Week in Review

February 25, 2019

Global Roundup

One dead in Venezuela's Brazil border area after troops open fire. At least one civilian was killed and several were injured in the southern Venezuelan town of Kumarakapay near the border with Brazil after troops opened fire there. (Reuters)

Trump threatens tariffs on EU cars if no trade deal reached. U.S. President Donald Trump threatened on Feb. 20 to impose tariffs on European auto imports if he is unable to strike a trade deal with the EU. (EurActiv)

U.K. says focus in Brexit talks is now to backstop guarantees. Britain’s Brexit ministry said after talks in Brussels on Feb. 21 that the focus of negotiations was now on getting new guarantees on the temporary nature of the Irish backstop. (HSN)

Key Brazil politicians say pension reform bill short votes needed for passage. Two key Brazilian politicians said on Feb. 22 that President Jair Bolsonaro’s administration was not yet able to win the votes in Congress necessary to pass a pension reform bill that would curb federal budget deficits by slashing public spending. (Reuters)

China’s Premier Li Keqiang warns central bank of “new potential risks” posed by record loans in January. Premier Li Keqiang has warned of the “new potential risks” that China’s record level of new loans in January could bring to the financial system. (HSN)

Trump’s demand for stable yuan to end U.S.-China trade war “acceptable” to Beijing. A demand from the United States that explicitly requires China to keep the yuan exchange rate stable as a condition to end the ongoing trade war plays right into Beijing’s hands, and is an offer the government in Beijing will accept, said analysts. (HSN)

Iran still holding up its end of nuclear deal, IAEA report shows. Iran has remained within the key limits on its nuclear activities imposed by its 2015 deal with major powers despite growing pressure from newly re-imposed U.S. sanctions, a report by the U.N. nuclear watchdog showed on Feb. 22. (Reuters)

Global trade pain stings export economies from Japan to Germany. From Japan to Germany, from economic numbers to profit warnings, there’s no shortage of evidence that the world is feeling the pain of a slump in trade. (HSN)

How did the United Kingdom get itself into such a political mess? Time is almost up, yet it is still unclear whether the withdrawal will be orderly, disorderly, postponed or abandoned. (Interpreter)

Five reasons the USMCA won’t be passed easily by Congress. Ratification of the agreement is far from certain, and not just because the government is divided along party lines. There are other factors at play that could stymie the President’s efforts to ratify the trade deal, not least of which is the ongoing row over funding of a border wall, which forced the longest government shutdown in history. (Global Trade Magazine)

Aluminum supply fears rise as U.S.-China trade issues linger. Certain global aluminum producers have become increasingly vocal regarding their concerns about excess Chinese aluminum capacity, despite supply reform by the Chinese government and a number of smelters being closed or experiencing ramp-up delays. (Fitch)

The India-Taiwan Treaty: India’s gateway to a knowledge economy. India and Taiwan’s bilateral investment treaty presents a great incentive for India to develop its human capital and transition into a knowledge economy. The treaty strengthens relations between India and Taiwan and is in line with India’s Act East policy. However, it will be a hard road for India in the making of the changes needed and its partnership with Taiwan will not go unnoticed by China. (Global Risk Insights)

Once hailed as unhackable, blockchains are now getting hacked. More and more security holes are appearing in cryptocurrency and smart contract platforms, and some are fundamental to the way they were built. (Technology Review)

Top 5 risks for trade finance in 2019. The world economy is expected to lose some steam this year as the effects of the U.S. stimulus fade, global monetary conditions continue to tighten and financial markets experience more volatility according to trade credit insurer Atradius. (Global Trade Review)




Widely Divergent Attitudes Toward Foreign Policy

Chris Kuehl, Ph.D.

The Munich Security Conference was a three-day meeting focused on global security. In the past, these events have been opportunities for allies to rally around a set of common themes. Past meetings have focused on global terrorism, the Middle East conflict, the threat from North Korea and the incursions by Russia into its neighboring states.

There have also been moves to deal with much larger issues such as climate change and the growing shortage of water and other resources. It has rarely been a forum for acrimony between attendees. This year has been a major exception to that rule. The speech by U.S. Vice President Mike Pence was greeted coldly and was contradicted by German Chancellor Angela Merkel’s speech that got a rousing reception from the assemblage.

It came down to a clash of themes and intent. Pence extolled the virtues of the neo-isolationist policies adopted by the U.S., while Merkel blasted that thinking as prelude to real global chaos. The theme that ran through much of the commentary from the allies was that they would have to rethink their policies so they can shoulder the burden the U.S. has elected to jettison. One of the key points made by Merkel and others was that Europe would not be bullied into compliance with U.S. policy. This was especially obvious with regard to Iran. The Europeans are not going to heed the U.S. on this issue and will actively work to subvert it.

One of the key developments from this meeting was the arrival of a large delegation from the U.S. Congress—most of the Democratic leadership. They were eager to assert that not all the U.S. was pointing in that isolationist direction. Joe Biden was the lead spokesman on this subject and did his best to contradict the position outlined by Pence. The point to be made was that many in the U.S. still saw Europe as an ally and not an enemy.

For all the talk about Europe taking on more of its own defense, there was deep skepticism expressed by many of the European delegates as they pointed out that no nation had yet indicated they were ready to take on that economic burden. There are really only three states that could reasonably be expected to pony up enough in the way of manpower and resources.

France and Germany already carry the bulk of the weight and neither looks eager to add appreciably to that contribution. The U.K. has long been the third leg, but its withdrawal from the EU puts it on the outs. It may not be prepared to do more—even if it could, given the current state of its economy. The U.K. tried to assert it would remain connected to its traditional role in global defense, but given the impact of Brexit on the U.K. economy, there is real doubt as to its ability to do so.

There was a lot of conversation regarding the Middle East with attention mostly on Syria and the state of ISIS. The overall reaction of the attendees was that U.S. President Donald Trump was dead wrong on the state of ISIS and that his remarks only inflamed them. The European position is that ISIS will turn its attention to attacking Europe and Trump has given them something to prove. The Syrian subject is an extremely sore point in Europe as it involves everything from the immigration crisis to the expansion of Russian influence. The U.S. has been assailed for its intent to walk away from Syria, but there has also been plenty of internal criticism of the European response.




Brazil: Voters Demand Change

PRS Group

A massive corruption scandal involving the theft of billions of dollars from the state-owned oil giant, Petrobras, produced an electoral earthquake at presidential and legislative elections held in Brazil last year. Widespread public disgust with the political establishment created an opening for a populist outsider to claim the top office, and Jair Bolsonaro, a former army captain with a political resume heavier on controversy than accomplishments, seized the opportunity. Running on a platform that featured pledges to crack down hard on government corruption and violent crime—and expressing a willingness to dispense with liberal democratic niceties, if necessary to get the job done—Bolsonaro secured a clear mandate in a run-off election held on Oct. 28, taking 55% of the vote.

Bolsonaro pledged to revive the badly hobbled economy by implementing an orthodox liberal policy program, highlighted by tax cuts, deregulation and the restoration of fiscal discipline by eliminating government waste and losses from corruption. The candidate’s assurances that he would leave the details of economic policy to technocrats won him the support of the business community, which for the most part chose to ignore the warnings from Bolsonaro’s leftist critics that his election would be the death knell of democracy in Brazil.

In terms of his leverage to secure needed backing for reform legislation, Bolsonaro’s chief asset is his very high approval rating, which topped 70% when he was sworn into office in January. But pulling together the multi-party coalition that will be required to ensure at least 257 votes in the Chamber of Deputies could be a daunting task for a president who seems to have little interest in the art of diplomacy, and has vowed to dispense with the patronage and pork that have been essential to the governing process in Brazil.

The challenge will be all the greater when it comes to agenda items such as pension reform, which will require the backing of a three-fifths majority, and is sure to provoke fierce resistance from the unions and other interest groups. Bolsonaro’s deliberate effort to demonize the main opposition, the Workers' Party (PT), and the political left more generally, rules out any chance of possible cooperation from that quarter. That has reinforced concerns among the president’s opponents that he is laying the ground for attacks on his opponents that go beyond rhetoric if he encounters significant legislative obstacles.

