Week in Review

December 10, 2018

Global Roundup

Macron’s defeat in Paris sounds alarm for Europe. The political vultures are circling around the French president and there’s much at stake for the world order. (Bloomberg)

White House intensifies confusion and fear on U.S.-China deal. The Trump administration raised doubts Dec. 4 about the substance of a U.S.-China trade ceasefire, contributing to a broad stock market plunge and intensifying fears of a global economic slowdown. (AP News)

Merkel protege Kramp-Karrenbauer succeeds her as German CDU leader. Germany’s Christian Democrats elected Annegret Kramp-Karrenbauer on Dec. 7 to replace Angela Merkel as party leader, a decision that moves her into pole position to succeed Europe’s most influential leader as chancellor. (Reuters)

Italy is teetering on verge of a recession. Italy’s populist government has a new problem brewing as it faces the risk that it could soon be dealing with the country’s first recession in five years. (HSN)

Swiss brush off EU deadline for backing new treaty. The Swiss government will seek more political consultations on a draft treaty setting out ties with the European Union, it said on Dec. 7, ignoring an ultimatum from Switzerland’s biggest trading partner to sign off by Dec. 7 or face punishment. (Reuters)

Xi Jinping heads to Portugal as China’s influence worries EU partners. Chinese President Xi Jinping arrives in Portugal Dec. 4 for a two-day visit to strengthen ties, amid concern in some EU capitals over China’s growing influence on the continent. (EurActiv)

“Brexit premium” drives up euro borrowing costs for U.K. firms as EU exit looms. British companies are being forced to pay more to borrow on international bond markets than their European peers as investors demand a hefty premium to compensate for a future hit to business and the U.K. economy from Brexit. (HSN)

South Korea's parliament ratifies revised FTA with U.S. South Korea’s parliament ratified a revised bilateral free trade agreement with the United States on Dec. 7, the trade ministry said, paving the way for the deal to come into effect on Jan. 1 with the main impact on automakers. (Reuters)

EU lawmakers adopt softer bad loans cover rules for banks. European Union lawmakers backed new rules on Dec. 6 that would soften requirements on the money that banks must set aside to cover potential losses from new debt that turns sour. (HSN)

Sri Lanka: Economic and political fragility. The Sri Lankan democracy has recently been burdened by a presidential coup. President Sirisena has overstepped his constitutional limits to sack the sitting prime minister and unilaterally appoint a new one. Instead of seeking parliament’s approval, he dissolved the House and announced snap elections for January 2019. (Global Risk Insights)

Stratfor 2019 annual forecast. The Great Power Competition Intensifies; Increased Geopolitical Risk for Business; Measuring Trade Volatility in the Global Economy; Hair-Raising Scenarios for Italy and Brexit; The Next Steps in the Anti-Iran Campaign; An Eye on Growing Supply in Global Energy Markets; Disruptive Forces at Work in the Americas. (Stratfor)

Fitch: 2019 sovereign risk outlook. Sovereign risks in 2019 centre on the tightening of global financial conditions, potential changes in trade policies that increase impediments to the flows of goods and services across borders, and heightened, or unexpected, political and geopolitical risks that quickly dominate the policymaking environment and market conditions. (Fitch)

Is dynamic discounting worth a second look? Whenever a vendor labels a solution as a “win-win,” treasurers naturally become suspicious. The hackles go up and the brain shuts down. In some cases, though, this well-worn phrase is entirely applicable. (TMI)

Three common invoicing scams and how to avoid them. Invoicing and payments fraud can take a variety of forms: invoices from fictitious companies, invoices for products that were never delivered, for unusually high amounts, or as part of a phishing scheme. As your business grows and your vendor list gets larger, how do you stay on top of the validity of each invoice? (Global Trade Magazine)

Why Can’t OPEC and Other Producers Agree?

Chris Kuehl, Ph.D.

The price per barrel of oil has been tumbling again. The assessment of just a few months ago now seems utterly foolish. Remember that argument that demand was coming back strong and it would spike oil prices back to the $100-a-barrel level?

The assumption that propelled that analysis was that the Organization of Petroleum Exporting Countries (OPEC) and other oil producers would do what they have done many times in the past when oil prices have been judged to have fallen too far.

Today, the per barrel price is down to $58 and still falling. It was at $86 only a few weeks ago. That is a 30% decline in a very short period of time. Why is this happening and what does this say about the future of oil production and pricing?

The fact is that oil is an inelastic good. It may not seem like it is because of the assertion that people’s consumption varies with the price at the pump. The reality is people do not vary their consumption much. They still have to get to work and other destinations and simply have to pay what is required.

In the long run, they can adjust the level of consumption by buying a more fuel-efficient car or moving closer to their place of employment, but those are not short-term reactions. The inelastic nature of oil means that prices can go up without appreciably affecting demand. That has been the pattern with oil producers in the past. The power of OPEC was always rooted in its ability to reduce output to the point that an artificial scarcity could be created and prices would rise accordingly. That tactic is not working as it once did.

There are three reasons as to why. The first is that OPEC has lost the control it once had over global oil production. In its prime, the organization effectively controlled close to 70% of global oil production, but today that percentage has fallen as low as 35%. Any decisions as to limiting output as a means by which to boost oil prices will have to include non-OPEC members such as Russia. It is very unlikely that OPEC will get any help from the Canadians, Mexicans, Norwegians, British or Americans. Right now, the Saudi Arabians are struggling to get the other OPEC members to reduce their output as members don’t think this action will get the prices to rise and all they will be doing is limiting their market share.

The second issue is that many producers are now ready and willing to fill any gaps that appear should the OPEC states elect to cut production. The U.S. alone can ramp up production at will very quickly. Every time the price goes up past the $70 or $80 level, there are producers willing to jump quickly into the fray. That immediately takes the prices back down as the flow of oil accelerates.

The third issue is demand. It isn’t as reliable as it once was. The U.S. and Europe still dominate consumption, but there has been decline in how much oil is needed. China was adding to that demand side at a pretty rapid clip, but this has slowed down as their economy has struggled. All the rest of the nations in the world combined do not equal what these three big consumers require.

The bottom line is that a cartel like OPEC only works when it has control over the bulk of the assets. The production of oil is now far too spread out to control when most of the major players are not part of that cartel. The consumers of oil now have a better position than the producers do.

Chinese Suppliers Feel Strain from US Tariffs

With the holiday season in full swing, U.S. retailers are beginning to revise their order contracts with Chinese suppliers, who, The Wall Street Journal (WSJ) reported, are starting to feel the pressure of President Donald Trump’s trade tariffs. High-profile retailers, such as Walmart, Home Depot and Amazon, are among the chains retooling their orders—an effort that started just before Trump’s meeting with China President Xi Jinping last weekend at the G-20 summit in Argentina.

Import taxes began at 10% and 25% on $250 billion worth of Chinese goods in September and October, respectively. The 10% tariffs were expected to rise to 25% at the beginning of 2019; however, the White House issued a statement on Dec. 1 to announce no escalation will occur at this time. The statement also noted “structural changes with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture,” Reuters reported. If not completed in 90 days, the tariffs will increase as originally planned.

On Nov. 28, WSJ reported Walmart and Home Depot were making advanced purchases in anticipation of the tariff hike. In a separate move, Amazon “cut back purchases and orders for certain of its private-label products that, because of the tariffs, it can no longer sell profitably if priced below competitors,” the article states. Meanwhile, Dollar Tree Inc. announced it is not only negotiating current pricing with its Chinese suppliers, but also canceling orders and exploring other products.

“U.S. companies have stressed to investors that they are trying to mitigate the impact of tariffs on their margins—for example, by passing cost increases along to customers when concessions can’t be squeezed out of suppliers,” WSJ states. “Retailers, in particular, say that although tariffs so far haven’t had a huge impact on their operations, that could change if the levies get steeper or are applied to more products.”

However, the retail sector’s price hikes come as no surprise considering they were predicted at the end of September when the first round of U.S. tariffs took hold. In a September email to Retail Dive, GlobalData Retail Managing Director Neil Saunders told the publication retailers were faced with a couple of options: increase costs or suffer in the margins.

“The exact response will vary from retailer to retailer, both strategies are likely to be used,” Saunders said, leaving retailers with less money to spend on “technology, elevated logistics costs, higher gas prices and rising labor expenses.”

As U.S. retailers’ orders fluctuate, so do Chinese manufacturers’ sales, WSJ added. Affected companies include camping chairs manufacturer Sunshine Leisure Products, furniture manufacturer Homegard International as well as an LED decorative lights supplier.

The U.S. steel and aluminum tariffs also returned to news headlines last week after the country’s No. 1 carmaker, General Motors Co., announced plans to stop all production at Ohio, Michigan and Ontario assembly plants in 2019 and then cease production on certain car models when the plants are up and running again. Workforce cuts will soon follow, but Reuters reported job cuts were not related to the tariffs. This follows a similar announcement from Ford Motor Company in October.

—Andrew Michaels, editorial associate

Euler Hermes: What Businesses Should Watch for in 2019

The cost of trade will mechanically increase in 2019 because monetary and financial conditions are tightening in dollar terms, according to trade credit insurer Euler Hermes.

For every 100 basis points of increase in U.S. 10-year interest rates, trade finance costs increase by 80 basis points, Euler Hermes explained. In parallel, specific currency, political and nonpayment risks are also increasing.

Additionally, the insurer pointed out that trade diversion has already started and could disrupt supply chains. “Corporates could focus on local markets and secured trade routes to keep revenues in check as risk of supply chain disruptions have increased with U.S.-China trade tensions,” it said.

Euler Hermes expects that the value of global trade will continue to grow in 2019, but that global FDI1 could decrease by 14% in 2018 before a modest uptick in 2019 (5%).

In the face of growing trade threats and political risks including Brexit and bilateral tensions such as in the Gulf countries, corporates have started to discuss secured trade routes either banking on neutral and competitive trade hubs that are not subject to protectionist measures from major economies, or by regionalizing their value chains along trade areas, Euler Hermes said.

“Asian pivots such as Bangladesh, Vietnam, Cambodia and Laos should benefit the most from this global trade re-wiring,” said Mahamoud Islam, senior economist for Asia. “Even if it is unlikely that China will be replaced soon as the key supplier, we see new players emerging in the longer term, mainly in ASEAN: Malaysia, Thailand and Indonesia.”

In Europe, Romania and Poland are the best positioned with modest growth of investment and strong growth of trade, Euler Hermes noted. Diversion effects due to new trade policies and corporates strategies will likely exacerbate this trend.

Last, tariffs are the tip of the iceberg, it concluded. Other forms of protectionism, political risk and Fait du Prince could increase further in 2019. From the United States to Germany and France, to China, government interventions against foreign takeovers have increased visibly. Moreover, transaction risks (growing sanctions or targeted regulatory risks on highly visible and strategic sectors such as automotive) as well as confiscation and expropriation risks on assets, could be a second phase to mounting protectionism.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations