Week in Review

December 17, 2018

Global Roundup

Untitled Document

Trump praises China move on autos, says trade deal could happen soon. U.S. President Donald Trump welcomed China’s move on Dec. 14 to suspend additional tariffs on U.S.-made vehicles, saying it could help push forward a larger trade deal with Beijing. (Reuters)

The trade war’s too broad to turn on quick fixes. Count the straws in the wind, and it looks like the trade tensions between the U.S. and China could be moving closer to a resolution. Don’t relax just yet, though. (HSN)

Theresa May survives but the Brexit conundrum remains. "It's a gridlock scenario," one expert said. "Even if Theresa May had lost, whoever replaced her would face the same problems." (NBC)

Dollar hits 19-month peak on gloom outside U.S. The dollar shone on Dec. 14, reaching a 19-month high against a basket of currencies, as investors preferred the safety of the world’s reserve currency in the wake of worrisome political and economic news outside the United States. (Reuters)

Detention of Canadians raises stakes in China-U.S.-Canada row. China on Dec. 13 confirmed it has detained two Canadian men, raising the stakes in a three-way international dispute over the case of a Chinese telecoms executive facing possible extradition from Canada to the United States. (Business Mirror)

What businesses should know about Brazil’s new president. On Oct. 28, Jair Bolsonaro of Brazil’s Social Liberal Party (PSL) defeated Fernando Haddad of the Worker’s Party (PT). This outcome can largely be attributed to three factors: Brazil’s lethargic and largely jobless economic recovery, a decline in public security and a strong and sustained anti-corruption wave. (Harvard Business Review)

EU-Japan trade agreement on track to enter into force in February 2019. On Dec. 14, the European Commission welcomed approval in the European Parliament of the EU-Japan Economic Partnership Agreement and the EU-Japan Strategic Partnership Agreement. (HSN)

Economists see U.S.-China trade war as biggest threat in 2019. Most economists in a recent survey view a trade war between the U.S. and China as the biggest threat to the U.S. economy in 2019, a sign that forecasters view political uncertainty and the potential for new punitive tariff barriers as greater risks than macroeconomic or financial disruptions. (HSN)

NAFTA vs. USMCA: The North American Free Trade Agreement and the U.S.-Mexico-Canada Agreement. Here’s the most important thing you need to know about free trade between the United States, Canada and Mexico: Nothing has changed! At least, not yet. (Shipping Solutions)

Survey: Financial professionals concerned they could become obsolete. This past summer, more than 900 finance and treasury professionals took part in the 2018 AFP survey, Your Personal Digital Readiness. The survey revealed a concern among treasury and finance professionals that they could become obsolete. (AFP)

Colombia: South America’s under the radar emerging global market? In June 2018, Colombian voters made Ivan Duque, an ambitious populist conservative, their next president, garnering 54% of the vote. The country’s future—and its attractiveness for global business investment—will be impacted by Duque’s administration as the country approaches a critical opportunity to grow as a South American and global economic leader. (Global Trade Magazine)

Liquidity management in Latin America: Change and opportunity. Two commercially-important countries in Latin America—Mexico and Argentina—have recently announced various significant regulatory changes that present potential opportunities for treasuries to enhance their liquidity management. (TMI)

Downside risks to weigh on sovereign ratings in 2019. A range of macroeconomic risks will present more downside than upside risks for sovereign credit ratings in 2019 with Latin America and MEA facing the greatest macroeconomic challenges next year (The National)

A practical guide to CCPA readiness: Implementing Calif.’s new privacy law. CCPA is an unfamiliar type of law for the United States due, in large part, to its broad scope. It establishes a new privacy framework for businesses that fall within its jurisdiction. (Corporate Counsel)



Did China Just Blink First?

Chris Kuehl, Ph.D.

The latest round of negotiations between the U.S. and China were not expected to yield much beyond a lot of posturing and accusations from both sides. It appeared both nations were more interested in ratcheting up the tension than in getting down to any sort of common ground.

The U.S. was accused of torpedoing the talks with the demand for the arrest of a prominent Chinese business leader on the grounds that the Huawei executive, Meng Wanzhou, was breaking the law over the Iran sanctions and had been involved in trying to steal U.S. technology. She has been detained in Canada. For now, the Chinese are directing their ire at the Canadian government.

The U.S. position has been predictably aggressive as statements from the director of the White House National Trade Council, Peter Navarro, became ever more pointed and hostile. With this as a backdrop, it was not expected to be a productive meeting in any respect, but the Chinese have led the talks off with a statement that indicates they are willing to bend on one of the issues where the U.S. had been demanding progress.

They will lower the tariffs on imported U.S. vehicles from 40% to 15%. This is not completely giving in because the U.S. had been asking for no tariffs at all, but it is significant. Does this mean that China needs a deal more than the U.S. does?

From the start of the fight between the two biggest economies in the world, three rather obvious realities now shape the conversation. The first is that both the U.S. and China will suffer some economic pain in the short term.

Many U.S. companies depend on supply from China, and many rely on the Chinese market. China is in the same position. The only real question is whether the countries can withstand the impact. The U.S. economy is currently stronger than the Chinese economy, and therefore will suffer less damage. This does not mean the damage done to the U.S. economy will be minor. It is likely this dispute can peel as much as 1% off U.S. GDP growth. The damage to China would be more pronounced and could drag its economy down to under 6% growth.

The second issue is which of the two nations stand to lose more in the long run. The hard truth is that the Chinese have a more challenging future. They have to find a consumer like the U.S.—that simply doesn’t exist. The U.S. is a consumer-based economy that relies on consumers for roughly 80% of its GDP and a like percentage of jobs.

The U.S. has always imported a great deal of the goods that consumers buy as the cost of making most of this in the U.S. is prohibitive. The consumer in the U.S. would not pay that much so the imports allow for a more robust lifestyle. Prior to the emergence of China as the “world’s manufacturer” the U.S. imported from dozens of countries around the world.

Today, most of these goods come from one place. This is what has allowed the Chinese economy to surge to its current levels. In short, China really needs the U.S. to buy the stuff it produces. In contrast, the U.S. needs to find a new source for the consumer goods. It is not really that difficult an assignment given where the U.S. once acquired the goods it now gets from China. The shift from China to places like India, Vietnam, Sri Lanka, Brazil and so on will take time. The costs may not be as cheap as they were in China, but they will be comparable. The Chinese advantage lies in its infrastructure and the support provided by the government. Other nations will be hard pressed to match this.

The third issue is how the trade conversation relates to other economic and political issues in the respective countries. The leader of China has made no secret of his interest in reforming the Chinese economy. Xi Jinping has stated many times he wants to move the Chinese economy away from dependence on exports to an economy that can survive and prosper with its own consumer class.

This means placing more emphasis on domestic production and less support for the export sector. It also means accommodating that new middle class and its desire for imports. It is not that China wants to be like the U.S. or even Europe in terms of import demand, but there is a desire to be more like the rest of the world.

Xi has opponents that do not share this vision. Perhaps the most influential is Li Keqiang. He was the favorite under the previous leadership of Hu Jintao and Wen Jiabao, but was passed over. He still feels he should have been the head of the country and has carefully criticized the Xi plans. Li is deeply concerned that China is compromising its growth by failing to accommodate key markets. He does not think China is ready to walk away from the strategy that has brought it this far.

Back to the question that appears in the headline. Did China blink? It would seem it has made the first concession although it has not dealt with the three issues that Navarro and others have asserted are most important. The U.S. wants protection of intellectual property, an end to demands for technology transfer and a more open attitude toward U.S. exports. The agreement to lower tariffs on imported cars is a step toward that latter issue, but it remains to be seen whether the U.S. reacts positively.



Kenya: Political Tensions Growing

The PRS Group

More than a year has passed since President Uhuru Kenyatta won a five-year renewal of his mandate in a re-run election necessitated by credible evidence that the initial round of voting conducted in August 2017 was tainted by widespread irregularities. A political truce concluded by Kenyatta and his main rival, Raila Odinga, in March 2018 has helped to reduce turmoil risk, and contributed to a political climate that is more conducive to making progress on structural reforms. Even so, political risk remains elevated, amid warnings from the International Monetary Fund (IMF) of a growing danger of debt default unless authorities take more aggressive action to implement the reforms required to ensure fiscal stability over the medium to long term.

The outlook is clouded by signs of restiveness within the governing Jubilee Party, stemming from the suspicions of Vice President William Ruto and his allies that Kenyatta has made a secret deal to endorse Odinga as his preferred successor at the presidential election scheduled for August 2022. The factional tensions are further aggravated by discussions of possible changes to the governing structure, including the devolution of national political authority and the restoration of the post of prime minister, both of which are vehemently opposed by Ruto and supported by Odinga.

Kenya is one of the more attractive investor locations in the central and east African region, a status solidified by the establishment of Huduma centers, a form of one-stop-shop designed to reduce the bureaucracy and corruption encountered when dealing with government agencies. In addition, exemptions from the excise duty and improvements in the power supply have attracted automobile manufacturers in recent years, including Peugeot, Toyota and Volkswagen, and the business climate will be further enhanced by the inauguration of direct flights to the US and other transport improvements, notably in the rail sector.

However, Kenya’s heavy reliance on China for loans, investment and trade has fed popular perceptions of an “invasion,” amplifying the resentment of Chinese competition expressed by the local business community. A rebalancing of the heavy bias in favor of China could increase opportunities for investors from other countries, but such a shift will be difficult to implement unless the government can simultaneously diversify its sources of international financing.

The analysis above is taken from the November 2018 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.


Election Calendar

Madagascar, President, Dec. 19

Togo, National Assembly, Dec. 20

Congo, Democratic Republic, President, Dec. 23

Congo, Democratic Republic, National Assembly, Dec. 23

El Salvador, President, Feb. 03

Vietnam’s Economy Grows Robustly, but Risks Intensify

Economic growth in Vietnam has proven resilient despite weakening external conditions, driven mainly by strong domestic demand and a dynamic export-oriented manufacturing sector, a World Bank report finds.

The World Bank’s bi-annual economic report, Taking Stock, on Vietnam shows the pace of expansion is forecast to remain at 6.8% this year, higher than the projected figure of 6.3% for emerging markets in East Asia and the Pacific.

Over the medium term, in line with the global trend, Vietnam will see a slower pace—6.6% and 6.5% in 2019 and 2020, respectively. Inflation will remain muted at 4% as the result of tightening monetary policies.

“Despite a challenging global context, Vietnam continues to achieve robust growth accompanied by moderate inflation and a relatively stable exchange rate” said Ousmane Dione, the World Bank country director for Vietnam. “Policymakers should take advantage of the still-favorable growth dynamics to advance structural reforms to enhance private sector-driven investment and growth, along with improving efficiency in public sector investment.”

Risks to the outlook have intensified and are tilted to the downside, the report highlights. Given its high trade openness and limited fiscal and monetary policy buffers, Vietnam remains susceptible to external volatilities. Escalating global trade tensions could cause a falloff in export demands, while tightening global liquidity could reduce capital inflows and foreign investment. Domestically, a slowdown in reforming state-owned enterprise and banking sectors could undermine growth prospects and create public sector liabilities.

“Slower global growth, ongoing trade tensions and heightened financial volatility cloud on the global outlook,” said Sebastian Eckardt, the World Bank lead economist for Vietnam. “As an open economy, Vietnam needs to maintain a responsive monetary policy, exchange rate flexibility and low fiscal deficits to enhance its resilience against potential shocks.”

In light of the recently ratified Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU-Vietnam Free Trade Agreement, this special section of the Taking Stock edition focuses on streamlining non-tariff measures to help boost Vietnam’s export competitiveness. This analytical work is a product of the Second Australia-World Bank Group Strategic Partnership in Vietnam. 

The report observes that while tariffs are rapidly declining, the number of non-tariff measures (NTM) is increasing. Vietnam’s average preferential tariffs have fallen from 13.1% in 2003 to 6.3% in 2015. In contrast, the number of NTMs has increased by more than 20-fold during the same period. International experiences show that poorly designed and implemented NTMs could restrict trade, distort prices and erode national competitiveness.

According to the report’s assessment, the NTM system in Vietnam remains complicated, opaque and costly, resulting in the high cost of compliance. One study estimates that the equivalent tariff rate that sanitary and phytosanitary measures Vietnam are imposing on imported goods is 16.6% compared to the average level of 8.3% for ASEAN countries.



Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations