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Key elements of the EU-Japan Economic Partnership Agreement

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The EU-Japan Economic Partnership Agreement will boost trade in goods and services as well as create opportunities for investment.

The agreement will further improve the position of EU exporters and investors on Japan’s large market, while including strong guarantees for the protection of EU standards and values. It will help cement Europe’s leadership in setting global trade rules and send a powerful signal that cooperation, not protectionism, is the way to tackle global challenges.

This Agreement, as other agreements concluded recently by the EU, goes beyond trade issues only. It represents a significant strengthening of our partnership with Japan, as reflected in the name of the agreement.

What is the Economic Partnership Agreement about?

Elimination of customs duties – more than 90% of the EU’s exports to Japan will be duty free at entry into force of the agreement. Once the agreement is fully implemented, Japan will have scrapped customs duties on 97% of goods imported from the EU (in tariff lines), with the remaining tariff lines being subject to partial liberalisation through tariff rate quotas or tariff reductions. This, in turn, will save EU exporters around €1 billion in customs duties per year.

Agriculture and food products – Japan is a highly valuable export market for European farmers and food producers. With annual exports worth over €5.7 billion, Japan is already the EU’s fourth biggest market for agricultural exports. Over time around 85% of EU agri- food products (in tariff lines) will be allowed to enter Japan entirely duty-free. This corresponds to 87% of current agri-food exports by value.

The agreement will eliminate or sharply reduce duties on agricultural products in which the EU has a major export interest, such as pork, the EU’s main agricultural export to Japan, ensuring duty-free trade with processed pork meat and almost duty-free trade for fresh pork meat exports. Tariffs on beef will be cut from 38.5% to 9% over 15 years for a significant volume of beef products.

EU wine exports to Japan are already worth around €1 billion and represent the EU’s second biggest agricultural export to Japan by value. The 15% tariff on wine will be scrapped from day one, as will tariffs for other alcoholic drinks.

As regards cheese exports, where the EU is already the main player on the Japanese market, high duties on many hard cheeses such as Gouda and Cheddar (which currently are at 29.8%) will be eliminated, and a duty-free quota will be established for fresh cheeses such as Mozzarella. The EU-Japan agreement will also scrap today’s customs duties (with a transitional period) for processed agricultural products such as pasta, chocolates, cocoa powder, candies, confectionary, biscuits, starch derivatives, prepared tomatoes and tomato sauce. There will also be significant quotas for EU exports (duty-free or with reduced duty) of malt, potato starch, skimmed milk powder, butter and whey.

Geographical Indications – the EU-Japan agreement recognises the special status and offers protection on the Japanese market to more than 200 European agricultural products from a specific European geographical origin, known as Geographical Indications (GIs) – for instance Roquefort, Aceto Balsamico di Modena, Prosecco, Jambon d’Ardenne, Tiroler Speck, Polska Wódka, Queso Manchego, Lübecker Marzipan and Irish Whiskey. These products will be given the same level of protection in Japan as they experience in the EU today.

Industrial products – tariffs on industrial products will be fully abolished, for instance in sectors where the EU is very competitive, such as chemicals, plastics, cosmetics as well as textiles and clothing. For leather and shoes, the existing quota system that has been significantly hampering EU exports will be abolished at the agreement’s entry into force. Tariffs on shoes will go down from 30% to 21% at entry into force, with the rest of the duties being eliminated over 10 years. Tariffs on EU exports of leather products, such as handbags, will go down to zero over 10 years, as will be those on products that are traditionally highly protected by Japan, such as sports shoes and ski boots.

Fisheries – import quotas will no longer be applied and all tariffs will be eliminated on both sides, meaning better prices for EU consumers and big export opportunities for EU industry.

Forestry – tariffs on all wood products will be fully eliminated, with seven years staging for the most important priorities. Most tariffs on wood products will be dropped immediately, with some less important tariff lines being scrapped after 10 years.

Non-tariff barriers – The EU-Japan negotiations addressed many non-tariff measures that had constituted a concern for EU companies, as some Japanese technical requirements and certification procedures often make it difficult to export safe European products to Japan. The agreement will make it easier for EU companies to access the highly regulated Japanese market. Examples of such barriers addressed include:

Motor vehicles – the agreement ensures that both Japan and the EU will fully align themselves to the same international standards on product safety and the protection of the environment, meaning that European cars will be subject to the same requirements in the EU and Japan, and will not need to be tested and certified again when exported to Japan. With Japan now committing itself to international car standards, EU exports of cars to Japan will become significantly simpler. This also paves the way for even stronger cooperation between the EU and Japan in international standard setting fora. It includes an accelerated dispute settlement between the two sides specifically for motor vehicles, similar to the one agreed under the EU-South Korea trade agreement. It also includes a safeguard and a clause allowing the EU to reintroduce tariffs in the event that Japan would (re)introduce non-tariff barriers to EU exports of vehicles. The agreement will also mean that hydrogen-fuelled cars that approved in the EU can be exported to Japan without further alterations.

Medical devices – In November 2014, Japan adopted the international standard on quality management systems (QMS), on which the EU QMS system for medical devices is based. This reduces the costs of certification of European products exported to Japan considerably.

Textiles labelling – In March 2015, Japan adopted the international textiles labelling system similar to the one used in the EU. Textiles labels therefore do no longer need to be changed on every single garment exported to Japan, as was the case before.

“Quasi drugs”, medical devices and cosmetics – a complicated and duplicative notification system that hampered the marketing of many European pharmaceuticals, medical devices and cosmetics in Japan was finally abolished on 1 January 2016.

Beer – From 2018 onwards, European beers can be exported as beers and not as “alcoholic soft drinks”. This will also lead to similar taxation, thus doing away with differences between different beers.

In addition, the Economic Partnership Agreement also contains general rules on certain types of non-tariff barriers, which will help level the playing field for European products exported to Japan, and increase transparency and predictability:

Technical barriers to trade – the agreement puts the focus on Japan and the EU’s mutual commitment to ensure that their standards and technical regulations are based on international standards to the greatest possible extent. Combined with the provisions on non-tariff measures, this is good news for European exporters of electronics, pharmaceuticals, textiles and chemicals. For instance, reliance on international standards will be helpful for easier and less costly compliance of food products with Japanese labelling rules.

Sanitary and phytosanitary measures – the agreement creates a more predictable regulatory environment for EU products exported to Japan. The EU and Japan have agreed to simplify approval and clearance processes and that import procedures are completed without undue delays, making sure that undue bureaucracy does not put a spanner in the works for exporters. The agreement will not lower safety standards or require parties to change their domestic policy choices on matters such as the use of hormones or genetically modified organisms (GMOs).

Trade in services

The EU exports some €28 billion of services to Japan each year. The agreement will make it easier for EU firms to provide services on the highly lucrative Japanese market. The agreement contains a number of provisions that apply horizontally to all trade in services, such as a provision to reaffirm the Parties’ right to regulate. It maintains the right of EU Member States’ authorities to keep public services public and it will not force governments to privatise or deregulate any public service at national or local level. Likewise, Member States’ authorities retain the right to bring back to the public sector any privately provided services. Europeans will continue to decide for themselves how they want, for example, their healthcare, education and water delivered.

Postal and courier services – the agreement includes provisions on universal service obligations, border procedures, licences and the independence of the regulators. The agreement will also ensure a level-playing field between EU suppliers of postal and courier services and their Japanese competitors, such as Japan Post.

Telecommunications – the agreement includes provisions focused on establishing a level playing field for telecommunications services providers and on issues such as universal service obligations, number portability, mobile roaming and confidentiality of communications.

International maritime transport services – the agreement contains obligations to maintain open and non-discriminatory access to international maritime services (transport and related services) as well as access to ports and port services.

Financial services – the agreement contains specific definitions, exceptions and disciplines on new financial services, self-regulating organisations, payment and clearing systems and transparency, and rules on insurance services provided by postal entities. Many of these are based on rules developed under the World Trade Organisation, while addressing specificities of the financial services sector.

Temporary movement of company personnel – the agreement includes the most advanced provisions on movement of people for business purposes (otherwise known as “mode 4”) that the EU has negotiated so far. They cover all traditional categories such as intra-corporate transferees, business visitors for investment purposes, contractual service suppliers, and independent professionals, as well as newer categories such as short-term business visitors and investors. The EU and Japan have also agreed to allow spouses and children to accompany those who are either service suppliers or who work for a service supplier (covered by “mode 4” provisions). This will, in turn, support investment in both directions.

State owned enterprises – state-owned enterprises will not be allowed to treat EU companies, services or products differently to their Japanese counterparts when buying and selling on commercial markets.

Public procurement – EU companies will be able to participate on an equal footing with Japanese companies in bids for procurement tenders in the 54 so-called ‘core cities’ of Japan (i.e. cities with around 300.000 to 500.00 inhabitants or more). The agreement also removes existing obstacles to procurement in the railway sector.

Investment – The agreement aims to promote investment between the EU and Japan. At the same time, the text explicitly reaffirms the right of each party to regulate to pursue legitimate policy objectives, highlighted in a non- exhaustive list. The agreement does not cover the protection of investment, on which negotiations are ongoing between the two sides for a potential agreement on the protection of investments. The EU has also tabled to Japan its reformed proposal on the Investment Court System. For the EU, it is clear that there can be no return to the old-style Investor to State Dispute Settlement System (ISDS).

Intellectual Property Rights (IPR) – the agreement builds on and reinforces the commitments that both sides have taken in the World Trade Organization (WTO), in line with the EU’s own rules. The agreement sets out provisions on protection of trade secrets, trademarks, copyright protection, patents, minimum common rules for regulatory test data protection for pharmaceuticals, and civil enforcement provisions.

Data protection – Data protection is a fundamental right in the European Union and is not up for negotiation. Privacy is not a commodity to be traded. Since January 2017, the European Union and Japan engaged in a dialogue to facilitate the transfers of personal data for commercial exchanges, while ensuring the highest level of data protection. With the EU General Data Protection Regulation that entered into force last year and the new Japanese privacy law that entered into force in May, the EU and Japan have modernised and strengthened their respective data protection regimes. In July 2018, the Commission and the Japanese government reached a satisfactory conclusion on the robustness each other’s data protection rules, and hence they intend to move forward with the adoption of a so-called “mutual adequacy” arrangement, which will create the world’s largest area of safe transfers of data based on a high level of protection for personal data.

Sustainable development – the agreement includes all the key elements of the EU approach on sustainable development and is in line with other recent EU trade agreements. The EU and Japan commit themselves to implementing the core labour standards of the International Labour Organisation (ILO) and international environmental agreements, including the UN Framework Convention on Climate Change, as well as the Paris climate agreement. The EU and Japan commit not to lower domestic labour and environmental laws to attract trade and investment. The parties also commit to the conservation and sustainable management of natural resources, and to addressing biodiversity, forestry, and fisheries issues. The parties agree to promote Corporate Social Responsibility and other trade and investment practices supporting sustainable development. The agreement sets up mechanisms for giving civil society oversight over commitments taken in the field of Trade and Sustainable Development. The agreement will have a dedicated, binding mechanism for resolving disputes in this area, which includes governmental consultations and recourse to an independent panel of experts.

Whaling and illegal logging – The EU has banned all imports of whale products for more than 35 years, and this will not change with the Economic Partnership Agreement. The EU and its Member States are committed to the conservation and protection of whales and have consistently expressed strong reservations about whaling for scientific purposes. Whales receive special protection under EU law and the EU strictly enforces the ban on trade under the Convention on Trade in Endangered Species (CITES). The EU addresses whaling by all third countries, including Japan, both in bilateral relations and in the international fora that are best suited to deal with this issue – for example, at the International Whaling Commission, where we work with like-minded partners to address whaling with Japan. The sustainable development chapter of the EU-Japan economic partnership agreement will provide an additional platform to foster dialogue and joint work between the EU and Japan on environmental issues of relevance in a trade context.

The EU and Japan share a common commitment to combat illegal logging and related trade. Trade in illegal timber is not an issue between the EU and Japan. The EU has a very clear legislation on illegal logging, just like Japan, which applies to imports from any country of origin. Both partners have surveillance and certification systems in place to prevent the import of illegal timber. The two partners also work closely with third countries to support them in setting up efficient mechanisms to address the problem. The agreement includes a legal provision committing both partners to the prevention of illegal logging and related trade.

Corporate governance – for the first time in an EU trade agreement, there will be a specific chapter on corporate governance. It is based on the G20/OECD’s Principles on Corporate Governance and reflects the EU’s and Japan’s best practices and rules in this area. The EU and Japan commit themselves to adhere to key principles and objectives, such as transparency and disclosure of information on publicly listed companies; accountability of the management towards shareholders; responsible decision-making based on an objective and independent standpoint; effective and fair exercise of shareholders’ rights; and transparency and fairness in takeover transactions.

Competition – the agreement contains important principles that ensure that both sides commit themselves to maintaining comprehensive competition rules and implementing these rules in a transparent and non-discriminatory manner.

State-to-State dispute settlement mechanism – the agreement ensures that rights and obligations under the agreement are fully observed. It provides an effective, efficient and transparent mechanism with a pre-established list of qualified and experienced panellists for avoiding and solving disputes between the EU and Japan.

Anti-Fraud – The EU and Japan will include an anti-fraud clause in the economic partnership agreement. The anti-fraud clause is a condition for the EU to grant tariff preferences to any third country. It makes it possible for the EU to withdraw tariff preferences in cases of fraud and refusal to co-operate, while ensuring that legitimate traders are not adversely affected. The aim is to prevent abuse of preferential tariff treatment.

At the same time, negotiations with Japan continue on investment protection standards and investment protection dispute resolution.

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Will the trade war between China and the United States come to end?

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USA China Trade War

Authors: Raihan Ronodipuro& Hafizha Dwi Ulfa*

The recent trade conflict between the United States and China has had a direct effect on some of the world’s economic players. These two countries are attacking each other with declarations and a trade war; the relationship between the two countries can be defined as a love-hate relationship because the two countries have a lot of mistrust for each other, but they still need each other.

The United States requires China as a global source of low-wage labor as well as a market for marketing American products, and China requires the United States as an investor in its companies as well as a market for marketing Chinese products known for their low-cost. What makes these two countries to be so cold to one another? To answer the question, let’s go back to when this trade war saga started.

Donald Trump is a successful businessman who owns enterprises and corporations all over the world. His candidacy for President of the United States in 2016 poses several concerns, including whether Trump is eligible to run for office. Trump replied by becoming the 45th President of the United States, succeeding Obama.

Trump adopted a protectionism agenda in order to shield the US economy from what he referred to as the “robber from China.” Trump has released a law stating that all steel and aluminum products entering the United States from Europe, China, Canada, and Mexico would be subject to 25% and 10% tariffs, respectively. Of course, China is outraged that the United States issued this order, as well as a related policy on all tribal products. Automobile components, as well as agriculture and fishery products, are manufactured in the United States.

In addition to the tariff battle, President Trump has expressly demanded that the TikTok and WeChat apps be prohibited from running in the United States. We know that these two technologies are very common in the larger population. Giant corporations, such as Huawei, have not survived Trump’s “rampage,” with the Chinese telecommunications giant accused of leaking US national security data to China through Huawei’s contract with US security authorities.

As a result, many US firms were forced to cancel contracts with Huawei or face sanctions. Google is one of the companies impacted by this contract termination, which means that all Huawei smartphone devices manufactured in 2019 and after will lack any of Google’s services such as the Google Play Store, Gmail, and YouTube.

Many of the world’s economic organizations predict a 0.7 percent drop in GDP in 2018 and a 2% growth in 2020. Coupled with the Coronavirus pandemic, the global economy has become increasingly stagnant, with global economic growth expected to be less than 0%.

Amid the tough trade negotiations between the United States and China, COVID-19 pandemic is also affecting their relationship. The United States domestic pressure to contain the pandemic, has led Trump to accuse China of being the virus spread source.  As a consequence, Trump put the US-China future relations at stake with his “China’s Virus” label. Besides, the United States absence from World Health Organization (WHO) during Trump administration along the pandemic, that become a new opportunity for China to expand its influence.  China uses the Covid-19 pandemic issue as an opportunity.

China’s successful in controlling the pandemic,  has also made China confident in facing the United States. Meanwhile, the United States is increasingly threatened by its position. Moreover, the United States dependence on overcoming Covid-19 which requires relations from many parties, including China, makes the United States’ position weak as a superpower.

This is what we hoped for when Biden took office. Many consider President Joe Biden to be willing to “soften” the United States’ stance on the trade war with China. After his inauguration on January 20, 2021, Biden has made many contacts with Beijing to address a variety of issues, one of which is the continuation of the trade war.

The United States and China agreed to meet in Anchorage, Alaska, on March 18-20, 2021, to discuss this issue. The meeting produced no bright spots in the escalation of the US-China trade war, but rather posed questions concerning the Middle East, Xinjiang, North Korea, and Taiwan.

The Biden administration stressed that it does not plan to abolish various regulations passed during the Trump administration’s term in the trade war with China, but it also does not intend to employ the same negotiation strategies as the Trump administration, which seemed to be very offensive. Besides, the Biden administration must be careful, If Biden prioritizes domestic challenges then China has room to push its agendas, including in the field of technology and territorial issues

Furthermore, the Biden administration’s policy has shifted from imposing tariffs on China to investing in industries that Biden believes are less competitive with China, such as nanotechnology and communication networks.

In conclusion, the trade war between the United States and China has ushered in a new age in the global economy, one in which China is going forward to replace the United States’ status as a world economic force, something that the United States fears.

The door to investment is being opened as broad as possible, the private sector is being encouraged to participate (under tight government oversight, of course), the cost of living is being raised, and the defense spending is being expanded. Today, we can see how the Chinese economy is advancing, becoming the world’s second largest economy after the United States, selling goods all over the world to challenge the United States’ status, and even having the world’s largest military after the United States.

The rise of China is what the US is scared of; after initially dismissing China’s problem as insignificant, the US under the Trump administration takes China and Xi Jinping’s problems seriously by starting a trade war that is still underway.

Will this trade war enter a new chapter in the Biden presidency, where the relationship with China will be more ‘calm’ and the trade war can be ended, or can it stalemate and maintain the stance as during the previous president’s presidency?

*Hafizha Dwi Ulfa is a Research Assistant of the Indonesian International Relations Study Center (IIRS Center) with analysis focus on ASEAN, East Asia, and Indo-Pacific studies.

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The “Retail Investor Revolution” in the U.S.

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Authors: Chan Kung and He Jun

Recently, the battle between retail investors and institutional investors is taking place in the U.S. stock market, with some short-selling institutional investors being driven to the brink of bankruptcy. The rise of the retail investor, which has led to huge volatility in the U.S. stock market, is nothing short of a “retail investor revolution” in a market dominated by institutional investors.

GameStop (GME), the world’s largest video game and entertainment software specialty retailer with a chain of nearly 7,000 retail stores worldwide, has continued to underperform in recent years under the impact of online gaming, with its stock price dipping from USD 28 per share in 2016 to USD 2.57 per share in April 2020. Nevertheless, since January 11, 2021, retail investors have been bullish on GME that it has soared to as high as USD 483 per share, a “crazy” move that drove Melvin Capital, a hedge fund with a large short position in the company, to the brink of bankruptcy. So far this year, short-sellers had lost USD 19.75 billion on GME, according to fintech and analytics firm S3 Partners. S3 Partners estimates that short positions in GME lost more than USD 7.8 billion on January 29 alone. The “long-short” battle between retail investors and institutional investors ended with the retreat of institutional investors.

Other U.S. stocks that have recently been caught up in the “long-short” battle have also been volatile. On January 28, American Airlines plunged after opening nearly 31% higher, closing up 9.30%. Castor Marintime, a Cypriot dry bulk shipping company, also plunged after opening with a 67.62% jump, closing up 14.77%. AMC Theatres, a U.S. cinema chain on the verge of bankruptcy, closed down 56.63% on the same day after soaring more than sevenfold in two weeks. Canadian mobile phone company BlackBerry and the U.S. fashion clothing chain Express also fell about 42% and 51%, respectively.

The U.S. capital market has long been dominated by institutional investors, and in mid-2018, institutional investors held 93.2% of the market value of the stock market, while individual investors held less than 6% of the market value. In the U.S. capital market, where institutions are the absolute majority, the market system and regulatory rules are set in favor of institutional investors. Market participants, i.e., investors (institutional investors and retail investors), regulatory authorities, and financing entities (enterprises) have formed a set of “self-consistent” system. However, the “retail investor revolution” has disrupted the conventional ecology of the market, with some young retail investors from the WallStreetBets (WSB) group on the Reddit forum throwing institutions into disarray. This “long-short” battle has put retail investors, represented by the “WallStreetBets”, at center stage and secured support from the top elites, including Elon Musk. In the face of this sudden “retail investor revolution”, the reasons and possible effects are worth in-depth observation and thinking.

First, who opposes the “retail investor revolution”?

The answer is of course, Wall Street as represented by institutional investors, who are the “establishment” in the capital market and represent the mainstream and value perspectiveof the financial market. Goldman Sachs, a prominent investment bank, saying the butterfly effect of the GME short squeeze is leading to the worst short squeeze in the U.S. stock market since the financial crisis. Over the past 25 years, the U.S. stock market has seen a number of severe short squeezes, but none as extreme as has occurred recently. Goldman Sachs warned that if the short squeeze continued, the entire financial market would collapse. According to Goldman Sachs, unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil. In recent years, the pattern of low volume and high concentration in U.S. stocks has increased the risk of funds unwinding their position across the market.

Market maker brokers and trading platforms have also imposed strict restrictions on retail trading. In the midst of a fierce battle between retail investors and short sellers in the U.S. stock market, for example, several brokerage houses, including Robinhood, a zero-commission online brokerage, and Interactive Brokers, one of the largest online brokerages in the U.S., abruptly shut down buying of WSB related stocks such as GME, AMC, and Nokia. Robinhood said the restrictions had to be put in place because of the pressure on data processing and margins brought by the volume of retail trading. But the move immediately drew accusations from the market that the decision was “market manipulation”.

Second, what gathers a group of scattered retail investors?

According to Chan Kung, founder of the ANBOUND, the answer lies in the internet. A group of young retail investors gather in a Reddit subsection called WallStreetBets (WSB), and rely on the convenience of the internet to mobilize and convene, forming a force that can influence institutions in specific areas (such as WSB concept stocks). As in recent years, public use of social networking platforms in the social and political spheres has shifted to the stock market investment sphere.

Chan also pointed out in that the role of the internet is not only in mobilizing and convening, but also in providing and sharing quality analysis. The dominance of institutions in the stock market is not only reflected in funds, but also in research capabilities. They rely on professional teams to collect information, conduct market research, and conduct modeling and analysis, forming a certain information monopoly and an overall investment advantage over retail investors. However, the development of the internet has broken up this information monopoly. Due to the convenience of information acquisition and sharing, some small institutions and professional investors also have a high analytical ability. Their participation and sharing make the Internet platform another kind of “large institutions”, which provide investment analysis and advice to retail investors in a distributed manner. The rapid information sharing and investment actions make the retail investor cluster a “disruptor” and “challenger” that cannot be underestimated in the capital market. Chan Kung also pointed out that among the retail investors, a group of people with strong information ability will further decide the market trend in the future, and the investment in the capital market will gradually become information-oriented, and the size of the funds will not be as important as in the past.

Third, how would the U.S. financial regulators handle the short squeeze and the stock market turmoil?

The U.S. Securities and Exchange Commission (SEC) said on January 29 that it is closely monitoring extreme price volatility and will review entities that “unduly inhibit” traders’ ability to trade certain stocks. The SEC also added that extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence, and that market participants should be careful to avoid “illegal” manipulative trading activity. The SEC is working with regulators to assess the current situation and review the activities of regulated entities, financial intermediaries, and other market participants. White House Press Secretary Jen Psaki said that Treasury Secretary Janet Yellen and the White House economic team are closely watching the stock market activity around GameStop and other heavily shorted companies. She called the trading in the video-game retailer “a good reminder, though, that the stock market isn’t the only measure of the health of our economy.” Fed Chairman Jerome Powell declined to weigh in on the activity around GameStop. “I don’t want to comment on a particular company or day’s market activity or things like that. It’s just not something really that I would typically comment on,” Powell said. This information suggests that the U.S. regulatory authorities are cautious in their stance on market volatility, but hope that the market will remain stable and compliant.

Fourth, what will happen to the market relationship between retail investors and institutions?

The “retail investor revolution” has exposed the contradiction between retail investors and institutions, and made the market relationship between retail investors and institutions the focus of the market. Retail investors are within their rights to take legal action against brokerage houses for restricting trading. In the market, it is not only the so-called “regulators” that can deliver justice. Chan Kung stressed that the real problem with institutional restrictions is that if Wall Street establishes a firewall for market trading and prohibits retail investors from uniting to make the market, then the market becomes an inter-agency market, and may even further evolve into a false trading market, shaking the foundation of the entire market system. Therefore, this unprecedented short squeeze triggered by retail investors has exposed a systemic defect in the U.S. capital market. To solve this problem, there is the need to continue observing and following up.

Remarkably, the same problem exists in China. People who speculate in Chinese stocks gather on WeChat and online forums to lead a large number of hot money to hit the market. Drawing on the example of the “retail investor revolution” in the U.S., the following questions are worth considering: Is such trading activity legal? If it is “illegal”, then what kind of market has the Chinese stock market become? If there are certain winners in the market, limits on how much the stock price can go up and how much they can go down, and, in short, all the criteria that are set internally, isn’t the market trading becoming akin to sham game? Such questions are also worth pondering in China’s retail investors-dominated stock market.

Final analysis conclusion

The historical experience shows that the enthusiasm of the market can never prevent the laws of the market from working, and that the rules formed on the basis of previous experiences and lessons are still the main keynote of the market. At the same time, one should also see that with the changes in the information world and the changes in the behavior of retail investors, retail investors are forming a force that can affect the market. Therefore, certain changes in the market system and regulatory approach as a result are likely to be a future trend.

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ESG as the New Loadstar for the Global Economy

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The ills of the world economy and the frequency of crises may in part emanate from a loss of the sense of direction. With economic policy rules increasingly undermined at the level of countries and international organizations, the resulting loss of an anchor resulted in a rising frequency of economic crisis episodes. Instead of the weakening norms and top-down conditionality of international organizations a new set of rules and standards is starting to propagate throughout the global economy from the micro-level of the corporate and financial world. This new moral code is epitomized in the ESG (environment, social, governance) framework, with the propagation of ESG principles taking place across all key segments of the global economy.

The buy-side is witnessing a growing volume of assets under management that is tracking ESG principles by 2020 the value of global assets employing environmental, social and governance data to deliver investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion. Sell-side research is actively advancing ESG products in the corporate research space as well as in evaluating the macroeconomic implications of the use of ESG standards. The largest corporates are starting to compete in the ESG space, with a rising importance attached to corporate ESG ratings. At the country level governments are actively elaborating the national ESG strategies and evaluating the risks and the opportunities harboured in the rising global presence of the ESG agenda.

For corporates the importance of complying with ESG principles is driven increasingly by the rising share of ESG-driven investments, most notably among the largest institutional investors. According to PwC, ESG funds are set to hold more assets under management than their non-ESG counterparts by 2025, with ESG funds’ market share projected to rise to 57% in 2025, compared with the current 15%. In effect, companies not complying with ESG norms deprive themselves of a rising share of the global investment pool, which may impart negative implications for the companies market capitalization.

There may be also notable implications for countries and companies in terms of borrowing costs depending on the resilience and susceptibility to environmental factors as climate change. According to the estimates of the IMF, an increase of 10 percentage points in climate change vulnerability is associated with an increase of over 150 basis points in long-term government bond spreads of emerging markets and developing economies, while an improvement of 10 percentage points in climate change resilience is associated with a decrease of 37.5 basis points in bond spreads.

Importantly, there are notable regional variations in perceptions and regulatory regimes governing ESG factors as revealed by a Blackrock survey of 425 investors in 27 countries with nearly $25trn in assets under management. For more than half of the respondents in EMEA (51%), the top reason for adopting sustainable strategies was because it is the right thing to do, while just 37 per cent of respondents in the region said mitigating investment risk was a key consideration. At the same time in the Americas, mitigating risk is the second highest driver of adoption (49 per cent), followed by better risk-adjusted performance (45%) and mandate from board or management (45%).

The positive aspect of the ESG agenda is that it broadens the time-horizons of the world economy, including its financial and the real sectors, and allows for longer term risks and vulnerabilities to be incorporated into the current decision-making.

The Covid crisis was the bell toll that greatly underscored the importance of such a re-calibration of the time-horizons in economic strategies away from the excessive short-termism of the pre-Covid era. There is also the greater emphasis on sustainability as the core principle that aligns the operation of the corporate and financial markets with the broader global agenda as reflected in the UN development goals.

On the other hand, the transition towards the ESG principles also involves risks that have to do with the significant differentiation across countries in terms of values and preparedness to incorporate ESG standards. Developing economies, most notably those with a sizeable share of the mineral resource sectors in their economies, will likely find it more challenging to compete with advanced economies in the speed of ESG transformation indeed with respect to environmental standards there is the risk of green protectionism being employed against developing countries. Another risk may be the use of ESG norms as the new universal rules-based framework that separates rather than unites the global community.

In the end, just as the apocalyptic predictions regarding the coming of the WTO membership for Russia have proven to be unfounded so the ESG challenge may well turn out to be a factor of creative change rather than destruction. In many respects the ESG value code aligns well with the crucial exigencies facing Russia’s economy the need for longer time horizons in economic policy-making and investing as well as greater emphasis on environmental standards and social issues. For Russia’s financial realm this is an important element related to the development of deeper and less speculative markets, more emphasis being placed on education and support for the fledgling class of retail investors, and greater transparency and higher governance standards in the corporate world.

From our partner RIAC

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Urban Development2 hours ago

Regional City Networks: Bringing the 4IR to Small and Medium-Sized Cities

The World Economic Forum is launching two regional networks of cities in Latin America and South Asia to share knowledge...

Development4 hours ago

Climate Finance: Climate Actions at Center of Development and Recovery

The Asian Development Bank (ADB) called access to climate finance a key priority for Asia and the Pacific as governments...

Human Rights6 hours ago

Migrants left stranded and without assistance by COVID-19 lockdowns

Travel restrictions during the COVID pandemic have been particularly hard on refugees and migrants who move out of necessity, stranding millions from home, the UN migration agency, IOM, said on Thursday. ...

New Social Compact8 hours ago

Reform of mental health services: An urgent need and a human rights imperative

Already in the early stages of the COVID-19 pandemic, the World Health Organisation (WHO) was warning that substantial investment in...

South Asia10 hours ago

US-China Developing Confrontation: India and QUAD

At the request of the editors of International Affairs magazine, the renowned Kanwal Sibal, India’s Foreign Secretary and Ambassador to...

Tourism12 hours ago

Advancing Harmonized Travel Protocols and Financing Tourism’s Survival

The World Tourism Organization (UNWTO) has again convened its Global Tourism Crisis Committee to lead the sector in harmonizing travel...

Europe13 hours ago

French Senator Allizard: Mediterranean – Theatre for future Europe

On the historic date of March 08th – International Women’s Day, a large number of international affairs specialists gathered for...

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