Week in Review

What We're Reading:

January 18, 2021

Asia credit roars into new year as wall of debt looms. A busy start to the year for Asia’s debt markets reflects global cash pouring into the region and companies in a hurry to lock in funding before a record pile of dues must be repaid. (HSN)

European firms unprepared for US-China breakup. The economic schism between the U.S. and China is likely to widen, despite a potential improvement in relations under Joe Biden, a new study says. The U.S.-China "decoupling" would throw European firms into uncharted waters. (DW)

World warily watches America’s post-election aftershocks. For America’s allies and rivals alike, the chaos unfolding during Donald Trump’s final days as president is the logical result of four years of global instability brought on by the man who promised to change the way the world viewed the United States. (AP News)

Uganda’s violent election has exposed divisions of age and class. The country’s economic model has created growth but few jobs. (The Economist)

Trump administration unveils rules to protect telecoms supply chain; labels China an adversary. The Trump administration on Jan. 14 labeled China, Iran, Russia, Cuba and North Korea as foreign adversaries as part of a new set of rules aimed at protecting the U.S. telecoms supply chain. (Reuters)

New EU trading relationship ‘greatest risk’ for UK exporters. British manufacturers say that adapting to a new trading relationship with the EU poses the greatest risk to their 2021 business plans, despite the two parties agreeing a last-gasp trade deal in late December. (Global Trade Review)

Venezuela takes tentative steps towards market reform. Latin American country deregulates at a rapid pace to try to repair devastated economy. (Financial Times)

Dutch government resigns over childcare subsidies scandal. Prime Minister Mark Rutte announced the resignation of his government on Jan. 15, accepting responsibility for years of mismanagement of childcare subsidies, which wrongfully drove thousands of families to financial ruin. (Reuters)

Collaborative supply chain platforms: Vectors of customer satisfaction? By providing visibility into the operations of the company, suppliers, and providers, a collaborative platform applied to the supply chain enables different stakeholders along the supply chain to better work together. It’s a great asset to control costs, but also to improve customer satisfaction. To what extent is this possible? (Global Trade Magazine)

New US tariffs on French, German aircraft parts take effect. The U.S. government said it would begin collecting new duties on aircraft parts and other products from France and Germany after failing to resolve a 16-year dispute over aircraft subsidies with the European Union. (EurActiv)

Welcome to Brexit—Now hand us your sandwich. Britons arriving in the Netherlands since the start of the year have found that leaving the European Union might have cost them more than they realized, including their lunch. (HSN)

PayPal becomes first foreign firm in China with full ownership of payments business. PayPal Holding Inc. has become the first foreign operator with 100% control of a payment platform in China, according to Chinese government data, as the U.S. fintech giant eyes a bigger foothold in a booming market for online payments. (Reuters)

America’s troubles ahead in the Asia-Pacific. A U.S. return to multilateralism can’t reverse a shifting strategic landscape and the fallout of domestic strife. (Interpreter)

There are not many areas of economic policy that evoke as much controversy as trade. The fact is that there will always be winners and losers when there is trade between nations. The question is which sector of the economy is set to win and which is likely to lose. There are two reasons countries trade with another and one is far less controversial than the other.

If your country lacks something it needs or wants, there is motivation to acquire it from some other nation. That is absolute an advantage. For example, if you are in Sweden, you are not going to grow coffee beans. To have your cup of morning motivation means you will be buying from places that do. The reality is we are part of a vast system of trade where one sells what one can and buys what is needed.

The controversy comes with comparative advantage. One could produce what one wants or needs, but a decision is made to buy from elsewhere anyway. The choice is made to produce what can be made efficiently while buying the rest. The U.S. is capable of making T-shirts and shoes, but not as cheaply as countries with far lower production costs. So, the U.S. and other developed nations focus on making sophisticated goods, while buying cheap consumer goods from others. What is more controversial is when one buys and sells the same thing, such as when the U.S. makes vehicles and then imports vehicles made by others in order to satisfy the demands of the consumer.

The emerging focus of the Biden trade policy as articulated by Katherine Tai is one that is not focused on the consumer. Tai has been nominated to be the next U.S. trade representative (USTR). Her background has been as an attorney for the USTR and as a Congressional staff member focused on trade. Her first remarks have set a course that is closer to traditional Democratic positions and not all that far from the positions taken by the Trump team.

It has been asserted that U.S. trade policy will be geared more towards the worker than the consumer. Trade deals that seem to cost U.S. jobs or threaten U.S. businesses will be rejected even if the deal would mean cheaper prices or more variety for U.S. consumers. This will likely mean continued pressure on China over its trade practices.

This would include holding it accountable to institutions such as the World Trade Organization, but it will also mean using trade tools such as tariffs and quotas and other regulations. There is also the pledge to enforce pacts such as the USMCA. Biden has indicated that he wants to rebuild the frayed alliances in Europe and with longtime allies such as Canada, Japan, South Korea, Mexico and others, but it seems that he is making it clear that rebuilding doesn’t mean putting U.S. workers and business at risk.

It is very early days and nobody knows the details at this point. With Democrats in control of the Senate, the approval of Tai as the next USTR is near certain, and her positions are relatively well known. She has not been a fan of the tariff approach in the past because this is essentially a tax on U.S. consumers. Her position has been that export promotion is far more effective and leverages the advantages of U.S.

In short, if you want the U.S. to buy from you, you need to buy from the U.S. She has also been more insistent that nations adhere to global rules when it comes to labor and the environment. As nations follow these rules, their production costs rise, making the U.S. more competitive in the global market. The approach of President Donald Trump has been mostly stick and a little bit of carrot. It appears that under President-elect Joe Biden, it will be more carrot, but the stick will remain as an option.

Nearly 20% of credit professionals who responded to the December FCIB International Credit & Collections Survey said they were experiencing an increase in payment delays in Mexico. About 10% noted a decrease; 62%, no difference; and 10% were not experiencing any delays.

The majority of respondents offer payment terms of up to 60 days. About 23% offer 61-90 days, and about 5% do not offer terms. The top three contributors to payment delays were cash flow issues (42%), customer payment policies (16%) and cultural norms and customs (11%). Average number of days beyond ranged from none to 75 days.

“Mexico’s economy is extremely volatile, and it is customary for customers to try and negotiate credits when they are extremely past due,” a respondent noted.

Advice for companies new to doing business in Mexico included the use of credit insurance and financial statements. Several respondents stressed researching and getting to know customers well. One pointed out that creditors should expect delays regardless of the payment terms extended.

“Collections in Mexico can be difficult and complex,” a credit professional warned. “Corruption is still an issue.”

Trade credit insurer Euler Hermes’ collection profile on Mexico notes the law does not provide a framework for standard payment terms. “It is common to rely on 30-day credit terms starting from the date of the invoice. In practice, payments take place within 40 to 50 days on average, while delays of 15 to 30 days may be expected.” The firm rates collection complexity and complexity relating to payments and court and insolvency proceedings as severe.

The December 2020 International Credit & Collections Survey also covers Australia, Canada and New Zealand. FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers who participated in the survey will receive the results via email. Participation in the survey guarantees you will receive the results whether or not you are a member and furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The monthly survey is open to all credit and risk management professionals.

The next survey will open Jan. 26 and will cover Chile, Guatemala, Honduras, and Trinidad & Tobago.

Romelio Hernandez, of HMH Legal S.C., will present 11 a.m., Jan. 28, the webinar, What key factors should credit managers consider in order to mitigate risk when selling to Mexican buyers on credit? He will share best practices and techniques for performing due diligence on prospective buyers, as well as review basic documents for securing credit sales to enhance the creditor’s position in court if debtors’ default on payment.

Catalina Margulis and Arthur Rossi, IMF Financial and Fiscal Law Unit

Countries are moving fast toward creating digital currencies. Or, so we hear from various surveys showing an increasing number of central banks making substantial progress towards having an official digital currency.

But, in fact, close to 80% of the world’s central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear.

To help countries make this assessment, we reviewed the central bank laws of 174 IMF members in a new IMF staff paper, and found out that only about 40 are legally allowed to issue digital currencies.

Not just a legal technicality

Any money issuance is a form of debt for the central bank, so it must have a solid basis to avoid legal, financial and reputational risks for the institutions. Ultimately, it is about ensuring that a significant and potentially contentious innovation is in line with a central bank’s mandate. Otherwise, the door is opened to potential political and legal challenges.

Now, readers may be asking themselves, “If issuing money is the most basic function for any central bank, why then is a digital form of money so different?” The answer requires a detailed analysis of the functions and powers of each central bank, as well as the implications of different designs of digital instruments.

Building a case for digital currencies

To legally qualify as currency, a means of payment must be considered as such by the country’s laws and be denominated in its official monetary unit. A currency typically enjoys legal tender status, meaning debtors can pay their obligations by transferring it to creditors.

Therefore, legal tender status is usually only given to means of payment that can be easily received and used by the majority of the population. That is why banknotes and coins are the most common form of currency.

To use digital currencies, digital infrastructure—laptops, smartphones, connectivity—must first be in place. But governments cannot impose on their citizens to have it, so granting legal tender status to a central bank digital instrument might be challenging. Without the legal tender designation, achieving full currency status could be equally challenging. Still, many means of payments widely used in advanced economies are neither legal tender nor currency (e.g., commercial book money).

Uncharted waters?

Digital currencies can take different forms. Our analysis focuses on the legal implications of the main concepts being considered by various central banks. For instance, where it would be “account-based” or “token-based.” The first means digitalizing the balances currently held on accounts in a central bank’s books; while the second refers to designing a new digital token not connected to the existing accounts that commercial banks hold with a central bank.

From a legal perspective, the difference is between centuries-old traditions and uncharted waters. The first model is as old as central banking itself, having been developed in the early 17th century by the Exchange Bank of Amsterdam—considered the precursor of modern central banks. Its legal status under public and private law in most countries is well developed and understood. Digital tokens, in contrast, have a very short history and unclear legal status. Some central banks are allowed to issue any type of currency (which could include digital forms), while most (61%) are limited to only banknotes and coins.

Another important design feature is whether the digital currency is to be used only at the “wholesale” level, by financial institutions, or could be accessible to the general public (“retail”). Commercial banks hold accounts with their central bank, being therefore their traditional “clients.” Allowing private citizens’ accounts, as in retail banking, would be a tectonic shift to how central banks are organized and would require significant legal changes. Only 10 central banks in our sample would currently be allowed to do so.

A challenging endeavor

The overlapping of these and other design features can create very complex legal challenges—and could well influence the decisions made by each monetary authority.

The creation of central bank digital currencies will also raise legal issues in many other areas, including tax, property, contracts, and insolvency laws; payments systems; privacy and data protection; and most fundamentally, preventing money laundering and terrorism financing. If they are to be “the next milestone in the evolution of money,” central bank digital currencies need robust legal foundations that ensure smooth integration to the financial system, credibility and broad acceptance by countries’ citizens and economic agents.

Reprinted with permission from the IMFBlog.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations