Week in Review

June 3, 2019

Global Roundup

U.S. will impose 5% tariff on all Mexican imports from June 10. The U.S. will impose a 5% tariff on all Mexican imports from June 10—and duties of up to 25% will be added in the coming months if Mexico does not take action to “reduce or eliminate the number of illegal aliens” crossing into the U.S., the White House said May 30. (CNBC)

Venezuelan government and opposition end talks with no deal. Venezuela’s government and the opposition ended a round of negotiations on the night of May 29 with no agreement, a setback for those bidding to unseat President Nicolás Maduro, who have seen their options narrow. (New York Times)

China's retaliatory tariffs on U.S. goods take effect amid standoff. An increase in Chinese tariffs on most U.S. imports on a $60 billion target list took effect as planned on May 25, with Beijing retaliating against Washington’s escalation in the trade war between the world’s two largest economies. (Reuters)

U.S.-EU talks struggle, threatening a new front in trade war. Even though President Donald Trump held fire earlier this month on auto tariffs that have the potential to further roil Europe’s struggling economy, a succession of domestic dilemmas on both sides of the Atlantic threaten to frustrate efforts at a trade pact before they’ve even begun. (Bloomberg)

China halts purchases of U.S. soybeans, report says. China is reportedly putting purchases of U.S. soybeans on hold amid the growing trade war with the U.S., a move that could ramp up the economic pressure on American farmers. (CBS News)

China’s capital outflow controls have gone to the “extreme,” former central bank adviser says. A former Chinese central bank adviser has admitted that Beijing’s capital account controls may be too “extreme” after personally being blocked from sending U.S. dollar funds abroad because he was too old. (South China Morning Post)

Bond flash economic warning as three-month yield tops 10-year rate by most since financial crisis. Long-term government debt yields fell further below rates on short-term notes and bills during the May 29 session, an unusual bond market phenomenon often heralded on Wall Street as a recession prognosticator. (CNBC)

Evidence Iran was behind Gulf attacks to be presented to UN, John Bolton says. Evidence that Iran has been behind recent attacks on oil tankers and pipelines in the Gulf is likely to be presented to the UN Security Council as early as this week, John Bolton, the U.S. national security adviser, has revealed. (Guardian)

Indian growth rate drops behind China to lowest in more than four years. India’s economy grew at its slowest pace in more than four years in the January-March period, falling behind China’s pace for the first time in nearly two years and raising the prospect of fiscal stimulus and a rate cut. (Reuters)

The trade war continues and businesses are responding. The trade war raging between the U.S. and China, which seemed headed toward a resolution before President Donald Trump in May accused the Chinese of reneging on commitments they made, is obviously the talk of the global trade-o-sphere. (Global Trade Magazine)

Bitcoin's rally masks uncomfortable fact: Almost nobody uses it. Bitcoin has a lingering problem that few people are talking about amid the renewed exuberance of the recent price surge. (Bloomberg)

No new phase seen in EU-Turkey relations after EP elections. The latest European Commission progress report has warned that Turkey is moving away from Europe. Little progress on the country’s accession is expected under the new EU legislature in 2019-2024, but political analysts don’t expect major negative changes either, as long as the refugee deal is in place. (EurActiv)

Automotive slowdown puts the brakes on world GDP growth. The slowdown in the global automobile market has had a material impact on world economic growth over the past nine months and has been a key driver of the global manufacturing downturn. (Fitch)


European Leadership Turmoil

Chris Kuehl, Ph.D.

There has rarely been a more confused political landscape in Europe and rarely at a more critical time. The economic growth in the eurozone has been anemic at best, and the Brexit mess is only dragging this growth down further. The rise of the populist right has affected every nation. There are dramatic changes in the relationship between the U.S. and Europe. Russia is still a major threat, and China’s dispute with the U.S. has affected Europe as well. Issues such as immigration continue to dominate the agenda, and there has rarely been less political stability as these issues are developing. The majority of the leaders in Europe are lame ducks to one degree or another. That is affecting the future leadership of the region.

Prime Minister Theresa May has resigned as party leader in the U.K. and will step down in June. She is likely to be replaced by the mercurial and virulently anti-European foreign minister, Boris Johnson. German Chancellor Angela Merkel has already stepped down as head of Germany’s Christian Democrats. That has compromised her influence as far as who will head the European Central Bank (ECB) or the European Commission itself. She has been pushing for Manfred Weber for the latter post and Jens Weidmann for the ECB. Neither candidate is being welcomed with open arms by the rest of Europe. French President Emmanuel Macron and Spanish Prime Minister Pedro Sanchez both oppose Merkel’s choices. The current head of the European Council is Poland’s Donald Tusk who will be stepping down in a few months.

The list of new national leaders is very long and complicates any sort of policy development on a wide range of controversial and urgent questions. In addition to the departure of May, Merkel and Tusk, the list of departing leaders includes Prime Minister Charles Michel of Belgium, as he has been unable to deter the growth of Flemish nationalists; Lithuania’s President Dalia Grybauskaite, as her term limit kicks in; and Finland’s Prime Minister Juha Sipila, as he will lose his post to the new center-left coalition.

Three important leaders will be facing new elections soon. All three are facing stiff opposition: Prime Minister Alexis Tsipras in Greece, Prime Minister Lars Lokke Rasmussen in Denmark and Minister of Defense Leo Varadkar in Ireland. When Chancellor Sebastian Kurz lost his vote of confidence in Austria, he was replaced by Acting Chancellor Hartwig Loger, but only until a new election. Kurz had been an ally for Merkel and other members of the center right.

The votes for the European parliament confirmed what many had been seeing in the national elections over the last few years. The voters are fed up with the traditional parties—center left or center right. They are not at all sure what they want instead, but there has been support for all kinds of alternatives. Populists like the Five Star Movement in Italy have gained and so have rabid nationalists such as the AfD in Germany or Republicans in the U.K. There were also big gains by the Greens and various extreme-leftist parties. The voters were in a mood to protest, but not to choose another course. There is major difference of opinion as far as what any nation should be doing differently—just agreement that something different needs to happen. The major issues range from the highly emotional, such as immigration, to the imminently practical, such as jobs and economic growth.

Looking ahead, it is likely that the big names in European politics will be French President Emmanuel Macron, Spanish PM Pedro Sanchez, Italian Deputy PM Matteo Salvini, Germany’s head of the Christian Democrats Annegret Kramp-Karrenbauer and Boris Johnson, should he become the next British PM.



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What Policies Should India Put in Place to Boost Business?

India was the fastest-growing economy among G20 countries in 2018 with 7.4% GDP growth, above China (6.6%), thanks to a better management of macroeconomic policies and clearer policy direction, trade credit insurer Euler Hermes said.

However, Euler Hermes’ Now India Index (NII) suggests that growth momentum slowed to 6.2% in first quarter 2019, due to weaker private demand and uncertainties around the outcome of the general election.

But India’s economic model is still well positioned to take advantage of the next cycle, the firm said. The economy could reach the size of Germany (USD4tn-plus) by 2025. Euler Hermes has identified three things the next government needs to do to boost business:


1. Open markets to foreign capital and reduce protectionist measures.

Despite the Modi administration’s efforts to open the market to foreign capital, there’s still a long way to go to address financial shortcomings and provide opportunities abroad. Financial resources are limited as public debt is high (general government debt at around 70%), while the banking sector is constrained by high nonperforming assets and savings are too low compared to investment. That is why maintaining the pace of reforms will be important to continue to draw investors’ interest and maximize the country’s potential.

“With an investment productivity of three (i.e., three units of capital are needed to create one unit of GDP) and a credit intensity of 1.4, India’s potential returns on investment are higher than those in China, which score six and three, respectively” explained Alexis Garatti, head of macroeconomic research at Euler Hermes.

In order to boost trade, a significant reduction of protectionist measures would also be necessary. Currently, India’s tariffs are among the highest in the world (e.g., 13.8% simple-average most-favored nation applied, compared to 9.8% for China in 2017) and foreign companies still struggle to access the markets of goods and services.


2. Implement a joint infrastructure industrial (I&I) strategy, with a strong focus on digital transformation.

In parallel, a radical improvement of infrastructure will be crucial to boost domestic trade and accelerate an economic catch up. This has been difficult over the years because of a lack of financing and difficulty in execution.

The Modi government estimated that the country would need infrastructure investment of USD150bn per year between 2017 and 2022 to create a sustainable growth environment.

“However, based on the World Bank Infrastructure needs simulation tool, we calculated a much higher need of USD 203bn per year with significant needs in energy-related infrastructure and transport,” Garatti added.

A further liberalization of the financial market could ease this financial burden by allowing foreign private investors to help in financing needed infrastructure projects.

Moreover, while India has the second-largest number of mobile phone and internet subscriptions in the world, only 37% of the population had access to the internet in 2018, compared to 53% worldwide. The country could still improve its edge on digitization as it has a huge potential considering the current growth rates (17% growth in the number of internet users in FY2017-2018). Supporting digitization would benefit various sectors and infrastructure builders could take advantage from a rise in sales.


3. Strengthen private consumption.

This is the last pillar for ensuring sustainable growth as it would provide a persistent boost to demand. While the joint infrastructure and industrial strategy will support a rise in the number of jobs and total income, a cost-effective redistribution strategy will be needed to address growing inequalities.

Authorities should provide more resources to the demand side of the economy by investing further in education and health. Furthermore, setting a minimum income guarantee could help strengthen private consumption. 

Business-to-consumer (B2C) sectors, such as household electronics and electric equipment, the automotive sector, pharmaceuticals and consumer services, will directly also benefit from this redistribution strategy.


A Look at Some of the Causes of the US-China Trade War

Amid the stream of headlines and calls with customers, the trade war between China and the U.S. has stirred tensions and ignited controversial discussions about international trade. The end of the trade tensions between the two economic powers will not likely be resolved in the near future, and while the anticipation of the end result has left economists and credit managers alike apprehensive, understanding the root of the war provides valuable insight into what may happen next.

During the educational session, “The Dragon and the Bear Market—What to Do When the Trade War Comes” at NACM’s 123rd Credit Congress in Aurora, Colorado, Kevin S. Wiley, Esq., broke down the nuances of the Chinese and American tensions, digging deep into the roots of the animosity between the two countries. Wiley touched upon several points of contention during his session, notably the loss of U.S. manufacturing and the rise of populism across the world.

According to Wiley’s presentation, since 2008, jobs in fields such as health care and food service have each increased by at least a million, whereas manufacturing and construction jobs have each declined by around a million-and-a-half. This downward trend of manufacturing jobs began in the 1960s as labor productivity rose.

With less U.S. manufacturing, Wiley said two schools of thought exist in regard to a loss of manufacturing in the U.S.: “decline of U.S. manufacturing caused by the ability to purchase cheap goods and the desire for cheap labor,” and, “decline of U.S. manufacturing caused by automation and improved labor productivity.”

In addition to these schools of thought about manufacturing, political trends have been shifting as far back as 1984, with Wiley citing the trade war with Japan up until the U.K.’s Brexit vote in 2016. Populism has been on the rise the past handful of years, notably with the elections of Nicolás Maduro in Venezuela, France’s Emmanuel Macron and Donald Trump in the U.S.

Extremist leaders propel countries to take extremist actions, another potential cause for the trade war between the U.S. and China. Trump has touted the “America First” slogan since his campaign, turning any potential trade allies away.

Wiley concluded his session by noting the end of the war has no clear date. He said China sees itself as “a peer competitor, politically, economically and materialistically,” but a relationship between the two economic powers will still likely be present in some capacity.

—Christie Citranglo, NACM editorial associate


Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations