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International Trade: A New Chapter in History

Osama Rizvi

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International political observers were shocked by Brexit and then Donald Trump‘s US Presidential victory. These two events are potent enough to unnerve the contemporary global order: first, in matters relating to security and, second as to trade. By the end of next March, Theresa May will likely invoke Article 50 of the Lisbon treaty and the complex process of Britain’s divorce from the European Union (EU) begins.

Also, it now has been a more than a month into Trump’s administration; and his flurry of Executive Orders have rocked the Washington, DC establishment.

This article examines the future of Multinational Corporations (MNCs) under this new Trump era and – with Brexit clearly on track – how MNCs will respond.  Some global firms may arguably be in retreat given the political uncertainty introduced by these changes.

During the 20th century, China was lowering its bulwarks to trade and other exchange and started opening up to the world and the Soviet Union collapsing.   The age of ‘Consumerism,’ had begun as Francis Fukuyama wrote in his seminal essay “The End of History.” At that time the idea of a global firm seemed quite attractive and lucrative. There was a vacuum, a space to be filled and the idea of the global firm was to fill this space.   Companies grew, businesses sprawled begetting supply chains and creating jobs, trade relationships, luring stakeholders.   Their businesses entail supply chains that cover 50% of world trade.   Nevertheless, the global arbitrage that international trade has created is starting to shrink.   Global business have become so large that it is, at times, difficult to manage the perplex, legal and logistical tapestry of carrying them out. Recalling the recent tax case of Apple Inc., Governments are now cracking on companies accused of tax evasion and as a result MNCs are stashing earnings in off-shore tax havens.

To give the above scenario some perspective, consider these facts: according to the UK Financial Times Stock Exchange (FTSE), the profits of the top 700-odd multinational firms have dropped by 25% and the ROE (return on equity) ratio is down by 7%- from “18% a decade ago to 11%”.   The Economist magazine reported research “examining record of 500 large firms which shows “in eight out of ten sectors multinational firms have expanded their aggregate sales more slowly than their domestic peers”.   We can see local firms, in some places, over taking or at least starting to take in some cases substantial market share from the MNCs. Take for example Uber’s surrender to the Sino giant Didi, in India and where Reliance mobile competing aggressively against Vodafone.   Nevertheless this doesn’t means that global firms are totally in retreat but that their earlier dominance is now facing some heat from the local firms.

However, in some case global firms may have started to sense a change in hospitality by host countries to investment.   This may provoke US and EU leaders such as Mr. Trump, Marine La Pen and other rightists and nationalists who are arguably perceived to be eager in targeting a scapegoat with their protectionist agendas.   So, we see Mr. Trump’s success in exploiting the sentiments of the US people by peppering his slogans with rightest promises. His policies at face value may appear productive – that is, reducing taxes (now taking the shape of Border Adjustment tax), less regulations and bringing jobs back but they have caused an unnecessary and unwanted surge in the US dollar.   This has led Janet Yellen to hint at an interest rate hike when the US Federal Reserve Bank’s FOMC (Federal Open Market Committee) meets next month in its policy setting meeting.   It may be argued that a strong US dollar is not good for the US and its trading partners. Donald’s Trump’s proposed “twenty-percent tariff” (against Mexican imports), if implemented, will make the dollar appreciate further causing inflation.   Economists will ask how?   An article in The Atlantic explains by suggesting that “higher tax on imports paired with lower taxes on exports will theoretically cancel each other out, as demand increases for U.S. exports (such exports would be cheaper) and the U.S. will demand fewer foreign goods (since they’ll be more expensive).   Economists assert that this will result in a shift in exchange rates that will offset taxes: in theory, the dollar will strengthen as a result of increased demand for cheaper American-made products.   As a result of a stronger dollar, American-made products will be more expensive and foreign goods will become cheaper as a stronger dollar increases purchasing power thus, offsetting the import tax”.

Brexit is another complex facet where uncertainty is growing. Theresa May triggers article 50 by the end of next month financial and equity markets embrace for a long stretch of unpredictable negotiations that may take more than two years.   According to many political analysts another key issue remains: immigration.   In any case the EU is not going to allow the UK to enjoy preferential treatment without it (UK) allowing the free movement of people. We are going to see new trade deals between UK and other countries. But the UK is going to lose a huge export market in the form of the EU.

While we read through the tale of the slowdown of global businesses as a whole there exists a business, risk solution to this rise in populism and inclination for protectionism: Political Risk Insurance (or PRI).   Lloyd’s of London, the oldest insurance market in the world, decided to move its subsidiary in Continental Europe after Brexit eventuated. Inga Beale, CEO of Lloyd’s of London, says “. “I wouldn’t be surprised if we start seeing much more political-risk insurance being bought all over the place,” in an interview.   Daniel Wagner, a Managing Director of Risk Solutions at Risk Cooperative, describes in an article for the Huffington Post how he predicted in the 1990’s that the PRI industry will grow in the years to come.   He holds the same view today: “The PRI industry stands at a similar precipice today. With the looming possibility of trade wars, deterioration in investment climates, and ever tightening lending standards, there is every reason to believe that, as much as the industry has grown – and that growth has been dramatic over the past 25 years – it also stands to grow dramatically in the coming 5-10 years.”

Certainly, the world is in the midst of a change. On political and as well as economic front. The global firms, as aforementioned, are already in for a correction. But Mr. Trump’s protectionism, his tweet-tantrums and talks of trade wars and the uncertainty of the British divorce from the EU, which, according to some, bodes ill for the bloc’s future, may accelerate the process of natural adjustment. Such an acceleration is detrimental to the international trade as a whole. We are standing on what seems the first page of this new chapter, let’s hope that there’s a pleasant quirk somewhere ahead.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Economy

Turkey’s financial crisis raises questions about China’s debt-driven development model

Dr. James M. Dorsey

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Financial injections by Qatar and possibly China may resolve Turkey’s immediate economic crisis, aggravated by a politics-driven trade war with the United States, but are unlikely to resolve the country’s structural problems, fuelled by President Recep Tayyip Erdogan’s counterintuitive interest rate theories.

The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which countries like China and Turkey witness moves towards populist rule of one man who encourages massive borrowing to drive economic growth.

It’s a model minus the one-man rule that could be repeated in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or rely on China and Saudi Arabia for relief.

Pakistan, like Turkey, has over the years frequently knocked on the IMF’s doors, failing to have turned crisis into an opportunity for sustained restructuring and reform of the economy. Pakistan could in the next weeks be turning to the IMF for the 13th time, Turkey, another serial returnee, has been there 18 times.

In Turkey and China, the debt-driven approach sparked remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty. Yet, both countries with Turkey more exposed, given its greater vulnerability to the swings and sensitivities of international financial markets, are witnessing the limitations of the approach.

So are, countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them and now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of their unsustainable debt.

The fact that China may be more prepared to deal with the downside of debt-driven development does little to make its model sustainable or for that matter one that other countries would want to emulate unabridged and has sent some like Malaysia and Myanmar scrambling to resolve or avert an economic crisis.

Malaysian Prime Minister Mahathir Mohamad is in China after suspending US$20 billion worth of Beijing-linked infrastructure contracts, including a high-speed rail line to Singapore, concluded by his predecessor, Najib Razak, who is fighting corruption charges.

Mr. Mahathir won elections in May on a campaign that asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese investments that failed to benefit the country and threaten to drown it in debt.

Myanmar is negotiating a significant scaling back of a Chinese-funded port project on the Bay of Bengal from one that would cost US$ 7.3 billion to a more modest development that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable debt.

Debt-driven growth could also prove to be a double-edged sword for China itself even if it is far less dependent than others on imports, does not run a chronic trade deficit, and doesn’t have to borrow heavily in dollars.

With more than half the increase in global debt over the past decade having been issued as domestic loans in China, China’s risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist and head of Emerging Markets Equity, is capital fleeing to benefit from higher interest rates abroad.

“Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further,” Mr. Sharma said referring to the US Federal Reserve.

Mr. Erdogan has charged that the United States abetted by traitors and foreigners are waging economic warfare against Turkey, using a strong dollar as ”the bullets, cannonballs and missiles.”

Rejecting economic theory and wisdom, Mr. Erdogan has sought for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding number of financiers and foreign powers seeking to drive Turkish interest rates artificially high to damage the economy by insisting that low interest rates and borrowing costs would contain price hikes.

In doing so, he is harking back to an approach that was popular in Latin America in the 1960s and 1970s that may not be wholly wrong but similarly may also not be universally applicable.

The European Bank for Reconstruction and Development (EBRD) warned late last year that Turkey’s “gross external financing needs to cover the current account deficit and external debt repayments due within a year are estimated at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.”

With two international credit rating agencies reducing Turkish debt to junk status in the wake of Turkey’s economically fought disputes with the United States, the government risks its access to foreign credits being curtailed, which could force it to extract more money from ordinary Turks through increased taxes. That in turn would raise the spectre of recession.

“Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations,” Mr. Sharma said.

Nevertheless, as The Wall Street Journal concluded, the vulnerability of Turkey’s debt-driven growth was such that it only took two tweets by US President Donald J. Trump announcing sanctions against two Turkish ministers and the doubling of some tariffs to accelerate the Turkish lira’s tailspin.

Mr. Erdogan may not immediately draw the same conclusion, but it is certainly one that is likely to serve as a cautionary note for countries that see debt, whether domestic or associated with China’s infrastructure-driven Belt and Road initiative, as a main driver of growth.

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3 trends that can stimulate small business growth

MD Staff

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Small businesses are far more influential than most people may realize.

That influence is felt well beyond Main Street. Small businesses make up 99.7 percent of all businesses in the U.S., and these firms employ nearly half (48 percent) the workforce, according to the 2018 Small Business Profile compiled by the U.S. Small Business Administration.

In addition, take a look at recent trends and developments in technology. It’s clear that these changes can give entrepreneurs that extra leverage to scale up. Here are three to consider.

Big companies have big opportunities for small firms

Back in the 20th century, a large company would get things done in this very straightforward way. Wherever there was a need, they hired someone directly to perform that task, whether it was a driver or an accountant.

Under today’s leaner models, these big companies are finding it’s much more efficient to partner with other firms to fulfill certain needs. According to Deloitte, 31 percent of IT services have been outsourced, as well as 32 percent of human resources. This increasing acceptance of outsourcing is a huge growth opportunity for small businesses owners.

For example, Amazon recently announced it is actively seeking and helping entrepreneurs who are willing to deliver packages as their contractors. The mega retailer will even go as far as helping with startup costs so long as these smaller firms deliver their packages. Landing a contract with a big corporation is a significant milestone for any company, but starting out with that lucrative contract is sure to let these startups hit the ground running.

Better connections for greater flexibility

When today’s entrepreneur has a new role to fill, they’re not confined to the talent pool in their immediate community. Because we now have the tools and connectivity to work from anywhere, a business owner can expand the search across multiple states!

What’s more, these flexible, work from anywhere options can give business owners the inspiration to do things differently. Having greater collaboration means having access to more options to fit specific needs.

For example, what is the very nature of being a small business owner? It’s dealing with a fluctuating volume of work. Tapping into the talent pool of freelancers to work on these specific, short-term tasks and projects is easier than ever, because for a segment of workers, freelancing is increasingly becoming a way of life. Freelancers currently make up 36 percent of the workforce, according to a study from Upwork. And, if trends maintain, most Americans will be freelancers by 2027.

Thanks to remote options with easy access to talent, small businesses can easily set up temporary or ongoing as-needed work arrangements. When you partner with Dell for your computing needs, you’ll get the expert help and support so you can set up the perfect flexible workspace system.

More automation brings better efficiencies

Without a doubt, new technology works in favor of small businesses and entrepreneurs because they have many tools at their disposal to automate labor intensive processes, be more productive and cut costs. For example, entrepreneurs can use software to process client payments and even set up automated payments, saving hours and costs associated with collecting, processing and reconciling under the traditional paper check payment system. That translates into a more efficient billing department that can spend more time focused on complex issues.

Let Dell equip your small business with the right tech tools, tailor made for your venture and backed with support, so you can focus on running your business.

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Transitioning from least developed country status: Are countries better off?

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The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled.  One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.

However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.

Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI).  Many of the forthcoming LDC graduates will transition based only on their GNI.  This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.

So what’s the issue?  A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI).  This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.

Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.

How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability?  Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced.  The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita.  The analysis was repeated just for Commonwealth countries and similar results were obtained.

Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability.  This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.

So what’s the take away?

The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity.  It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.

One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.

What are your thoughts?

Commonwealth

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