In that regard, the fact that Bolsonaro’s administration has already become embroiled in a scandal, in which the president’s son is a central figure, does not bode well. It remains to be seen whether the scandal, which indirectly ties the president to a notorious criminal gang, has legs. But even if it does not blow up in the president’s face, the allegations, if not disproven, will sow suspicion and skepticism that may diminish the willingness of the electorate to give Bolsonaro the benefit of the doubt if other questionable ties or actions are revealed.

The poor economic performance contributed to the anti-establishment sentiment that carried Bolsonaro to victory, and he is under pressure to bring rapid improvement. Pension reform is crucial to freeing up fiscal resources that can be used to stimulate an economic recovery while simultaneously shrinking the large budget deficit. Key elements of an effective pension reform will necessarily include the establishment of a uniform minimum age of retirement that increases over time and changes to the rule for adjusting benefits for inflation, both of which are sure to generate significant pushback from the public that weakens the resolve of lawmakers.

For now, the president is leaving that task to Paulo Guedes, but it is unlikely that Bolsonaro will maintain a hands-off approach if the economy minister’s policy mix does not produce satisfactory results. The president’s congressional voting record suggests that he is a populist and nationalist by inclination. He has more than once voted against privatization and pension reform, and typically has supported increases in civil service wages. On that basis, it appears that Bolsonaro has draped himself in the mantle of liberal orthodoxy for purely political reasons, and has no deep commitment to maintaining that course.

The analysis above is taken from the January 2019 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.



Brexit Preparedness: Commission Intensifies ‘No-deal’ Customs Preparedness Outreach to EU Businesses

The European Commission has stepped up its “no-deal” outreach to EU businesses in the area of customs and indirect taxation such as VAT, given the risk that the United Kingdom may leave the EU on March 30 without a deal.

The outreach campaign is part of the Commission's effort to inform businesses that want to continue trading with the U.K. after March 30 on what they need to do to ensure as smooth a transition as possible, the commission stated.

In order to prepare for a “no-deal” scenario and to continue trading with the U.K., these businesses should:

  • Assesswhether they have the necessary technical and human capacity to deal with customs procedures and rules, e.g., on “preferential rules of origin.”
  • Considerobtaining various customs authorizations and registrations in order to facilitate their trading activity if the U.K. is part of their supply chain.
  • Get in touchwith their national customs authority to see what other steps can be taken to prepare.

range of material has been made available to businesses, including a simple 5-step checklist, providing an overview of the steps that need to be taken. The campaign material is available in all EU languages.

The European Commission campaign is expected to complement national efforts to inform EU businesses and help to reach out to affected businesses in the EU27 member states.

The ratification of the Withdrawal Agreement continues to be the objective and priority of the Commission, it stated. “This ratification however remains uncertain.”

Stakeholders, as well as national and EU authorities need to prepare for two possible main scenarios:

  • If the Withdrawal Agreement is ratified before March 30, EU law will cease to apply to and in the U.K. on Jan. 1, 2021, i.e., after a transition period of 21 months. The Withdrawal Agreement includes the possibility for a single extension of the transition period for up to one or two years.
  • If the Withdrawal Agreement is not ratified before March 30, there will be no transition period and EU law will cease to apply to and in the UK as of March 30. This is referred to as the "no deal" or "cliff-edge" scenario.

In such a no-deal scenario, goods coming from or going to the U.K. will be treated as imports from and exports to a “third country.” This means that customs formalities and controls will apply at import and export. Customs duties, VAT and excise duties will be levied at importation, while exports to the U.K. will be exempt from VAT.

The Commission has published a series of notices, available in all EU languages, which aim to better inform stakeholders and travelers about the consequences that a no-deal scenario could have for their business when it comes to customs procedures, indirect taxation, such as VAT and excise duties, preferential rules of origin and import/export licenses.



Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations