Trade Friction: A Primer on the United States and China

Published

2 years ago

10/05/2018

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.

chart

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.

How can financial services firms keep pace with escalating requirements?

Published

11 mins ago

29/09/2020

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How can financial services firms keep pace with escalating requirements? 1

By Tim FitzGerald, UK Banking & Financial Services Sales Manager, InterSystems

Financial services firms are currently coming up against a number of critical challenges, ranging from market volatility, most recently influenced by COVID-19, to the introduction of regulations, such as the Payment Services Directive (PSD2) and Fundamental Review of the Trading Book (FRTB). However, these issues are being compounded as many financial institutions find it increasingly difficult to get a handle on the vast volumes of data that they have at their disposal. This is no surprise given that IDC has projected that by 2025, the global “datasphere” will have grown to a staggering 175 zettabytes of data – more than five times the amount of data generated in 2018. As an industry that has typically only invested in new technology when regulations deem it necessary, many traditional banks are now operating using legacy systems and applications that haven’t been designed or built to interoperate. Consequently, banks are struggling to leverage data to achieve business goals and to gain a clear picture of their organisation and processes in order to comply with regulatory requirements. These challenges have been more prevalent during the pandemic as financial services firms were forced to adapt their operations to radical changes in customer behaviour and increased demand for digital services – all while working largely remotely themselves.

As more stringent regulations come in to play and financial services firms look to keep pace with escalating requirements from regulators, consumer demand for more online services, and the ever-evolving nature of the industry and world at large, it’s vital they do two things. Firstly, they must begin to invest in the technology and processes that will allow them to more easily manage the data that traditional banks have been collecting and storing for upwards of 50 years. Secondly, they must innovate. For many, the COVID-19 pandemic will have been a catalyst for both actions. However, the hard work has only just begun.

Legacy technology

Traditionally, due to tight budgets and no overarching regulatory imperative to change, financial institutions haven’t done enough to address their overreliance on disconnected legacy systems. Even when faced with the new wave of regulation that was implemented in the wake of the 2008 banking crash, financial services organisations generally only had to invest in different applications on an ad hoc basis to meet each individual regulation. However, as new regulations require the analysis of larger data sets within smaller processing windows, breaking down any and all data siloes is essential and this will require financial institutions that are still reliant on legacy systems to implement new technologies to meet the regulatory stipulations.

With this in mind, solutions which offer high-quality data analytics and enhanced integration will be key to the success of financial institutions and crucial to eliminate data silos. This will enable organisations to achieve a faster and more accurate analysis of real-time and historical data no matter where they are accessing the data from within smaller processing windows to keep pace with regulatory requirements, while also benefiting from low infrastructure costs.

This technology will also play a huge part in helping financial institutions scale their online operations to meet demand from customers for digital services. According to PNC Bank, during the pandemic, it saw online sales jump from 25% to 75%. Therefore, having data platforms that are able to handle surges in online activity is becoming increasingly important.

Real-time analysis of data

Tim FitzGerald

While the precise solution financial services institutions need will differ based on the organisation, broadly speaking, the more data they are storing on legacy solutions, the more they are going to require an updated data platform that can handle real-time analytics. Even organisations that have fewer legacy systems are still likely to require solutions that deliver enhanced interoperability to help provide a real-time view across the business and enable them to meet the pressing regulatory requirements they face. Let’s also not lose sight of the fact that moving transactional data to a data warehouse, data lake, or any other silo will never deliver real-time analytics, therefore, businesses making risk decisions based on this and thinking it is real-time is completely inappropriate.

As such, financial services firms require a data platform that can ingest real-time transactional data, as well as from a variety of other sources of historical and reference data, normalise it, and make sense of it. The ability to process transactions at scale in real-time and simultaneously run analytics using transactional real-time data and large sets of non-real-time data, such as reference data, is a crucial capability for various business requirements. For example, powering mission-critical trading platforms that cannot slow down or drop trades, even as volumes spike.

Not only will having access to real-time data enable financial institutions to meet evolving regulatory requirements, but it will also allow them to make faster and more accurate decisions for their organisation andcustomers. With many financial services firms operating on a global basis, this is vital to help them keep up not only with evolving regulations but also changing circumstances in different markets in light of the pandemic. This data can also help them understand how to become more agile, help their employees become productive while working remotely, and how to build up operational resilience. These insights will also be vital as financial institutions need to consider the likelihood of subsequent waves of the virus, allowing them to gain a better understanding of what has and hasn’t worked for their business so far.

Innovation

The financial services sector is fast-paced and ever-changing. With the launch of more digital-only banks, traditional institutions need to innovate to avoid being left behind, with COVID-19 only highlighting this further. With more than a third (35%) of customers increasing their use of online banking during this period, it is those banks and financial services firms with a solid online offering that have been best placed to answer this demand. As financial institutions cater to changing customer requirements, both now and in the future, implementing new technology that provides access to data in real-time will help them to uncover the fresh insights needed to develop new and transformative products and services for their customers. In turn, this will enable them to realise new revenue streams and potentially capture a bigger slice of the market. For instance, access to data will help banks better understand the needs of their customers during periods of upheaval, as well as under normal circumstance, which will allow them to target them with the specific services they may need during each of these periods to not only help their customers through difficult times but also to ensure the growth of their business. As financial institutions not only look to keep pace with but also gain an advantage over their competitors, using data to fuel excellent customer experiences will be essential to success.

With the current economic uncertainty and market volatility, it’s critical that financial services are able to meet the changing requirements coming from all angles. With COVID-19 likely to be the biggest catalyst for financial institutions to digitally transform, they will be better able to cater to rapidly evolving landscapes and prepare for continued periods of remote working. As they look to achieve this, replacing legacy systems with innovative and agile technology solutions will be crucial to ensure they can gain the accurate and complete view of their enterprise data they need to comply with new and changing regulations, and better meet the needs of consumers in an increasingly digital landscape, whether they are located in an office or working remotely.

Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room

Published

4 days ago

25/09/2020

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Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 2

By Jeff Carlson, author of The Photographer’s Guide to Luminar 4 and Take Control of Your Digital Photos

suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”

Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.

It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.

But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.

Improve the picture quality of your call

The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.

Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”

Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”

Place your camera at eye level

A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.

Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”

Low camera placement from a MacBook

Make the most of natural lighting

Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.

Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”

Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 4

Backlit against a window Facing natural light

Use supplementary lighting like ring lights

The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.

Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.

“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.

Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”

In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.

Centre yourself in the frame

Make sure you’re getting the right angle and that you’re using the frame effectively.

“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”

Be mindful of your backdrop

It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.

“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”

A busy background as seen by a webcam

Make the most of virtual backgrounds

If you’re really struggling with finding a background that looks professional, try using a virtual background.

Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”

Be aware of your audio settings

Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.

“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.

The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”

Be wary of video app add-ons

Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.

“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”

Be the best looking person in the virtual room

What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.

Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation

Published

5 days ago

24/09/2020

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Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation 6

By Keith Phillips, CEO of TISATech

If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.

Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.

If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.

But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.

For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.

Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.

The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.

However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.

The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.

With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.

The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.

With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.

Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.

Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.

The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.

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