The Effects Of The Global Trade Agreement

We live in a world that is increasingly getting connected. In such a world, trade agreements are bound to expand internationally, and to think and act otherwise would be downright stupid.

These global trade agreements, as such, are either bilateral or multilateral understanding between two or multiple countries and govern the trade policies between them. These agreements have a massive impact on worldwide trade and investments and are one of the major causes responsible for shaping business relationships across the globe. And while such agreements might not affect directly affect the place where you live or operate, being aware of the current trade agreements can definitely uncover numerous opportunities.

Forming up opinions is up to you; we do not intend to initiate an argument over how good or how bad these global trade agreements are. This article aims to get you familiarized with such agreements and tell if your supply chain could be affected or not.

While a few countries have settled upon free trade agreements and are in the process of widening them, a number of other nations have formed common markets and unions; this form of development can a have a thorough effect on small-scale businesses.

Two of the most common agreements are the Trans-Pacific Partnership (TPP) between Australia, New Zealand, Singapore, Canada, Brunei, Peru, Mexico, Chile, Malaysia and Japan, and the North American Free Trade Agreement (NAFTA) between Canada, United States and Mexico.

Now, how such agreements impact your local business’s supply chain depends on a simple fact; whether your business is an importer, exporter or neither.

Scenario 1: You neither import nor export

It’s fairly easy to decide whether you are an importer or not, right? I understand that you do not directly source products from a foreign supplier, and technically speaking, that doesn’t make you an importer. However, trade agreements can still impact you. Your suppliers are directly affected by such regulations, and this vulnerability can affect your supply chain.

Keep the distinction in mind.

Scenario 2: You identify yourself as an importer

Owing to the low cost manufacturing in some countries, many small scale suppliers are able to compete with global giants.

With a trade agreement between two countries, most of the times, the country with lower labour costs benefits when the trade tariffs are lowered or eliminated. With trade agreements, importers usually get to source low-cost goods and it allows for the unrestricted movement of such low-cost goods through higher cost partner nation.

In case, such an agreement is dissolved, an importer would inevitably face a higher cost of goods and thus look for cheaper sourcing options, decrease their operational costs, and ultimately increase the prices, which would be borne by the customers, of course.

Scenario 3: You are an exporter

This even counts if you sell products that another firm exports because at some point or other, taxes would be levied on your sold goods. So how does it affect you? Your customers end up paying higher amounts for your products.

With a trade agreement in place between the country where the product originates and the receiving country, the very same products would move through the receiving nation freely. In such cases, you’d definitely want to keep such an agreement intact and leverage this competitive advantage you have in this particular country bound by trade regulations.

As a small or a medium sized business, it is therefore important for you to identify where your business lies with respect to global trade agreements.

United States – China Trade Relations

Tuesday November 8, 2016 marked a new age of American politics. Donald Trump shocked the world and became the 45th President of the United States of America. The controversial businessman captivated the American public with his unconventional rhetoric and “in-your-face” campaign style. Throughout his campaign to becoming President he proposed many agendas and ideas on what he thought it would take to “make America great again.” One of his big talking to points during his campaign crusade was that he wanted to put America “first” again. Which means he essentially wants to initiate plans that benefit America first and then worry about the outside world. This was very controversial considering America has always done whatever they could to help other countries. However, Trump and his advisors believe that we as a country might be helping out others and suffering the consequences.

This idea of putting America first goes hand in hand with how he is dealing with international trade, most notably China. Donald Trump has often said that China is responsible for nearly half of our trade deficit and he believes that their government is manipulating their currency. To counter this, Donald Trump has proposed we slap a 45 percent tariff on all Chinese imports. The Trump administration says that this tariff would stem from years of China stealing jobs and manipulating the trade system. Recent studies have put the total job losses in the US associated with the Chinese at 2 million. Most of these jobs are in the manufacturing industry.

Fearing a significant tariff on their imports, China has now threatened to retaliate if these tariffs are in fact imposed. The Chinese government has relayed the message to the US government urging against these “outlandish” tariffs (McDonald). China’s Commerce Minister Zhong Shan stated that the US and China are interdependent and bilateral trade relations would have an impact on the worldwide economy. They are afraid that if things start to escalate a trade war might be imminent (McDonald).

A trade war between the US and China would have significant impact on both economies. First, if trump imposes his tariffs, China’s exports to the United States would fall around 25 percent. This means that China’s annual economic growth would decrease by as much as 1 percent. If China retaliates and imposes a tariff on the US, its economic growth would as much as a quarter percentage point (Reuters). Not to mention the consumers that would ultimately suffer. If Chinese imports get taxed, then companies would be forced to raise their prices, which would then hurt the consumer of said products. Really what this comes down to is the US trying to decrease the trade deficit with China. There are several ideas out there on how to go about this. One idea was that instead of placing a tariff on all Chinese imports, just impose targeted tariffs instead. These tariffs would be put on products that face heavy competition from Chinese imports such as steel, machinery, and auto parts. Another way to decrease the deficit would be enhance service exports to China.

Like any problem, the best to solving one is through discussion. These tensions between the US and Chinese governments are very real and very serious. The two biggest economies in the world are on the brink of a stand-off that could set both economies backwards. Sun Jiwen, spokesman for China’s Ministry of Commerce, believes that these trade tensions will resolve through much-needed dialogue. However, it might take a little more than an open invitation for Trump to join the table of discussion. Trump is playing hardball. He feels that the US has been wronged since China has joined the WTO (World Trade Organization) in 2001 (Reuters). China has said they are willing to sit down with Trump administration to come up with a plan that could benefit both nations. China’s President Xi Jinping has defended free trade on numerous occasions and stated that “no one will emerge as a winner” in an international trade war (Reuters).

These are significant times in our country. The US has always been at the forefront world leadership and it is interesting to see with this new administration how these problems will play out. Every decision has a consequence, good or bad. I hope the Trump administration weighs all of the options before irrationally making a decision. The fate of the United States economy depends on it.

Economic Turmoil and the Future of Brazil

For many years, Brazil has been an emerging economic hub, attracting investors from all over the world. The Brazilian economy saw an 368% increase in Gross Domestic Product growth from 2003 to 2011. In addition, Brazil took in almost half of Foreign Direct Investment flowing into South America during 2015. This doesn’t come as a surprise since it reigns as one of the major emerging national economies. However, Brazil has seen a recent economic downturn with increasing unemployment and a contracting GDP. In fact, the Brazilian government cut 2017 GDP expectations from 1.6% to 1% growth. Having been one the most lucrative foreign investments for governments to individual investors, what happened to the so-called “Country of the Future” and can Brazil regain its momentum?

Back in 2015, recession hit Brazil hard and the country is still struggling to get back on track. According to the CIA World Factbook, the economy contracted 32% from its peak in 2011 and unemployment reached a new high at 12.6% in 2016. Being based mostly on services, agriculture and oil, Brazil’s economy has a direct correlation with global demand. With global recession looming, Brazil is feeling the effects of a slow world economy.

Brazil is a top tourist destination offering beautiful beaches, a diverse culture and exciting festivals. However, with the world economy slowing down, people are less likely to travel abroad. Since the majority of the country’s GDP derives from the service industry, Brazil will not be able to rebound any time soon unless there is a major boost in consumer confidence.

The demand for Brazilian exports was slashed when its largest trading partner, China, entered into an economic slowdown of their own. The decrease in exports caused massive layoffs throughout the nation. The notorious economic downward spiral began by wary consumer spending as unemployment rose. Companies that tried to gain capital by borrowing in U.S. dollars found it difficult to pay back those loans as the Brazilian Real crashed 25% in the span of a year in 2015.

One of the major hits came from low oil prices and the corruption of Petrobras, a large oil company and Brazil’s largest source of investment. Brazil is major producer of oil, exporting $11.8 billion worth in 2015, according to the Observatory for Economic Complexity. OPEC delivered a major blow when the cartel decided not to cut oil production, causing oil futures prices to plunge. In order to cope with heavy losses, Petrobras was forced to sell off assets and halt future research and expansion plans.

As if things weren’t going poorly, Petrobras was also caught in a scandal with former Brazilian president Dilma Rousseff and other high office executives. From 2004 to 2012, the company had spent over $2 billion on bribes to politicians whom would allow the company to charge inflated prices for construction contracts. Now that the scandal has unfolded, Petrobras executives face jail time and the company as a whole is forced to pay billions in fines.

So what does the future hold for Brazil?

Although at the moment the future looks dim, there are still signs of hope Brazil can turn itself around. The Real has seemed to stabilize in 2016 and heads into 2017 with an upward trend. Moreover, experts’ GDP projections for 2018 through 2020 show promising figures that Brazil can restore pre-recession level growth.

Even more promising, U.S. companies are still showing faith in Brazil’s future. American Airlines plans to invest $100 million in an aircraft maintenance center in Sao Paulo. Brazilian Investment Partnership Minister Wellington Moreira Franco and many countries like the United States, United Kingdom, France and Japan agree there are still reasons to invest in Brazil. This should be seen as a sign of confidence that the Brazilian market will grow soundly with the support of both national and international investment.