Week in Review

What We're Reading:

October 5, 2020

EU to take legal action against UK over breach of international laws. The European Union is to take legal action against the United Kingdom for breaking the terms of the Withdrawal Agreement. (Irish Post)

US oil producers on pace for most bankruptcies since last oil downturn. Thirty-six producers with $51 billion in debt filed for bankruptcy protection in the first eight months of the year, according to the law firm Haynes and Boone. (Reuters)

Greece, Turkey agree to NATO deal to avoid conflict in Mediterranean. NATO has announced the framework of a deconfliction agreement between Greece and Turkey. The two neighbors are trying to avoid a military conflict over the exploration of hydrocarbons in the eastern Mediterranean. (DW)

Will environmental failings bring down the EU-Mercosur deal? It has taken 20 years to build but Europe’s trade deal with the ‘Mercosur’ group of South American countries is looking increasingly like a rush job. (EurActiv)

Lebanon, Israel to hold talks over disputed border. Lebanon and Israel will hold talks over their disputed border, the Lebanese Parliament speaker has announced. The United States will act as a facilitator. (DW)

Kuwait bids farewell to late ruler and pillar of Arab diplomacy as new emir takes over. Kuwait on Sept. 30 laid to rest late ruler Sheikh Sabah al-Ahmad al-Sabah, a Gulf Arab elder statesman who helped steer his nation through some of the region’s most turbulent decades. (Reuters)

WTO backs EU tariffs on $4 bln US goods over Boeing subsidies. The World Trade Organisation has authorised the European Union to impose tariffs on U.S. goods worth $4 billion to retaliate against subsidies for American planemaker Boeing Co, people familiar with the matter said. (EurActiv)

How deglobalization is hurting the world’s emerging economies. There is every reason to worry that a historic process of deglobalization is underway, threatening to scuttle the growth models of poor countries that previously used trade as a path to prosperity. Worst of all, this disturbing shift has been met by silence or even encouragement by those who should know better. (HSN)

As Brexit talks intensify, banks see sharply higher risk of no-deal exit. The chances of Britain leaving the European Union without a trade deal have risen dramatically in the last three months, according to major investment banks, most of which now see the probability of such an outcome at 50% or higher. (HSN)

Why Is the Census Bureau monitoring your exports? What does the Census Bureau have to do with international trade? More than you may think. (Shipping Solutions)

China’s threat of force in the Taiwan strait. China’s most recent incursions go beyond their previous flyovers in both scope and size, raising the possibility that these actions constitute an impermissible threat to use force against Taiwan. (Lawfare)

Saudi takes countermeasures to combat soaring deficit in new budget. Saudi Arabia’s economic woes have come to light after the kingdom released its latest budget, which showed that the deficit will widen to 12% of gross domestic product (GDP) in 2020. (MEMO)

The original crisis brought on by the pandemic was in the supply chain. Back in January and February, the issue was seemingly limited to Asia and China specifically. The U.S. and Europe had not yet been affected by the spread of the virus, and the only concern was what might happen to the supply chain out of Asia. As the pandemic became a global problem, the supply chain crisis expanded and governments became aggressive regarding the effort to reshore. There has always been tension between the business community and governments when it comes to where to manufacture and what to import and export. This tension has dramatically increased with lockdown recessions that have taken root in every country.

Political leaders have become increasingly protectionist. They want to preserve jobs and regain the ones that have been lost. That seems to translate into trying to get companies to relocate their operations into their own nations. There have been efforts to promote reshoring in the U.S., Europe and Japan as well as efforts to keep companies from moving out of nations such as India, China, Brazil, Mexico and others. There have thus been many confident predictions regarding this reshore movement.

Now that we are into the eighth month of the lockdown recession crisis, it is apparent that everybody thinks that reshoring is a good idea except the companies that are expected to bring their operations home. Despite threats and incentives, the vast majority of companies are resisting the reshoring effort. They set up these operations for a reason, and that rationale still holds.

The Trump approach has been entirely based on threats and punishments. Companies in the U.S. that import from a wide variety of nations—Canada to China—are required to pay tariffs, and there have been outright threats to fine and punish companies operating in China. Despite these threats, a survey of U.S. companies doing business in China indicated that 96% of them intended to continue doing precisely what they are doing now. They will not close operations; they will not reduce the level of imports from China.

The Europeans and Japanese are taking the incentive route and are offering considerable sums of money to entice companies to move operations back to the home nation. This has not proved to be much more effective than the threats issued by Trump. There has definitely been some diversification of the supply chain taking place, and companies are definitely holding more in the way of inventory to protect themselves from supply chain disruptions. However, the factors that motivated their decision to shift to an overseas supplier or platform remain intact.

There have always been three reasons that companies elect to locate operations in other nations. The top of the list is cost of production, and it always has been. For example, if the job is labor intensive, the U.S. can’t compete because workers in these other nations are paid far less. There are also issues of regulation and other expenses.

The second motivation and one that is growing in importance is the desire to be close to another market. Chinese consumers buy more cars than U.S. consumers these days, so that is a good reason to manufacture them in China. The third rationale is access to raw materials and commodities. It makes no sense to haul materials back to a home nation when the production can be carried out where the materials are. This doesn’t mean that some reshoring will not take place as companies adopt more technology that reduces the dependence on labor. The point is that most companies operating in other locations are there for good reason.

A new report by PYMNTS and American Express identifies three pain points for accounts receivable (AR) teams:

• Continued reliance on manual AR management practices
• The resulting lack of speed
• High operating costs associated with managing receivables

“These problems often tend to amalgamate and result in delayed payments—a challenge that firms across the board face and has become more damaging since the start of the COVID-19 pandemic,” the report states.

The B2B Payments Innovation Readiness Report: How Automation Can Help Businesses Better Manage Their AR Processes analyzes survey responses from 460 small to large businesses to understand how manual processes impact the accounts receivable for businesses across sectors such as advertising, technology, construction, energy and healthcare for which sales to other businesses accounted for at least 75% of their total revenues and for which at least 20% of sales are made on terms.

Average days sales outstanding (DSO) for businesses that rely on manual AR processes was found to be 30% longer than that of firms that rely on medium or high levels of automated processes for collecting receivables. And it took 67% more time to follow up on overdue payments, according to the findings.

Nearly 45% of the firms surveyed note payment acceptance, customer credit checks, invoice delivery and payment collections as being the most affected by pandemic shift to working from home. The report finds that a significant share of firms changed payment terms and credit limits, and adopted digital invoicing and payment methods.

About two-thirds of the firms are planning to move toward technological solutions for AR functions, including collections, customer credit checks, cash applications and reconciliations.

The impact of the pandemic has accelerated their interest and use of automated AR processes. The sectors most negatively affected by manual processes were healthcare, construction and technology. All sectors were affected by processes critical to cash application and credit checks.

“The degree of automation used in managing AR strongly relates to firms’ ability to shorten their collection cycles,” the report states. “Our research shows that the average term for firms with no or very little automation is 31 days and they take an additional 24 days to follow up on late payments. Firms that have moderately to highly automated AR processes have an average term of 24 days and take only 16 days to follow up.”

The COVID-19 pandemic has prompted more than eight out of 10 businesses to move to automation, the report says. The pandemic also has prompted about 70% of the surveyed firms “to modify the credit conditions offered to their customers … and 57.1% have adjusted their credit limits. Just 31.1% of firms that lack automation have changed their payment terms and only 6.6% have adjusted their credit limits.”

The report notes that 47% of firms have lengthened payment terms and 26.3% have increased credit limits. It also finds that 14.3% of firms shortened payment terms and 22.8% lowered credit limits.

Coface's Political Risk Index highlights a dual trend: a decrease in the risk of conflict at a global level and an increase in the risk of political and social fragility.

The latter is exacerbated in the countries most exposed to the coronavirus pandemic, the trade credit insurer noted. Similar to last quarter, the uncertainties surrounding the forecasts presented in this barometer are very high, Coface cautioned. They are primarily linked to the global health situation. Since June, the pandemic has continued to gain momentum. While waiting for a vaccine and/or treatment, businesses and households have postponed spending and investment projects, both out of constraint (during periods of lockdown) and as a precaution.

Coface anticipates a global growth rate of -4.8% in 2020, followed by a 4.4% rebound in 2021. GDP in the eurozone and in the United States would remain 3.5 points and 2 points below 2019 levels, respectively, it said, adding that it would take at least three years to return to pre-crisis levels of production. Similarly, the rebound in world trade will only be partial.

This persistently lower level of economic activity compared to pre-crisis levels is expected to encourage an increase in poverty, income inequality and thus social discontent, the firm predicted.

The annual update of Coface's Political Risk Index, published in this barometer, shows the extent to which the COVID-19 pandemic—in addition to its human and economic impacts—exacerbates these political risks. In addition to the traditional indicators used to measure these risks, this year Coface has added a pandemic exposure index that measures the public’s opinion regarding authorities' management of the health crisis In addition to causing a potential increase in civil unrest, grievances linked to COVID-19 could also amplify social movements inherited from the pre-COVID period, such as those seen in Hong Kong, France, and Chile, to name a few.

• Among mature economies, the degree of dissatisfaction of public opinion with the management of the health crisis is highest in Spain, the United States, the United Kingdom and France.
• In the emerging world, Iran and Turkey are among the countries with the highest level of social risk. Several Latin American countries (Brazil, Mexico, Peru, Colombia), as well as South Africa, present both a high political and social risk and high exposure to the COVID-19 crisis.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations