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Trade Friction: A Primer on the United States and China

By Joseph Bruseulas, RSM US LLP
Trade friction represents the natural state of international economic affairs. While the benefits of free trade are unassailable, from time to time, distributional impacts to distribution caused by comparative advantage and specialisation move to the forefront of economic diplomacy. The U.S.-China trade spat marks the opening salvo in a period of increasing friction within the global trade system.A bipartisan consensus in Washington contends that China should be confronted over its international trade practices. That said, some alternative strategies to those being deployed by the Trump administration can avoid upsetting global asset markets, disrupting the flow of goods and risking escalation to a trade war.
Trade Friction, Trade Spats & Trade Wars
Since the trade wars of the 1930s upended a prior period of nearly forty years of globalisation, there is little U.S. memory of a trade war. Amid today’s brazen media reports, it is important to separate reality from hyperbole. There are major differences between trade frictions, tradespats and trade wars. Policymakers, investors and firm managers need to understand those differences.
Trade Friction
For 30 years, the World Trade Organisation has been the primary vehicle preventing trade friction from spilling over into a trade spat, usually the first indictor an economy could be on the road to a trade war.
An agricultural trade dispute between the United States and Japan demonstrates the WTO’s importance. In the 1980s, Japan’s efforts to protect its upscale apple market through a series of non-tariff barriers to prevent entry of cheaper American apples led to bi-lateral friction. The Japanese, claimed it was attempting to prevent fire blight bacterium from entering the U.S. ecosystem, convened a panel to mediate. Japan and the U.S. reached a mutual agreement in September 2005, and a trade spat was avoided.
Trade Spats
A trade spat is best defined as tit-for-tat retaliation involving industrial or tradable service products between two or more trading partners.. Trade spats are typically short; they end with the withdrawal of tariffs by the instigating party after losing in the WTO courts or following domestic economic impact associated with tradeoffs that lead to job losses and higher prices.
Examples of tariff spats include actions taken by the George W. Bush and Barrack Obama administrations. Bush imposed 20 percent tariffs on steel imports in 2001, resulting in retaliation by the WTO, which ruled the actions were illegal under existing treaty obligations. The European Union followed up by imposing $2.5 billion in retaliatory tariffs. The Bush administration quietly withdrew its import taxes in 2002.
The Obama administration imposed taxes of 35 percent on the import of tires in 2009 to ostensibly save jobs. The move resulted in a net increase of about 1,200 jobs at a cost of roughly $1.1 billion or $900,000 per job. After a rigorous economic analysis, the Obama administration, quietly backed away from the tariffs, withdrawing them in late 2012.
The prospective tariff war the Trump administration intends to start with China will likely look like the Obama experience. Outsizedretaliation by China on industries beyond steel and aluminum such as agricultural, including the symbolic targeting of products politically important to Trump such as Harley Davidson motorcycles, Levis jeans and Kentucky bourbon, has made for high-profile optics. However, we would need to observe more far-reaching actions before characterising the ongoing friction as a trade dispute.
Trade War
A trade war occurs when countries move beyond WTO involvement and issue punitive taxes against a country or economic bloc.The first sign isa period of disruption and devolution in global trade:dissolution of the global trading regime through the repeal of multilateral trade treaties such as NAFTA; aggressive erection of non-tariff barriers; caps on capital flows and the expropriation of foreign-owned firms and property. Such conditions portend sharp currency devaluations such as those of the Great Depression of the 1930s.
Over the last 75 years the United States has provided the foundation and framework of the global trading system. While current US-China trade friction can still be fairly categorised as a trade spat, the decision by the Trump administration to impose tariffs on allies and adversaries alike has stimulated fears that the United States is on the cusp of bringing that era to an end.
Partial Equilibrium Model of a Trade Spat
One way to illustratea trade spat’s potential damage to the international economy is by viewing a partial equilibrium model that treats the import market as one for a specific product in a much larger global economy. The diagram below illustrates demand for imports as a function of their relative domestic price. Imposing a tariff causes the trade equilibrium for the product at the global price to deviate. Thus, the price of the good following the tariff shifts up and the quantity of the good provided shifts to the left from the global price to that following the trade spat with the blue shaded triangle representing the deadweight loss caused by the imposition of the new tariff policy.
How large would the deadweight be? It would depend on the size of the tariff regime imposed and the relative elasticity of demand for the good negatively impacted by the new policy. The tariffs on steel and aluminum are quite small with relatively modest elasticities.
Then why has the response in financial markets been so large? The answer lies in the pace of globalisation over the past thirty years and the construction of supply chains spanning various global economic blocs during that time. While a relatively contained trade spat between the United States and China would likely only shave 0.02 to 0.03 percent from U.S. gross domestic product, it would also force Chinese and U.S. firms to seek supply chain alternatives, devaluing the businesses that depend upon them and reducing the value of investments in non-liquid assets that have been made over the extended period of globalization.
Washington Consensus
Despite multiple diplomatic and commercial agreements with China, the past thirty years of economic interaction has not produced the outcome desired by the United States, European Union or its allies—to integrate China into the existing global trade framework. It’s not clear whether China ever desired to be part of that order or is interested in fostering its development. Whatever the case, as the United Statesenters a period of relative decline, that order is going to change and with it policy from Washington regarding China.
That policy shift is being driven by relative changes in growth and financial conditionsin each economy. As a result, the new bipartisan consensus in Washington has formed to both challenge and accommodate China’s economic rise. For now, the consensus remains that China must be confronted onits overproduction and dumping of supply into global markets as well as its appropriation of intellectual property from western firms operating in its country.
State of Play
While at this time the diplomatic and economic interaction between the Trump administration and China could be described as open mouth operations well short of a trade war, the potential economic impact and price distortions to the global economy are significant.
It’s possible the Trump administration will slap an additional $100 billion in tariffs on Chinese exports to the United States, bringing the total to $150 billion (larger than the $136 billion in U.S.exports to China). The risk is that China will respond in an asymmetrical fashion through non-tariff barriers and expansion of the tariffs beyond manufacturing and agriculture.
Although it must be stated that appropriation of IP is largely a private sector problem for firms that produce for China and is not a cause of US domestic distributional issues. Thus, there is clearly an opportunity to address these issues immediately without significantly disrupting the global trade system. The irony that the Trump administration which has campaigned against US based firms producing in foreign companies is now on the verge of launching a trade war on behalf of firms that choose to produce in China is not lost here.
Alternative to Undermining Multilateral Trade Institutions
The first round of the trade spat has not been beneficial to the Trump administration. The administration is now considering a rapprochement with the eleven signatories of the Trans Pacific Partnership, which was the geo-economic entity agreed upon by the 12 countries accounting for over forty percent of global economic activity on how to challenge China over its economic policies. The re-entry of the U.S. into the TPP would reduce current tensions and provide a better alternative to the general global economic uncertainty and upset in global asset markets that has accompanied the first salvo launched by the Trump administration. Moreover, the Chinese have signaled to all that it would be easier for them to make concessions within an integrated regional and global framework for discussions.
The U.S.-Sino economic relationship is complex and predicated on a growing global supply chain across a diverse universe of products, services and investment. The ability of the two countries to negotiate the problems surrounding the implementation of rules governing intellectual property and the dumping of commodities in international markets would be far more successful if done via the WTO and with the United States under the Trans-Pacific Partnership.
Trade conflicts are the ultimate wars of choice. They are easy to start, difficult to end and typically result in losses to both sides. The future of trade between the United States and China will be defined not by manufacturing and agricultural trade. Rather, it will be organised around the rules and framework governing the coming era of artificial intelligence and machine learning. That period of interaction will likely be defined by how the current trade friction and trade spats are settled.
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ECB launches small climate-change unit to lead Lagarde’s green push

FRANKFURT (Reuters) – The European Central Bank is setting up a small team dedicated to climate change to spearhead its efforts to help the transition to a greener economy in the euro zone, ECB President Christine Lagarde said on Monday.
Lagarde has made the environment a priority since taking the helm at the ECB, taking a number of steps to include climate considerations in the central bank’s work as the euro zone’s banking watchdog and main financial institution.
She is now creating a team of around 10 ECB employees, reporting directly to her, to set the central bank’s agenda on climate-related topics.
“The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves,” Lagarde said in a speech.
She said that climate change belonged in the ECB’s remit as it could affect inflation and obstruct the flow of credit to the economy.
The ECB said earlier on Monday it would invest some of its own funds, which total 20.8 billion euros ($25.3 billion) and include capital paid in by euro zone countries, reserves and provisions, in a green bond fund run by the Bank for International Settlement.
More significantly, ECB policymakers are also debating what role climate considerations should play in the institution’s multi-trillion euro bond-buying programme.
So far the ECB has bought corporate bonds based on their outstanding amounts but Lagarde has said the bank might have to consider a more active approach to correct the market’s failure to price in climate risk.
“Our strategy review enables us to consider more deeply how we can continue to protect our mandate in the face of (climate) risks and, at the same time, strengthen the resilience of monetary policy and our balance sheet,” Lagarde said.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Emelia Sithole-Matarise)
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What to expect in 2021: Top trends shaping the future of transportation

By Lee Jones, Director of Sales – Grocery, QSR and Selected Accounts for Northern Europe at Ingenico, a Worldline brand
The pandemic has reinforced the need for businesses to undergo digital transformation, which is pivotal in the digital economy. In 2020, we saw the shift to online and cashless payments accelerated as a result of increased social distancing and nationwide restrictions.
The biggest challenge on all businesses into 2021 will be how they continue to adapt and react to the ever changing new normal we are all experiencing. In this context, what should we expect this year and beyond, in terms of developments across key sectors, including transport, parking and electric vehicle (EV) charging?
Mobility as a service (MaaS) and the future of transportation
Social distancing and lockdown measures have brought about a real change in public habits when it comes to transportation. In the last three months alone, we have seen commuter journeys across the globe reduce by at least 70%, while longer-distance travel has fallen by up to 90%. With it, cash withdrawals for payment has drastically reduced by 60%.
Technological advancements, alongside open payments, have unlocked new possibilities across multiple industries and will continue to have a strong impact. Furthermore, travellers are expecting more as part of their basic service. Tap and pay is one of the biggest evolutions in consumer payments. Bringing ease and simplicity to everyday tasks, consumers have welcomed this development to the transport journey. In-app payments are also on the rise, offering customers the ability to plan ahead and remain assured that they have everything they need, in one place, for every leg of their journey. Many local transport networks now have their own apps with integrated timetables, payments, and ticket download capabilities. These capabilities are being enabled by smaller more portable terminals for transport staff, and self-scanning ticketing devices are streamlining the process even further.

Lee Jones
Ultimately, the end goal for many transport providers is MaaS – providing an easy and frictionless all-encompassing transport system that guides consumers through the whole journey, no matter what mode of travel they choose. Additionally, payment will remain the key orchestrator that will drive further developments in the transportation and MaaS ecosystems in 2021. What remains critical is balancing the need for a fast and convenient payment with safety and data privacy in order to deliver superior customer experiences.
The EV charging market and the accelerating pace of change
The EV charging market is moving quickly and represents a large opportunity for payments in the future. EVs are gradually becoming more popular, with registrations for EVs overtaking those of their diesel counterparts for the first time in European history this year. What’s more, forecasts indicate that by 2030, there will be almost 42 million public charging points deployed worldwide, as compared with 520,000 registered in 2019.
Our experience and expertise in this industry have enabled us to better understand but also address the challenges and complexities of fuel and EV payments. The current alternating current (AC) based chargers are set to be replaced by their direct charging (DC) counterparts, but merchants must still be able to guarantee payment for the charging provider. Power always needs to be converted from AC to DC when charging an electric vehicle, the technical difference between AC charging and DC charging is whether the power gets converted outside or inside the vehicle.
By offering innovative payment solutions to this market segment, we enable service operators to incorporate payments smoothly into their omnichannel customer experience that also allows businesses to easily develop acceptance and provide a unique omnichannel strategy for EV charging payments. From proximity to online payments, it will support businesses by offering a unique hardware solution optimized for PSD2 and SCA. It will manage both near field communication (NFC) cards and payments from cards/smartphones, as well as a single interface to manage all payments, after sales support and receipt with both ePortal and eReceipts.
Cashless options for parking payments
The ‘new normal’ is now partly defined by a shift in consumer preference for cashless, contactless and mobile or embedded payments. These are now the preferred payment choices when it comes to completing the check-in and check-out process. They are a time-saver and a more seamless way to pay.
Drivers are more self-reliant and empowered than ever before, having adopted technologies that work to make their life increasingly efficient. COVID-19 has given rise to both ePayment and omnichannel solutions gaining in popularity. This has been due to ticketless access control based on license plate recognition or the tap-in/tap-out experience, as well as embedded payments or mobile solutions for street parking.
These smart solutions help consider parking services more broadly as a part of overall mobility or shopping experience. Therefore, operators must rapidly adapt and scale new operational practices; accept electronic payment, update new contactless limits, introduce additional payments means, refund the user or even to reflect changing customer expectations to keep pace.
2021: the journey ahead
This year, we expect to see an even greater shift towards a cashless society across these key sectors, making the buying experience quicker and more convenient overall.
As a result, merchants and operators must make the consumer experience their top priority as trends shift towards simplicity and convenience, ensuring online and mobile payments processes are as secure as possible.
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Opportunities and challenges facing financial services firms in 2021

By Paul McCreadie, Partner at ECI Partners, the leading growth-focused mid-market private equity firm
Despite 2020 being an enormously disruptive year for businesses, our latest Growth Index research reveals that almost three quarters (74%) of mid-market financial services companies remained resilient throughout the pandemic.
This is positive news, especially when taking into account the economic disruption that financial services firms have had to go through since the crisis began. No doubt 2021 will also hold its own challenges – as well as opportunities – for firms in this sector.
Challenges outlook
Unsurprisingly, the biggest short-term concern for financial firms for the year ahead involved changing pandemic guidance, with 42% citing this as a top concern. With the UK currently experiencing a third lockdown many financial services businesses will have already had to adapt to rapidly changing guidance, even since being surveyed.
Businesses will also be considering the need to invest in working from home operations, and there may be uncertainty over re-opening offices on a permanent basis. According to the research 30% of financial services firms are planning to adopt remote working on a permanent basis, so decisions need to be made now about whether they invest more in enabling staff to do this, or in their current office premises.
Due to Brexit, UK financial services firms are no longer able to passport their services into Europe, which may cause problems, particularly in the next 12 months as the Brexit deal is ironed out and the agreement is put into practice. Despite this, Brexit was only cited by 24% of financial firms as a short-term concern. While it’s comforting to see that UK financial firms aren’t hugely concerned about Brexit at this juncture, it is going to be vital for the ongoing success of the industry that the UK is able to get straightforward access to Europe and operate there without issue, otherwise we may see these concern levels rise.
Looking ahead to longer-term concerns for financial services businesses, the top concern was global economic downturn, of which 40% of firms cited this as a worry when looking beyond 2021.
Investing and adopting tech
Traditionally, the financial services sector has been slow to adopt digital transformation. Issues with legacy systems, coupled with often large amounts of data and a reluctance to undertake potentially risky change processes, have meant many firms are behind the curve when it comes to technology adoption. It’s therefore promising to see that so much has changed over the last year, with 45% of financial services firms having invested in AI and machine learning technology – making it the top sector to have invested in this space over the last 12 months.
One business that exemplifies the benefits of investing in machine learning is Avantia, the technology-enabled insurance provider behind HomeProtect. The business has undergone a large tech transformation in the last few years, investing in an underlying machine learning platform and an in-house data science team, which provides them with capabilities to return a quote to over 98% of applicants in under one second. This tech investment has allowed them to become more scalable, provide a more stable platform, improve customer service and consequently, grow significantly.
This demonstrates how this kind of tech can help businesses to leverage tech in order to offer a better customer experience, and retain and grow market share through winning new customers. This resilience should combat some of the concerns that firms will face in the next year.
Additionally, half (51%) of financial services firms have invested in cybersecurity tech over the last year, which allows them to protect the platforms on which they operate and ensure ongoing provision of solutions to their customers.
International resilience
Clearly, there is a benefit of international revenues and profits on business resilience. In practice, this meant that businesses that weren’t internationally diversified in 2020 struggled more during the pandemic. In fact, the businesses considered to be the least resilient through the 2020 crisis were three times more likely to only operate domestically.
Perhaps an attribute towards financial services firms’ resilience in 2020, therefore, was the fact that 53% already had a presence in Europe throughout 2020 and 38% had a presence in North America. This internationalisation gave them an advantage that allowed them to weather the many storms of 2020.
Looking at how to capitalise on this throughout the rest of 2021, half (51%) of are planning overseas growth in Europe over the next 12 months, and 43% in North America. Further plans to expand internationally is not only a good sign for growth, but should further increase resilience within the sector.
Conclusion
While there are many concerns, the fact that financial services businesses are investing in technology like AI and machine learning, as well as still planning to grow internationally, means that they are providing themselves with the best chances of dealing with any upcoming challenges effectively.
In order to maintain their growth and resilience throughout the next 12 months, it’s imperative that they continue to put their customers first, invest in technology and remain on the front foot of digital change.