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Reshaping Global Trade

Reshaping Global Trade

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well as a profound hit to the global economy.  At the time of the World Health Organization’s (WHO) declaration of a global pandemic on March 11, 2020, the human toll of the disease stood at over 121,000 reported cases and 4,373 deaths spanning 110 countries.

These numbers are increasing, and the social and economic fallout continues.  Stock market declines in major economies reflect growing difficulty doing business and investor uncertainty about the near future.  Stock markets in the US fell nearly 10% on average on March 12 alone, with European stock markets falling well over 10% on the same day.

It is now obvious that no industry or economic sector will be spared by the impact of the virus.  Notable declines in tourism and airline industries are reverberating across supply chains.  Airline losses are estimated to be near $113 billion with governments mulling an economic stimulus for that industry.

Accordingly, trade flows are down, initially owing to the heavy toll of the virus on Chinese and other Asian manufacturing hubs, but also due to slowing consumer confidence and store closures worldwide.  Initial layoffs in the Port of Los Angeles, the first in the US directly owing to the crisis, have begun while both manufacturing and construction industries are trying to postpone difficult measures.

As businesses close, events are cancelled, and employees are told to stay at home in impacted countries, not only has the now pandemic cause a global downturn, but it’s unclear how long it will last and if it will lead to a recession.  Only recently, Goldman Sachs predicted that the US economy would grow only 0.9% in the first quarter and would not grow at all in the second quarter of 2020.

While the length and severity of the pandemic remains unknown, a fair follow-on consideration is how the global economy will prepare itself for the next crisis, and what the long-term impact will be on global trade flows.

The pandemic has shed a light on rising pre-crisis corporate debt.  Concerns for vulnerably indebted companies and sectors and helped to spur central banks around the world to drop interest rates recently.  Additionally, companies with too much supply chain exposure in China are likely to pursue efforts to diversify their supply chains, likely to other Asian locations or to North America.

As of March 3, 2020, Chinese companies had issued over 4,800 force majeure certificates, stating their inability to meet their contractual obligations with clients.

The need for companies to diversify their supply chain exposure and conduct systematic risk analysis is becoming more and more apparent.  Will there be a shift, and will it help US manufacturers and exporters? As always, the interconnectedness of the global economy makes it difficult to gauge.

While US importers may look to diversify away from China, US exporters to China will no doubt suffer.  Already, some analysts think that China will not be able to meet its obligations to increase purchases of US exports.  It’s possible that North American manufacturers, with a new free trade agreement in place, could present a viable competitor to overseas supply chains that look increasingly risky, post-coronavirus.

Risk is the operative word and what this unfolding pandemic has shown is that preparation and risk assessment are crucial for companies in today’s economy.  A major part of this effort should include proper insurance coverage for a wide range of contingencies.

Securitas Global Risk Solutions (“Securitas”) is an expert in helping companies develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to business in China and other affected countries are rising as are worldwide disruptions to travel and trade as countries scramble to put safeguards in place to stem the spread of the virus.

For companies with overseas operations and business, this latest public health crisis underscores the importance of planning for the unexpected, including an annual comprehensive assessment to properly mitigate the risk of doing business overseas where situations can change quite rapidly.

Like earlier epidemics such as SARS in 2002-2003 and the Ebola outbreak of 2014-2016, efforts to contain transmissions involve a range of decisions to quarantine the sick and minimize human-to-human contact.  This proves particularly difficult in a global economy in which the flow of goods and people are both commonplace and vital, even in areas of the world seen as remote or rural.  Outbreaks raise public concerns and even outright fear in both nearby countries and worldwide, and can lead to political decisions in non-crisis countries to suspend travel or block the transport of some or all goods.  These actions are often sudden and unforeseen, with reaching consequences for complex supply chains.

Stories of the economic impact of Coronavirus are developing.  At present, the disease remains mostly centered in China and that country is expected to see the most drastic economic impact.  Already analysts are predicting both a significant first-quarter economic slowdown and an overall GDP decline for 2020 as many businesses remain closed or people remain at home, especially in the auto-manufacturing hub of Wuhan at the center of the crisis.  With China’s economy already cooling, (GDP fell to 6.1% in 2019 from 6.6% in 2018) it remains to be seen what the impact will be on China’s export-driven growth, particularly electronics exports or its $280 billion per year textile exports.

Companies doing business in China are in a scramble to adjust their operations and specific industries are noting shocks.  American exporters of agricultural products and machinery are already feeling the effects of the slowdown, as China struggles to keep food supply chains open in the face of quarantines and declining consumption.  West Coast port traffic is already reporting a significant decline in traffic. Other notable examples include the cruise ship industry and tourism in general, beset by virus outbreaks on ships and growing travel restrictions. In addition, the luxury goods industry, which enjoys popularity among wealthier Chinese consumers and tourists, is projecting a $40 billion decline in sales in 2020.

The Coronavirus outbreak highlights the need for international companies to engage in a range of contingency planning to anticipate how to adapt business operations in the face of risks such as public health crises, natural disasters, energy shortages, slow or broken lines of communication and political risk.  An entire field of business continuity planning encourages companies to regularly assess operational and financial risk by actively planning and developing working contingency plans.  Proper insurance coverage, just one aspect of this, is crucial so that cash flows and financial obligations can be protected, even in the case of unforeseen breaks in trade.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Officially Launched: U.S. International Development Finance Corporation (DFC)

Officially Launched: U.S. International Development Finance Corporation (DFC)

U.S. International Development Finance Corporation Launches

The end-of-the-year appropriations deal struck by Congress and the Trump Administration brought a number of policy changes offering significant opportunities for U.S. export and investment growth overseas.

A new agency, the U.S. International Development Finance Corporation (called the DFC) began operations on January 2, 2020.  Created by the BUILD Act of 2018, the DFC begins its first year in operation having secured a working $299 million budget for 2020.

Along with the recent seven-year reauthorization of the EXIM Bank, the DFC represents a significant step by the United States in asserting a larger and more capable role in international trade and investment.

What Is the DFC?

The International Development Finance Corporation is a merger of the former Overseas Private Investment Corporation (OPIC) and the Development Credit Authority, formerly housed in the U.S. Agency for International Development, the DFC represents an effort to streamline and bolster American support for private-sector projects in low and lower-to-middle-income countries.

In emerging markets, the role of state-run and multilateral Development Financial Institutions (DFIs) are growing, raising calls for the U.S. to adapt and expand its efforts, while also countering the increasing economic role of China.  While China puts billions into emerging market projects, mainly in infrastructure development, its private-sector development finance role is emerging.  

EXIM Shipping Containers Miami Port

The DFC Brings New Changes

The DFC significantly expands the capacity of the U.S. government to support private-sector-led development projects.  The DFC now has a $60 billion investment cap, up from OPIC’s $29 billion cap.  But unlike OPIC, the DFC has a more explicit mandate to focus on low- and middle-income countries (though waivers can be obtained for high and middle-income country projects that meet U.S. national interest, or that specifically focus on poor and vulnerable populations.)

In addition to adopting OPIC’s debt financing and political risk insurance portfolios, the DFC is now able to fund project feasibility studies and technical assistance grants and can lend in local currency to hedge against currency risk.  The most notable change, however, is the DFC’s new capacity to take an equity stake in investments (Congress approved $150 million for 2020) allowing it to play a stronger role in projects chosen for financing.

The DFC will be allowed to take up to 30% position in any project.  The DFC will also adhere to OPIC’s lending standards for social and environmental risk and impact.  While OPIC was formerly tasked to work with companies that were either U.S. based or included a U.S. partner, the DFC has only a mandate to prioritize U.S. companies. 

Concerns raised since the passage of the BUILD Act in 2018 about the amount allocated for DFC equity investments (considered low), accounting rules about the budgetary treatment of equity investments, and a prohibition on the DFC’s use fees to offset its operating expenses were not addressed in the time between the passage of the BUILD Act and launch of the DFC, but are expected to be raised in the future by congressional supporters of the new agency.

For more information about the DFC, see https://www.dfc.gov/

About Securitas Global Risk Solutions

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop solutions to mitigate credit and investment risk across the world.  As a specialty insurance broker focused on developing trade credit and political risk insurance programs, Securitas is focused on developing solutions that meet the needs their clients.  See our Website at https://www.securitasglobal.com/ for more information, or contact us at:

Telephone: 484-595-0100

Fax: 484-582-0111

 

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EXIM Reauthorized Through 2026

EXIM Reauthorized Through 2026

Exporters Can Pursue Trade Goals with Confidence

Legislation passed just before the end of 2019 has reauthorized the Export-Import Bank of the United States (EXIM) for a seven-year period, until December 31, 2026, the longest authorization in the institutions history.  EXIM reauthorization was part of the nearly $1.4 trillion federal appropriations package passed by Congress and signed by President Trump on December 20, 2019. 

In addition to the seven-year authorization extension, the legislation also includes a process that allows EXIM to continue operations in the event that the bank’s Board of Directors lacks a quorum.  (EXIM’s quorum lapsed in 2015, significantly limiting the bank’s lending operations, and was only restored in mid-2019).   

EXIM’s authorization also includes a number of key policy changes critical to bipartisan congressional support as well as support from the administration.  These include: 

1. A goal of increasing small business exporters participation in EXIM projects, with a target of increasing small business exports to 30% (from the current 25%) of total EXIM supported exports by 2021.   

2. An additional goal for EXIM to reserve 5% of its exposure authority to support renewable energy, energy efficiency, and energy storage technology exports.   

3. A new initiative, called the “Program on China and Transformational Exports” which reserves 20% of EXIM exposure authority to assist American exporters to compete directly with Chinese exports and to assist exporters in innovative technologies, such as artificial intelligence, biotechnology and biomedical sciences, wireless communications, quantum computing and high performance computing, renewable energy, energy efficiency and storagesemiconductor manufacturing, emerging financial technologies, and water treatment and sanitation.  

4. A requirement that EXIM consult with the State Department to assess risk to national interest of any proposed transaction over $25 million in which the end user, obligor, or lender is controlled by, or a business entity of the Chinese government.  

With an extended period of authorization and full financing capacity, US exporters and their overseas clients can more confidently access and utilize EXIM’s services.  EXIM Chair Kimberly Reed noted, ““This legislation ensures EXIM’s authority to support jobs and keep America strong through exports for a long time to come.”  In addition to the initiatives noted above, the EXIM Bank helps support US exports through a range of programs, including guaranteeing loans to foreign buyers, credit insurance and some direct lending to foreign companies. To learn more about the range of products offered by the EXIM Bank, click here. 

As a active EXIM broker, Securitas has years of experience working with ExIm’s various trade credit insurance policies to ensure U.S. companies generate export-driven growth.  In 2015, Securitas was named EXIM Broker of The Year. 

Securitas is ready to help companies, particularly small businesses interested in pursuing an export strategy, learn how to access EXIM’s services. 

Recommended: EXIM News

Reshaping Global Trade

Reshaping Global Trade

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well...

Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to...

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

What the Recent Trade Deals Mean for Exporters

What the Recent Trade Deals Mean for Exporters

Trade Policy Actions Offer Possibilities for Exporters

In the previous week, two trade policy announcements signaled movement on key trade priorities of the Trump Administration.  Both the renegotiation of the North American Free Trade Agreement (NAFTA), now called the US-Mexico-Canada Agreement or USMCA, and the tentative “Phase One” trade agreement between the US and China came closer to finality last week.  Both have the potential to bring about changes in 2020 that could benefit US exporters.

First, on Tuesday, December 10, after months of re-negotiation, the USMCA cleared the last hurdle to US ratification with Congressional negotiators signaling support for a revised draft.

The new draft revises the agreement originally signed by leaders of the three countries in November 2018 and notably includes stronger enforcement measures for worker rights and environmental protections, as well revisions to patent protections for certain pharmaceuticals.

Only a few days later on Friday, December 13, US Trade Representative (USTR) Robert Lighthizer announced completion of negotiations with Chinese counterparts on an “enforceable” first-stage trade agreement with China, mainly covering key areas of agriculture, technology, intellectual property, and financial services.  The agreement stalls an anticipated round of new tariffs on Chinese goods that were set to go into effect on December 15.

USMCA Seeks Stability, Fairness

Efforts to press Mexico for enforceable actions on worker rights and wages, underscore negotiators efforts to create a more level playing field for US manufacturing.  Critics of the 1994 NAFTA agreement claimed it incentivized manufacturing offshoring to Mexico, and failed to improve Mexican incomes and buying power.

In auto manufacturing specifically, the new deal will mandate an increase in the percentage of a vehicle’s value that must be sourced in North American (75%, up from 62.5%), the amount of North American steel and aluminum that must be used (70%), and the percentage of a vehicle’s value must be made by workers making at least $16 an hour.

Despite the new regulations, the American Automotive Policy Council, which represents the Big Three automakers, praised the deal, noting that it “will incentivize a $23 billion increase in US annual parts sales alone.”

As Canada and Mexico are the largest export markets for US agricultural goods, the agreement offers some stability for the sector.  With many Canadian and Mexican tariffs set to end in the new agreement, American producers, specifically in the pork and dairy sectors, are set to benefit.

The agreement ends a period of trade discord between the three countries.  With recent tit-for-tat tariffs set to end and an agreement likely ratified, the USMCA will offer US businesses greater policy stability and a favorable environment for increasing trade flows in 2020.

Overall, a US International Trade Commission report completed earlier this year estimated that the USMCA would increase US exports to Canada by 19.1 billion or 5.9% and to Mexico by $14.2 billion or 6.7%.

Automotive Manufacturers in the Trade Deal

China Agreement a First Step

The US-China agreement comes after nearly two years of disagreement over trade, and is being hailed by the US side as an initial step toward an overall effort to reach final comprehensive trade agreement in the future.  For its part, the US agreed to lower tariffs on an estimated $360 billion in goods from China, and cancelled tariffs on roughly $160 billion worth of consumer goods that were set to go into effect last weekend.

China agreed in return to cancel planned retaliatory tariffs on over 3,000 American products while agreeing to several concessions, such as a promise to stop requiring US companies to hand over proprietary technology to enter the Chinese market.  China has also agreed to buy $50 billion in agricultural products in 2020 and agreed to an additional increase in overall US exports of $200 billion over the next two years.  For example, in 2018, China purchased $9.3 billion in US agricultural products, and an overall total of $120.3 billion in US goods and services.

The US will keep 25% tariffs on a separate list of Chinese goods in place to be discussed in future follow-on negotiations.

US importers, particularly in the computer and retail industries will immediately benefit from the halting of expected new tariffs, which were set to hit Chinese-made electronics, toys, and garments.  For US exporters, the details of China’s pledge to increase purchases of US products remains to be worked out with initial language from the USTR noting broadly that increases will include “manufactured goods, food, agricultural and seafood products, energy products, and services.”

US soybean and pork sales are expected to increase, while US auto parts manufacturers will not be impacted by planned retaliatory tariffs that have now been called off by China.  Leading US exports to China include soybeans, integrated electronic circuits, automobiles, and aircraft.  Importantly, China also has agreed in general to a number of provisions to improve the overall environment of doing business in the country, including improved respect for intellectual property and removal of many existing barriers to its financial services sector.

While these promises are worth noting, China’s record on maintaining its economic commitments are questionable, at best.  USTR has noted that new agreement will be “totally enforceable,” details will become more available as the final text is worked out between the two countries.

Exporting to Mexico, Canada, China:  Tools for Exporters

Both trade agreements will hopefully introduce more certainty into cross-border trade and lead to increasing opportunities for US exporters.

The International Trade Administration (ITA), the U.S. Department of Commerce’s export promotion agency (www.export.gov) offers a range of services from general information about trade, to more detailed market and product data, to seminars and promotional events highlighting U.S. products. The US Commercial Service (USCS) can further provide companies with more tailored and detailed counseling and services – particularly small and medium-sized enterprises.  The USCS can be accessed at www.export.gov/locations while its Philadelphia office is at https://2016.export.gov/pennsylvania/philadelphia/.

 

For More Analysis of Both Agreements See the Following Sources:

USMCA

USTR Fact Sheet on USMCA; and USTR Industry Specific Fact Sheets

Wall Street Journal, “From Farms to Silicon Valley, U.S. Businesses Stand to Gain From USMCA,” December 10, 2019

Washington Post, “The USMCA is finally done. Here’s what is in it.” December 10, 2019

US – China “Phase One” Agreement

USTR Fact Sheet

Wall Street Journal, “U.S., China Agree to Limited Deal to Halt Trade War,” December 14, 2019

Reuters, “Factbox: What is actually in the U.S.-China ‘Phase One’ trade deal?,” December 16, 2019

 

About Securitas

Securitas Global Risk Solutions aids current and potential exporters through political risk and trade credit insurance, as well as a range of financial solutions to help clients protect their foreign sales, increase cash flows, and access global markets more securely and aggressively.

Based in the Philadelphia area, the team at Securitas is prepared to work with clients to understand their export goals and structure affordable risk solutions.  Securitas Global Risk Solutions is located at 900 West Valley Road, Suite 701, Wayne, PA 19087, by phone at 484-595-010, and at www.securitasglobal.com

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100