAFTA deal not yet in sight, Canada stands firm on auto tariffs. Canada and the United States showed scant sign on Sept. 20 of closing a deal to revamp NAFTA, and Canadian officials made clear Washington needed to withdraw a threat of possible autos tariffs, sources said. (Reuters)

Maldives election: Fears China-backed president could return country to dark days. The Maldives will hold presidential elections on Sept. 23 amid warnings the Indian Ocean archipelago is reverting back to the authoritarian rule it threw off in a democratic spring a decade ago. (The Guardian)

Matteo Salvini and the risk of populism. Recent disputes between Italy’s interior minister and the EU are symptomatic of the failure of member states and the EU as an institution to live up to their ideals. (Global Risk Insights)

Traders and banks prepare for long winter as trade war escalates again. A sharp wave of anxiety is spreading among Asia Pacific traders and bankers as to the potential damage of the U.S.-China trade war, with many now accepting that the situation is unlikely to improve for some years. (Global Trade Review)

Forecasters unanimous: U.S.-China trade war bad for economy—Reuters poll. The U.S. economy will expand at a robust pace in coming quarters but slow to 2% by the end of 2019, according to forecasters polled by Reuters who unanimously said the escalating trade war with China was bad economic policy. (Reuters)

It is not all Fed: Domestic debt risks may spur more Asia rate hikes. Some Asian economies running large external surpluses, including Thailand and South Korea, might be forced to tighten monetary policy soon as high household debt pose a bigger financial risk than the U.S. Federal Reserve’s steady pace of rate hikes. (HSN)

May needs urgent “plan B” to avoid hard Brexit, warn MPs. The U.K. needs to “urgently” draw up an alternative to Theresa May’s Chequers to avoid crashing out of the EU with a “chaotic and damaging” Brexit, MPs warned in a new report on Sept. 18. (EurActiv)

EU leaders reject U.K.’s post-Brexit economic proposal, pressuring Theresa May. European Union leaders rejected the British government’s proposal for how to maintain economic relations with the bloc post-Brexit, piling pressure on Prime Minister Theresa May as she was seeking a boost from the talks to help put down a possible rebellion in the party. (HSN)

Ten years on from financial crisis, banks find KYC more confusing than ever. The complexity of know your customer (KYC) regulations continues to bite banks and is acting as a severe deterrent to the financing of trade. (Global Trade Review)

Vietnam's President Tran Dai Quang dies at age 61. Vietnam's current president, Tran Dai Quang, has passed away following a "serious illness," state media reported. (DW)

Japan’s economy was a cautionary tale: Now it’s starting a new chapter. The world's third-largest economy has suffered from a caricature. Yes, Japan fell from its pinnacle in the 1990s because of a property crash, enfeebled banks and a dwindling population. But that was then. It's not falling anymore. (Bloomberg)

Divisive Brazil election careens into “dangerous” polarization. Brazil’s presidential campaign, already the most divisive since the end of military rule three decades ago, is growing increasingly polarized each day and raising concerns about the future of the country’s democracy. (Reuters)

Is it possible to stop Turkey’s economic meltdown? The country’s currency, the lira, has fallen nearly 40% against the dollar since the start of the year. Double-digit inflation has sent prices of food, energy, and other goods soaring. (Futurity)

Trade and Tariff War Between US and China Escalates

Chris Kuehl, Ph.D.

There was some doubt as to what this latest escalation of the trade war would look like in the end. There has been some frantic give and take between the two nations, while it has been increasingly difficult to figure out the strategy employed by either the U.S. or China. It is quite obvious there are multiple audiences in play for both and more is at stake for both countries than just economics. At the moment, it is hard to see either Trump or Xi backing down significantly. It is abundantly clear neither will admit to giving ground publicly. This certainly doesn’t mean that a compromise can’t be reached with room to spin it as a victory, but at the moment, it doesn’t appear either leader thinks the trade battle has hurt them or their country enough to shift positions. In fact, the majority of economists have concluded that very little damage has been done to either country thus far. It may have affected perhaps 3% of Chinese exports and 2% of U.S. imports, although the latest round of tariffs will likely hike these percentages.

The parable of the mice and the elephants comes to mind at this point. The assertion is that when two elephants fight, it will be the mice that will get hurt. The Chinese ship around $500 billion worth of goods to the U.S. every year and they buy around $130 billion worth from the U.S. That leaves a trade deficit of around $350 billion. Even as the U.S. imposes tariffs, they are not imposed on about half what the U.S. buys from China. China’s retaliatory tariffs affect about a third of what China buys. It is also useful to remember that many Chinese operations export to the U.S. from the other nations where they have a presence. The Chinese multinational is not quite as global as those from the U.S. are, but the U.S. gets a significant amount of “Chinese” product that is made in places as far flung as Malaysia, Indonesia, Nigeria and Brazil.

If these tariffs are not going to immediately cripple the Chinese or American economies what or who will pay the price of this war? The short answer is the U.S. consumer, select U.S. industries as well as the Chinese consumer and select Chinese industries. The pain will not be evenly distributed in either nation. The latest round of tariffs from the U.S. is a little less aggressive than was originally asserted, however. Instead of a 25% tariff, there will be a 10% tariff imposed with the threat of an escalation later if there is no retreat on the part of the Chinese. This set of tariffs has been aimed squarely at the consumer goods the U.S. has been buying from China for years.

The immediate impact will be felt by the consumer who will be paying higher prices for these goods. Past experience has demonstrated that the prices will not go up by just 10%—the average rise will be closer to 30%. The prime reason for the high price will be the disruption of supply chains and the subsequent need to develop a new set of them. The consumer goods China sells to the U.S. appeal because they are cheap, but there are many countries in the world that can also produce these same products at a low price. What these other nations lack is a good infrastructure. That adds cost to the supply chain—a cost where consumers will bear the brunt.

The fact that some $200 billion worth of consumer goods will now be more expensive will have an impact on the spending habits of consumers, but it is not clear how much at this time. Best-case scenario is that consumers are in a good mood and ready to spend on the holidays and will take the price hikes in stride, or they will find substitute goods that do not rise as much. The reality is that all producers will take advantage of the tariff policy as they can raise their prices and still be less than the Chinese imports. The worst-case scenario is the tariffs land on the U.S. consumer like a tax—which, of course, it is. The consumer got a nice boost from the tax cut at the start of the year. It may have added between $2,000 and $3,000 to the annual paycheck. These tariffs may well add $2,000 to $3,000 to the annual budget of a consumer and thus wipe out the benefits of that tax cut.

The other vulnerable sector of the U.S. economy will be that which is affected by the Chinese trade retaliations. This has become a chest bumping exercise between two leaders attempting to establish their positions—both internally and externally. President Trump sees this issue as a winner with his base and will ignore entreaties from the business community as well as his own party. Xi has a plan based on creating a powerful domestic consumer base and is just as determined to impose that change on China. The Chinese will strike where it will do the most political damage to the U.S.—the farm sector. Many of the new tariffs will be aimed straight at the food the U.S. farmer counts on selling to China.

OECD Sees Global Growth Moderating as Uncertainties Intensify

Economic growth prospects are now slightly weaker across the board than anticipated in May, when the Organization for Economic Cooperation and Development (OECD) released its latest Economic Outlook. Escalating trade tensions, tightening financial conditions in emerging markets and political risks could further undermine strong and sustainable medium-term growth worldwide.

The OECD projects that the global economy will grow by 3.7% in both 2018 and 2019, with rising differences across countries, in contrast to the broad-based expansion seen in the latter part of 2017 and earlier this year. Confidence has weakened; trade and investment growth have proven slower than anticipated; and wage growth has remained modest across most countries despite OECD-wide unemployment having fallen below pre-crisis rates. The outlook and projections reflect a downward revision of the global economy since the previous Economic Outlook in May 2018 and cover all G20 economies.

The outlook identifies the worrisome slowdown in trade growth—combined with widespread political uncertainty—as the principal factor weighing on the world economy. It underlines that further trade restrictions could have adverse effects on jobs and living standards, particularly for low-income households.

“Trade tensions are starting to bite and are already having adverse effects on confidence and investment plans,” said OECD Chief Economist Laurence Boone. “Trade growth has stalled; restrictions are having marked sectoral effects; and the level of uncertainty on trade stances remains high. It is urgent for countries to end the slide towards further protectionism, reinforce the global rules-based international trade system and boost international dialogue, which will provide business with the confidence to invest,” Boone said. “With tighter financial conditions creating stress on a number of emerging economies, especially Turkey and Argentina, a strong and stable policy framework will be key to avoid further turbulence.”

The outlook calls on policymakers to enhance resilience, boost productivity and improve inclusiveness. Policy should address the root causes of financial market pressures, including excessive asset prices and indebtedness in various forms, both public and private; improve resilience to shocks in both emerging and advanced economies; steer fiscal policy toward measures that support long-term growth; and focus reforms on skills and labor market inclusion to improve opportunities for all.

WEF Throws Weight Behind Blockchain for Trade Finance

PYMNTS.com

The World Economic Forum (WEF) has thrown its support behind blockchain technology to expand trade finance availability across the globe, touting the technology as a way to address the “paper monster,” tap into data and support governments’ export/import initiatives.

Released last week, the World Economic Forum and Bain & Company’s report, Trade Tech—A New Age for Trade and Supply Chain Finance, declared that the current trade finance gap—calculated at $1.5 trillion by the Asian Development Bank—could be reduced by $1 trillion if distributed ledger technology (DLT) sees greater adoption by industry participants.

Emerging markets and small- and medium-sized businesses will see the greatest impact from blockchain in trade finance operations, the WEF predicted, with smart contracts and digital customs documentation offering the greatest disruption potential.

“Implementing blockchain-based solutions can eventually do more for SMEs in emerging markets than removing tariffs or closing trade deals,” said the WEF’s Head of Supply Chain and Transport Industry Wolfgang Lehmacher in a statement.

Citing Bain & Company analysis, the WEF warned that just as the demand for trade finance remains largely unmet today, the demand for digitization of trade finance processes—and for DLT to enhance that digitization process—similarly remains unmet. Reliance on paper between brokers, freight forwarders, government agencies, other logistics players, buyers, suppliers and financial service providers has created a “paper monster” limiting trade finance availability and efficiency.

Researchers predict that an estimated 40% of traditional trade finance worth $0.9 trillion will move onto distributed ledger technologies that can lower fees and enhance service. The report also expects $1.1 trillion of new trade volume to emerge as a result of distributed ledger technology’s ability to remove barriers that currently exist in the “paper monster” model.

The letter of credit (LOC) is an oft-mentioned legacy tool in the trade finance market that could see transformation from blockchain. Already, the LOC has seen a decline in share of global trade finance value since 1970, the WEF noted, citing World Bank data. Newer technologies like tokenization, smart contracts and internet of things (IoT) devices can further distance trade finance from legacy solutions like the LOC, particularly with their ability to tap into data.

Information on companies’ payment histories, delivery performance, reliability and other factors can all play a key role in mitigating trade finance risk. With technologies like artificial intelligence and IoT bridging trade finance players to this kind of key data, blockchain may play an important role in hosting that information in a secure way.

The benefits of DLT-powered trade finance can be vast, but not only for SMBs. According to the WEF, governments stand to gain significantly from blockchain in this market, not only via a reduction in paper, but also through the ability to connect siloed regulatory bodies—like central banks, port authorities and agricultural bodies—to streamline compliance efforts.

Despite the potential, however, not everyone is convinced blockchain can make the impact its proponents claim, and the WEF itself acknowledged challenges to the transformation that blockchain could bring.

“Many corporate participants have been unwilling to invest in integrating with freight forwarders, government bodies and document preparers, and many banks have been reluctant to invest as long as corporate adoption remains low,” the WEF stated in its report. “So, although trade is getting more efficient for large multinationals and companies in developed countries, small companies in poorer countries are paying a high price.”

Significant shifts, including the migration of banks away from the center of trade finance, won’t necessarily be easy to endure.

“The benefits of adopting DLT in trade will affect everyone from banks to companies to governments to consumers,” said Bain & Company Expert Vice President Gerry Mattios in another statement. “But action has to be taken in a collaborative way and with an ecosystem approach in mind. Individual actions won’t bring the expected results.”

Reprinted with permission from PYMNTS.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations