Week in Review
December 3, 2019
Trump to hit Brazil and Argentina with steel and aluminum tariffs. Donald Trump is to reimpose tariffs on imports of steel and aluminum from Brazil and Argentina after accusing the countries of a “massive devaluation” of their currencies that hurt U.S. farmers. (Financial Times)
EU fails to block U.S. tariffs in new WTO aircraft ruling. The World Trade Organization has found the EU has failed to withdraw all subsidies to plane maker Airbus, three people familiar with the matter said, a decision likely to permit the United States to maintain tariffs on European goods. (Reuters)
Top U.S. and Chinese trade negotiators hold phone call, discuss core issues. Top trade negotiators from China and the United States held a phone call last week as the two sides try to hammer out a preliminary “phase one” deal in a trade war that has dragged on for 16 months. (HSN)
EU approves increase in U.S. beef imports to ease bilateral trade tensions. European Union lawmakers approved an increase in U.S. beef imports to the EU on Nov. 28, a move likely to ease transatlantic tensions. But they also criticized tariffs imposed by U.S. President Donald Trump on metal imports and a threat he has made to target EU cars and car parts. (Merco Press)
Defense budgets set to dominate yet another NATO summit. Despite pleas to set aside bickering over military spending so the issue doesn’t dominate a third NATO summit in a row, the United States is almost certain to demand again this week that its 28 NATO partners respect their pledges to boost defense budgets. (AP News)
Bitcoin is facing a major crossroad as sell-off proves relentless. Bitcoin is nearing a critical juncture as its recent sell-off shows few signs of abating. (Bloomberg)
China financial warning signs are flashing almost everywhere. From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policymakers to the test. (Business Mirror)
Cuba takes another swipe at ending dual currency system. Two Havana department stores began on Dec. 2 to give change only in pesos, instead of the local dollar equivalent known as the convertible peso, in another step toward ending Cuba’s dual monetary system. (Reuters)
India’s economic growth slips to 4.5%, lowest in six years. India’s economic growth slipped to 4.5%, its slowest pace in six years, in the July to September quarter, with the labor-intensive manufacturing sector contracting. (Business Mirror)
U.S. businesses less willing to invest in Germany. Whatever is behind the recent plunge in foreign investment in Germany, the country needs to work on its infrastructure and digitization strategy to stay strong. (DW)
Why China’s debt defaults look set to pick up again. Chinese companies are facing a reality check after years of ramping up debt. (Bloomberg)
What Does a Post-Brexit Trade Relationship Look Like?
Chris Kuehl, Ph.D., NACM Economist
The Brexit agony in the U.K. continues to fester. At this point, the elections do not seem to provide an answer to what happens next. Neither the Tories nor Labor look to be able to form a government; voters do not seem to have a clear opinion on Brexit.
The same regions that supported it during the referendum support it now, and the same regions oppose it. One of the points that has been clear throughout the discussion is that both the U.K. and EU would like to preserve the trade relations that exist between the two.
The issues that have motivated the Brexiters have been social—immigration and the impact of Europe’s cultural rules on Britain. Now that it seems inevitable that another stalemate is developing, there are some renewed attempts to hammer out some kind of trade deal.
European leaders are suggesting a separate trade deal can be explored once the dust settles from a Brexit, but they have stressed that any such deal will have to comply with European standards as far as labor and environmental laws as well as the host of other regulations that order business relations.
There are many in the British business community that supported a Brexit on the basis of wanting freedom from these European rules, but the majority of the U.K. voters did not react to these issues—their concern was immigration and the supposed assault on British culture. There was concern about lost jobs and changing societal norms, but less popular interest in rules and regulations.
The challenge now is getting the business community on board regarding a new trade agreement. If there is to be a Brexit, will a replacement trade arrangement take its place? The most vexing issue still hangs over all these negotiations. What will done about Northern Ireland. The EU will not accept a loose border that would allow companies in the U.K. to use Ireland to thwart the Brexit withdrawal, while the U.K. doesn’t want a hard border that would likely lead to intense unrest in Ireland and Northern Ireland. The trade deal might be a way to address the Irish border question, but there have been few detailed plans developed for how that would work.
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Global Trade to Grow at Slowest Pace in a Decade
Higher uncertainty and higher global tariffs are taking a toll on trade, noted trade credit insurer Euler Hermes. In 2019, the volume of global trade of goods and services should grow at its slowest pace (1.5%) in a decade.
Exporters will likely see USD420bn in losses this year, according to the firm’s latest global trade report, Trade Wars: May the Trade Force Be with You in 2020 and Beyond.
China, Germany and Hong Kong are the main victims of the trade recession, the report finds. Though the currency effects explain most of this, the export shock has clearly been widespread across European countries and export hubs. Among sectors, electronics, metals and energy sectors are likely to have suffered the most.
According to Euler Hermes’ Trade Momentum Index the worst has passed. “It has stopped deteriorating, while still remaining negative,” said Ludovic Subran, group chief economist at Allianz and Euler Hermes. “In 2020, we hence expect trade to remain in a low-growth regime, slightly accelerating to 1.7%, while the global economy continues to decelerate (2.4% after 2.5% in 2019). The so-called Phase 1 deal between the U.S. and China, despite being superficial, may bring some comfort. But renewed threats of tariffs and a busy political year (global summits, U.S. elections) in 2020 should bring higher volatility, leaving no hope for sizable improvement going forward.”
The strongest export gains will be recorded in China and the U.S. However, their trade feud has taken a toll: Export gains for both countries will be roughly half of what they were in 2018. Rising protectionism in the form of U.S. tariffs on cars could target Germany and the U.K. next.
As for sectors, electronics, metals, and machinery and equipment will continue to ail in 2020. In contrast, software and IT services, agri-food, and chemicals will see moderate export gains.
When faced with escalating U.S.-China trade tensions, small and agile exporters benefited the most from trade diversion. In other words, the largest trade partners are losing market share or gaining less than average (Canada, Germany, Japan and Mexico), while many of the smallest trade partners (Taiwan, the Netherlands, and France) are rapidly gaining.
Winners may not stay winners for long. Vietnam, for instance, which benefited from the trade conflict, is now on the hot seat as its trade surplus with the U.S. has soared.
Phantom trade is the other consequence of escalating U.S.-China trade tensions. Some Chinese companies could be shipping their merchandise to third markets, such as Taiwan and Japan, just to then ship the goods to the U.S., avoiding tariffs.
“This rerouting avoids tariffs and artificially inflates trade figures (because the same good travels to an additional market before reaching the final partner),” said Georges Dib, economist at Euler Hermes. “Our preliminary analysis on South East Asia, with not more than a year and a half of data, shows that Japan and Taiwan are used as rebound markets for machinery and mechanical appliances, and for electrical machinery.”
Late Payments Epidemic Continues to Have Ripple Effects in Europe
The late payments epidemic continues—with particular impact in Europe.
Forbes noted this past week, that in the United Kingdom, per data from Previse, larger companies are paying their smaller suppliers more slowly than they are paying their larger suppliers. Previse has estimated that businesses, on average, pay their smaller suppliers 30 days later than they do larger suppliers. The company has analyzed 10 million invoices spanning 24 billion pounds of spending by large companies.
The findings show that suppliers billing less than 10,000 pounds annually do not have invoices processed until 35 days after paperwork is received. Thus, payment is late even before the invoice is approved. For the larger suppliers, invoices take just three days to process. The financial publication noted the government has estimated that the average time to pay invoices now stands at 37 days in the U.K., beyond the 30-day period recommended.
A separate report by Intuit QuickBooks found that in the U.K., small businesses are spending about 56 million hours a year to chase down overdue payments. The firms are taking about one week a year to address late payments, according to the Intuit research. The time spent to get those payments is worth more than six billion pounds, and more than 11% of those outstanding payments were more than 200 days late.
Drilling down a bit, in the U.K. in November, a number of businesses within the construction sector have been suspended from the Prompt Payment Code in the wake of having failed to pay their suppliers on time. The businesses include Eurovia Infrastructure Limited; Kier Integrated Services Limited; Kier Infrastructure and Overseas Limited; Kier Construction Limited; and Kier Highways Limited.
The moves bring the number of companies suspended to about 20, Highways Magazine reported.
“Eurovia Infrastructure Limited is a subsidiary of Eurovia U.K. Limited and is one of our contracting legal entities in the U.K.,” a spokesperson for Eurovia told the outlet. “We fully recognize the importance of complying to the Prompt Payment Code, taking the responsibility for paying our supply chain very seriously.”
Elsewhere, and on a larger scale, Western Europe might see its inaugural increase in insolvencies in several years, to the tune of 2.7%. That comes amid macro-level pressures, such as the U.S.-China trade war and Brexit. In addition, as newKerala.com reported, citing Atradius, payment practice data show trade credit is on the rise. Atradius estimates that companies in Western Europe transacted more than 60% of total sales value to business-to-business (B2B) customers on credit, up from 41.4% last year.
And, the company said, 30% of the total value of those B2B invoices were unpaid as of the due date. Breaking that down a bit, the highest tally of unpaid invoices comes in at more than 35% in the U.K. and nearly 35% in Greece. The lowest percentage was seen in Denmark at slightly more than 20%.
A bit closer to home, a digital bank that raised $110 million from investors—through a roster that includes actors Leonardo DiCaprio and Orlando Bloom—is finding it a challenge to raise additional funding.
The bank, Aspiration, which allows customers to choose how much they pay in return for the services they receive, had been seeking a Series C funding round earlier this year, as noted by Co-Founder Andrei Cherny. The funding round, per CNBC, at $200 million, would have valued the company at $1 billion.
But it has been a challenge to get investors onboard, and the company has had to lay off as much as 15% of its staff and has been, according to unnamed sources, withholding some payments to vendors. The digital bank said that it has more than 1.5 million U.S. customers and has made a hallmark of being socially responsible as it invests customer deposits.
Preprinted with permission from PYMNTS.com.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations