In 2017 a grand 50 US retailers filed for bankruptcy, including Toys R Us, True Religion and RadioShack, and 2018 is set to be just that much harsher for US malls and high streets, with over 3600 stores set for closure.
Above, Finance Monthly takes a look at 5 of the most anticipated ‘closing downs’ on America’s high streets this year.
While he retains a strong voter base in the conservative heartlands of North America, the Presidency of Donald Trump continues to be defined by an excess of smoke and a seemingly endless hallway of mirrors. Nothing embodies this better than the former real estate mogul's comprehensive tax reform plans, which has been presented as legislation for low and middle-income earners in the US.
While Trump's estimates suggest that the typical American family will receive a tax cut of $1,182, however, it will also offer huge breaks to wealthier citizens and the largest corporations in the US.
In fact, Trump's decision to slash the base corporate tax rate from 35% to just 21% represents the focal point of his proposed reforms, while it has already created considerable opportunities for entrepreneurs and investors alike. Here's how.
How Does Trump's Tax Reform Work and Who are the Initial Winners?
As well as slashing the corporate tax rate in the US by 14%, President Trump has provided sweeping tax reductions for special interests while also lowering the top federal tax rate from 39.6% to 37%.
Interestingly, the commercial tax cuts are permanent and will be sustained for the entire duration of the Trump administration and beyond, until the President's successor proposes his own reforms in the future.
While this will benefit all businesses to some degree or another in the US, those currently paying an inflated level of corporation tax will be the biggest winners. So too will corporations that hold considerable amounts in overseas cash and investments, with both of these tax breaks offering natural advantages to some of the largest and highest earning companies in the world.
Take Apple, for example, who at the time of writing hold an estimated 94% of its $269 billion cash reserves in overseas balances. As a direct result of Trump's tax reform, the CFRA estimates that the technology brand will be ultimately repatriate as much as $200 billion of this capital back into the US, while using the proceeds to buy back stock and boost its bottom line even further.
The same principle can also be applied to companies such as Amazon and Facebook, while JP Morgan analyst Sterling Auty has stated that US-based software stocks will also emerge as the largest beneficiaries of the tax reform. This includes prominent brands such as Intuit and Aspen Technology, who tend to have the majority of their revenue domiciled in the US and boast exceptionally high profit margins.
How will this Influence Investors?
Traders may be looking to take advantage of those companies that have benefited from the reforms, of course, and fortunately Trump's legislation has provided clear and obvious benefits for corporations that meet certain criteria relating to their business model and infrastructure.
More specifically, there should be a clear focus on companies that boast significant cash holding overseas, as well as those that have naturally high profit margins.
This includes a large majority of businesses in the vast and diverse technology sector, with brands such as Apple able to leverage their infrastructure, international reach and inflated margins to benefit significantly from Trump's multi-layered tax reform.
A rapid ramp-up of European banks' bail-in buffers is critical because the authorities' ability to support failing banks is now heavily constrained, S&P Global Ratings said in a new report, "The Resolution Story For Europe's Banks: The Clock Is Ticking."
"The UK, Switzerland, and Germany aside, European banking systems today typically lack the sizable buffers of subordinated bail-in instruments that could avoid bailing-in senior unsecured instruments if a systemically important bank fails," said S&P Global Ratings credit analyst Giles Edwards.
Three years since bank resolution regimes were created in most European countries, banks in the region continue their long march from bail-out to bail-in—and many will still be on this road for years to come. After all, making large, complex banks truly resolvable is no mean feat, particularly for those that start with minimal bail-in buffers.
Furthermore, the EU's resolution authorities have a tougher task than most--whereas the U.S. and Swiss authorities are acting on only the most systemic banks, their EU counterparts must set MREL (minimum requirement for own funds and eligible liabilities, which is the regulatory bail-in buffer) for all banks and lay the complex groundwork to enable a bail-in resolution for even midsize banks.
In S&P Global Ratings' view, the EU has achieved much in a short time by strengthening its crisis management framework for the financial sector. And the framework has had a positive impact on our ratings on European banks. Under regulatory requirements, European banks that are not global systemically important banks still have plenty of time to build their buffers, though these may start to look less comfortable as we progress through 2019.
Resolvability cannot be achieved overnight, and we do not underestimate the scale and complexity of the task in the European banking union in particular.
"Yet looking back at 2017, we saw more limited progress in some areas than we had expected, notably in the setting of banks' MREL," Mr. Edwards said.
Bail-in buffers aside, we also note that bank resolution actions could still be undermined if solvent banks cannot access sufficient liquidity in resolution--a topic that has become an imperative to address.
(Source: S&P Global)
Penningtons Manches recently revealed that British companies are enjoying an unprecedented period of investment from West Coast-based US firms, with 74 deals contributing to a total value of £1.08 billion in 2017 – the first time Silicon Valley investment into the UK has broken the billion-pound mark.
The new report from Penningtons Manches, Golden Gate to Golden Triangle, finds that software companies take the lion’s share of this investment, benefiting from £2.2 billion in funds since 2011. The number of deals from Silicon Valley into UK firms has increased by 252 per cent over that period.
Many of these companies are based in the UK’s Golden Triangle - between 2011 and 2017, 79% of all US investment into UK firms went to those based in the area that includes London, Oxford and Cambridge.
Life science firms were the second most invested in, taking £472 million from West Coast investors since 2011, with hardware companies and medical tech following with £207 million and £58 million respectively.
West Coast investors may have been involved in more deals, but the research found that East Coast investors have provided more capital. They invested £1.31 billion into UK companies in 2017. Between 2011 and 2017, the total number of deals by East Coast investors into UK companies rose by 48% from 29 to 56.
The investment reflects a wider trend of inward investment into UK companies which is seeing a rise across the board. Despite concerns about Brexit, the report unveils a 62% increase in foreign investment into UK firms in 2017, a third of which were by North American investors and a quarter by those in the United States. Investors from outside of the UK were involved in £5.9 billion worth of deals, a 187% rise on the previous year and eight times the amount in 2011.
James Klein, Partner at Penningtons Manches, comments: “We are delighted that the findings from the report reveal such appetite from West Coast investors to nurture Britain’s most innovative, high potential firms. Penningtons Manches has a long history of working with technology firms, their innovators and their investors, and we launched our San Francisco office to better support our growing client base in the Bay area and to develop meaningful connections between our US clients and the fast-growth tech businesses in the UK that we represent. We look forward to supporting this continued interest from US investors into the future.”
The report also sheds light on the reasons that UK firms seek US investment. From a survey of British firms considering US investment, the top reasons for looking West are:
- Greater access to US markets – 83% of non US-backed firms cited access to markets as a reason to take US investment;
- Existing relationship with investor – 48% of UK companies who have already done deals with US-based firms said that their primary driver for taking more US investment was their existing relationship with their investor;
- Technical expertise of investor – 46% of non US-backed firms firms cited this as a reason for seeking US investment;
- Favourable investment climate – 44% of non US-backed firms cited this as a reason to take US investment.
The report also finds that Brexit has had a mixed impact on US investment into UK firms. Despite the fact that devaluation of the pound has reportedly created a surge of British exports since Brexit, the research finds that companies that have raised smaller amounts are more likely to believe it has had a beneficial impact: 100% of British companies surveyed who have raised between £100,000 and £500,000 believe currency fluctuations have been beneficial, but only 42% of those raising £1 million - £5 million felt the same.
(Source: Penningtons Manches)
Investors should expect an increase in market volatility and ensure that they are properly diversified, warns the senior analyst at deVere Group.
The warning from Tom Elliott, International Investment Strategist at deVere Group, comes as US President Donald Trump announced Tuesday that the United States will exit the Iran nuclear deal and impose “powerful” sanctions.
Mr Elliott comments: “Investors should expect an increase in market volatility following Trump’s announcement that he is quitting the Iran nuclear deal.
“There will be global stock market sell-offs as the world adjusts to the news.”
He continues: “Due to the severity of the US President’s approach, in the shorter term at least it is likely gold and the US dollar may rally on growing fears of further conflicts in the Middle East breaking out; and risk assets, namely stocks and credit markets, may weaken. Oil may rally strongly.
“We will need to wait for the full Iranian response. However, I expect that they will try to continue to appear the reasonable partner and work with Russia and the Europeans, playing them off against the US If they take a more aggressive stance, oil, gold and the dollar will go considerably higher.”
Mr Elliott concludes: “Geopolitical events such as these underscore how essential it is for investors to always ensure that they are properly diversified - this includes across asset classes, sectors and geographical regions – to mitigate potential risks to their investment returns.”
Finance professionals in the UK and across the globe will have been keeping their eyes on the ongoing developments at Facebook and assessing the business implications emerging from the aftermath of the Cambridge Analytica furore. Earlier this month, Facebook Founder and Chief Mark Zuckerburg appeared before Congress in the US to discuss his company’s activities and the alleged misuse of personal data. It proved a fascinating glimpse into the inner workings of Facebook and shone a light onto how we, as individuals, are ‘willingly’ sharing our data with platforms. The truth of the matter is, not everyone understands the process and benefits such as data sharing can bring - not just to the technology industry, but a variety of sectors and stakeholders from retail to finance, and to both advertisers and consumers.
Despite the guidelines on sharing third party data of thekrogerfeedback for winning $5000 that are already in place, the issue has called into question whether the practice requires further regulation so that lawmakers, industry regulators, advertisers, publishers, financiers, brands and consumers alike are clear on how and when it is acceptable to share personal information.
Facebook is in an unusual position where increased regulation in its platform would likely benefit its business. In fact, it has even welcomed closer regulation on social media, and has offered to develop further thoughts on self-regulation. The social media behemoth has the infrastructure to absorb any impact increased regulation would have on its business, but is this true of its competitors?
Publishers such as Facebook have a choice of how they use their own data, but everyone involved in the industry, including financiers, should be striving for transparency, choice and true customer centricity. Increased regulation is there to protect the consumer in the event of malpractice, bad actors or misuse of personal data. This is a unanimously positive move, and those who put their customers first will continue to survive and thrive.
Our world is becoming more and more data-driven. The opportunities to leverage this data are plenty and benefit all parties, but they need to be done in an ethical, privacy-compliant way that assists the customer rather than exploits them. Greater clarity and regulation that focuses on eliminating the latter - and not inhibiting the former - should be welcomed with open arms by all stakeholders.
Facebook has a wealth of personal data that is volunteered by its members - in effect creating the largest identity graph in the world today. Regulation has to ensure that Facebook - as well as any others in the publisher community - is transparent with how that data is collected and used. To this extent, the impact of regulation should be to create a level playing field and promote the democratisation of data.
The challenge comes when advertisers decide where to spend their budgets. Marketers have more choices than ever and can reach consumers in thousands of places online. The use of third-party data both inside and beyond Facebook’s walls is the means to providing that choice. The alternative is for Facebook to monopolise targeted advertising, which would be bad for the industry as a whole.
If advertisers want to allocate their spend across multiple publishers and platforms, it makes sense to be able to leverage standardised data models and apply them everywhere, rather than building custom models across every touch point. LiveRamp enables this neutrality and agnosticism, and provides a secure and privacy compliant connection to any destination platforms an advertiser wishes to use.
Advertisers’ data is one of their most valuable assets, and they need to be comfortable when sharing it with platforms and publishers like Facebook. More stringent regulations concerning personal data can serve to give advertisers the peace of mind that their data is secure, and allow them to confidently demonstrate its ethical use whenever called upon to do so.
This can only work if data providers source and govern their data in ethical, privacy-compliant ways. The best models and experiences draw from multiple ethical data sources working together, all with the best interests of the customer at heart.
Advertisers need to look out for themselves, their customers and their own data. They should seek to adhere to ethical practices and work only exclusively with experienced and ethical partners.
I believe increased regulation has the potential to benefit not only Facebook but also its competitors. Increased transparency in any industry, be it the financial or tech sector, should make it easier for businesses and consumers to connect and interact, unlocking additional value for both. Regulation, if designed and imposed correctly, can help consumers hold greater control of how their data is used while allowing businesses to use it more responsibly and efficiently.
With over 15 years’ experience assisting US individuals to navigate the complexities of the US and UK tax legislation, James Murray is currently a Director at Frank Hirth. James has a focus on those international US citizens and Green-card holders who have an interest in a non-US structure including those in the asset management sector.
Frank Hirth has over 140 tax professionals across London, New York and Wellington providing US and UK tax compliance and advisory services to individuals, partnerships, trusts and companies. Most technical staff are fully qualified to ‘dual handle’ both regimes, to provide global tax efficiency. Established over 40 years ago Frank Hirth is recognised as the leading tax accounting practice for assisting with international US tax matters outside of the US.
What are the headlines from recent US tax reform?
The main headline of President Trump’s Tax Cuts tellgamestop Jobs Act 2017 (‘tax reform’) signed into law in December 2017 was very much in the corporate arena with a reduction of the Federal tax rate from an eye watering 35% to a more globally competitive 21%; as well as a move to a territorial system of taxation for US companies.
Individual US citizens, greencard holders and residents continue to be subject to US Federal tax on their worldwide income, irrespective of where they physically reside. The top Federal tax rate has been reduced to 37%, however, they have also withdrawn a number of favourable deductions that were previously available – resulting in only a marginal change in the effective tax rate in many cases.
Unfortunately, some of the changes targeted at US corporations have had what may have been unintended, and certainly unexpected, results for our international US clients who have business interests overseas.
In what way has it impacted Americans doing business outside the US?
These changes can result in certain income within non-US companies being attributed to the US shareholders on an arising basis for US personal tax purposes, as opposed to upon receipt of funds by way of dividend. As a consequence the US and UK tax points and character may not align and therefore can result in double taxation.
We are already seeing that this will require those US individuals with a certain level of interest in a UK company needing to reconsider how to best structure their business and the best strategy for extracting funds tax efficiently.
Has there been a change in the number of Americans living in the UK as the result of the reform? Why is this?
It is too early to tell or measure, particularly given the general uncertainty in the UK with Brexit. Over the last few years there has been a general increase in the number of US citizens choosing to relinquish their US citizenship although again this may be down to several factors. For instance, the implementation of FATCA has been instrumental in identifying those US individuals living overseas who may not have appreciated the tax implications of holding such a status.
Do you have any advice for American taxpayers residing in the UK?
Yes. The key is to ensure that high quality, joined up advice is sought as soon as possible. Navigating two very complicated tax regimes is a challenge and mitigating double taxation is vital. There are a number of anti-avoidance and anti-deferral measures within both the US and the UK legislation which, without the appropriate guidance, can lead to mismatches and other issues. This is even more apparent for long term UK residents following the changes to the UK deemed domicile rules that became effective 6 April 2017 as they can no longer access the UK’s remittance basis.
Managing the US and UK tax systems requires a deep understanding not only of each jurisdiction’s legislation, but most importantly how they interact with one another, including the use of tax treaties. There are many myths out there that can often be dispelled following discussion with an expert. We find that more than ever having tax advisors working closely and collaborating with wealth managers and lawyers often results in the client obtaining rounded, and not siloed, guidance as to how best manage their affairs.
Are there any substantial changes you anticipate in the future, good or bad?
Many of the US tax reform changes are due to sunset in 2026 and so are not permanent. It will be interesting to see what, if any changes occur, especially if the US administration changes. At present there has been no indication that any amendments will be passed to correct errors. There will however be increasing pressure to do so.
With the ongoing spat between the United States and China, which seems to be only getting uglier, Katina Hristova explores the history of trade wars and the lessons that they teach us.
Trade wars date back to, well, the beginning or international trade. From British King William of Orange putting steep tariffs on French wine in 1689 to encourage the British to drink their own alcohol, through to the Boston Tea Party protest when the Sons of Liberty organisation protested the Tea Act of May 10 1773, which allowed the British East India company to sell tea from China in American colonies without paying any taxes – 17th and 18th century saw their fair share of trade related arguments on an international level.
Boston Tea Party/Credit:Wikimedia Commons
Trade wars were by no means rare in the late 19th century. One of the most infamous examples of a trade conflict that closely relates to Donald Trump’s sense of self-defeating protectionism is the Smoot-Hawley Tariff Act (formally United States Tariff Act of 1930) which raised the US already high tariffs and along with similar measures around the globe helped torpedo world trade and, as economists argue, exacerbated the Great Depression. As a response to US’ protectionism, nations across the globe began striking each other with an-eye-for-an-eye tariffs – countries in Europe put taxes on American goods, which, understandably, slowed trade between the US and Europe. As we all know, the Depression had an impact on virtually every country in the world – resulting in drastic declines in output, widespread unemployment and acute deflation. Even though most countries began to recover between 1932 and 1933, the world was hit by World War II shortly after that. In 1947, once the war was over, the World Trade Organisation (WTO) was established - in an attempt to regulate international trade, strengthen economic development and hopefully, avoid a second global trade war after the one from the 1930s.
Schoolchildren line up for free issue of soup and a slice of bread in the Depression/Credit:Flickr
Another more recent analogy from the past that could be applied to the current conflict between two of world’s leading economies, is the so-called ‘Chicken War’ of 1963. The duel between the US and the Common Market began when European countries, feeling endangered by US’ new methods of factory farming, imposed tariffs on US chicken imports. For American poultry farmers, the Common Market tariffs virtually meant that they will lose their rich export market in West Germany and other European regions. Their retaliation? Tariffs targeting European potato farmers, Volkswagen campers and French cognac. 55 years later, as the Financial Times reports, the ‘chicken tax’ on light trucks is still in place, predominantly paid by Asian manufacturers, and has resulted in enduring distortions.
President Trump may claim that ‘trade wars are good’ and that ‘winning them is easy’, but history seems to indicate otherwise. In fact, a closer look at previous examples of trade conflicts seems to suggest that there are very few winners in this kind of fight.
For now, all we can do is wait and see if Trump’s extreme protectionism and China’s responses to it will destroy the post-World War II trading system and result in a global trade war; hoping that it won’t.
In 2018, we are witnessing the emergence of a new kind of atmosphere in the recovering oil markets. With an impending trade war between two of the world’s biggest economies on the cards, the impact of geopolitical uneasiness has never been greater. Prices have been volatile thanks to swings in oil supply and now geopolitics has created a scenario of uneasiness in one of the economy’s best performing assets.
Even though a sharp 5% rebound last month pacified stakeholders, worry looms that the US’s protectionist trade policies are only pushing China to impose further reciprocative tariffs, fueling a trade war. In addition to this, the US’s role in the Iran nuclear deal and an ever increasing American crude production (over 10 million barrels a day) gives the current market all the characteristics of an imbalance. Then there is the case of OPEC, Russia and other non-OPEC producers that began to cut back production in early 2017 to ease the global glut accumulating since 2014. Where weak compliance in the past marred any significant impact on price, stronger compliance between the cartel this year appears to be bearing fruit with production at its lowest in months, however, growing tensions in the Middle East and a potential global supply-demand deficit could see the price-check contract dissolve earlier than expected.
In the highly volatile oil market, it is difficult to allocate any single catalyst to oil price movements; more often it is many catalysts working together. That said, a weak dollar, followed by geopolitical pressures in Syria, North Korea, Iran, China and an economic crisis in Venezuela, are all surprisingly giving oil the much awaited upward push, with prices peaking to a 3-year high and Brent crude finally breaking the $70 psychological mark. Interestingly, the recent Twitter feud where President Donald Trump warned Russia to prepare for a possible US missile attack on Syria has brought forth the impending reality of potential supply disruptions in the Middle-East, driving the prices to all-time highs. All this happened despite US Government data reports pointing out an unexpected rise in crude stockpiles.
Oil prices have now almost tripled the harrowing 13-year low of $26 in January 2016. Five months before that, prices were around $60. In July 2014, they had been $100, in 2011 they were $113 per barrel for Brent crude. The market dynamics have since evolved enough to cause larger fluctuations in price in the short-term, however, the long term picture is still obscure and it is hard to say if prices will go back over $100 in the coming years, though many analysts hold quite a positive outlook.
With the US oil production set to rise further in the coming months, the current market’s long-term outlook appears well supplied, a fact likely to hinder any further significant price growth of the current rally, however more short-term price spikes are quite possible considering the high probability of military action in Syria.
The key indicators for any commodity market begin at the supply-demand ratio, keeping this in mind, a number of analysts have pointed out that the increase in oil supply from US shale producers has not pushed the global supply-demand balance into surplus as previously expected, hinting at a deficit similar to the one we saw in 2011. As demand has continued to grow steadily and with production cuts undertaken by the largest oil producers in the world, we have slipped into a deficit which could potentially widen.
Even as prices recovered and US shale producers accelerated their production output, in the current
market scenario, it is quite unlikely that this alone will be enough to bring balance to the global market. While some analysts assert that OPEC will likely intervene and increase production to correct the deficit, others have claimed that given the enormous economic growth and increasing demand from large Asian countries like China and India, even OPEC will not be able to satiate demand as their output capacity is simply not enough. This also reflects the intricate position that OPEC is currently in, it could decide to cut outputs or shift towards a higher output position, both of these options carry significant risks. But we already know how important higher oil prices are for OPEC, that despite proxy wars between Saudi-Arabia and Iran in Yemen and Syria - we have strong compliance from OPEC members so far. At the same time, the unrest in the Middle-East is likely to help prices flare up, as evident in the recent spike during unsuccessful missile attacks by Iran-aligned Houthis aimed at Saudi Arabia's oil facilities. The OPEC deal runs until the end of the year and the cartel will meet again in Vienna in June to decide its next course of action.
In the longer term, there are many possibilities and sides to the story, though some stark characteristics can be set aside due to their paramount importance. Geopolitical factors and sudden financial shifts, in my view, play a major disturbance in predicting a linear development of the oil industry. Given the capital-intensive nature of the oil business, any investments in new production capacity or any change in production can take a long time. There are also a certain numbers of inelastic factors, for example capital intensity and the high ratio of fixed to variable costs in all parts of the supply chain. The price inelasticity along with advancements in technology have long been cited as the leading factors for the oil industry’s inability to conjure self-adjustment mechanism.
Keeping this in mind, we can observe that while OPEC anticipates global reserves to drop further with more output from rivals while expecting even higher global demand. The International Energy Agency (IEA) claimed that by 2023 the US will become self-sufficient due to scaled up shale production, potentially becoming one of the world’s top oil producers. They also claim that demand for crude oil from OPEC will drop below current production levels within a year or two.
Which one of them is right remains to be seen but it is quite certain that the next few semesters will be crucial for the oil market which currently appears to have all the symptoms of steady turbulence.
About Guild Capital Partners Ltd.
Guild Capital Partners Ltd., is a boutique financial services firm headquartered in Mayfair, London specialising in debt restructuring and privatisation solutions.
Founded in 2014 by financial expert and entrepreneur Marco Quaranta, the firm is led by an experienced team of senior professionals noted for their investment acumen, financial services expertise, and ability to execute complex transactions in the dynamic and highly regulated financial services sector.
Operating through decades of experience, the team specialises in evaluating solutions for Mergers & Acquisition deals, navigating regulatory scenarios and partnering with banks and other financial institutions to help build stronger and more valuable enterprises for their clients.
There has been a lot of recent news regarding trade tariffs, as America and China impose a number of greater tariffs on a wide range of each other’s goods. Is this all political showboating though, or do they actually have an impact?
Trade tariffs were introduced to increase the ease and competition, while decreasing the costs of shipping goods abroad. This has been a great source of growth for international business and globalisation, yet there are concerns that it isn’t always beneficial to everyone involved.
The Role of Trade Tariffs
According to the World Trade Organisation (WTO), trade tariffs are customs duties or taxes on merchandise imports. This provides an advantage to locally produced goods over those which are imported therefore, while those sourced from abroad help raise greater revenues for governments. Countries can set their own trade tariffs and change these when desired, though this can result in tense political situations when tariffs are called into question.
Trade tariffs are used to protect developing economies and their growing industries, while they can be used by advance nations too. These are a few common roles for trade tariffs:
- Protect jobs: Imported goods can threaten domestic jobs and industries, especially if they’re produced cheaply abroad. Domestic firms may then cut jobs to save on costs, with higher unemployment leading to political unrest. Trade tariffs can be used to create a more level playing field.
- Consumer concern: Especially when importing foodstuffs, if one country is worried certain products may be contaminated they can levy a tariff to reduce the risk.
- Political retaliation: When countries believe trading partners haven’t been fair, played by the rules or there are other political differences, they can increase tariffs. This could mean the other nation then retaliates by levying tariffs too. If tensions ease off, then it’s likely any increases will be reverted.
There are many examples throughout history where trade tariffs have been used in many such ways, and they’re still being implemented as political weapons today. That alone suggests that they do work.
Price Impact
In the simplest terms, trade tariffs increase the price of imported goods. It means that domestic companies don’t need to increase their prices to compete, though this does allow some businesses that wouldn’t exist in a more competitive market to continue running. Without trade tariffs it would be something of a free border for goods, that could see high levels of unemployment in some countries with low production levels.
Trade tariffs can also be used to help limit volume too, by raising them to tempt consumers to stick with domestic goods and slow down the amount being exported if businesses are priced out. The higher the tariffs the less likely businesses in overseas countries are likely to export.
Benefits of tariffs can help governments raise revenues, especially in times of need, while for domestic companies they benefit from less competition. When tariffs are levied many domestic businesses can really benefit in these times. However, for consumers and businesses that rely on importing certain materials or goods, such as steel for production, the price can become inflated due to tariffs. There are constant shifts in benefits, with consumer consumption often lowered with higher tariffs for the short term, for example.
America’s Trade War
The changing global economy means that businesses need to implement key strategies to deal with such shifts, as explained by RSM. A great example of how the global economy is changing is with a step towards deglobalisation, best demonstrated by President Trump’s ideas of protecting and improving US manufacturing by adapting tariffs and effectively starting a trade war with China.
This started in early March 2018 when the USA imposed a 25 per cent tariff on the imports of steel entering the country. Such a move was designed to protect the US steel industry but has impacted upon the stock market and China, along with over 1,000 more tariffs, which is the USA’s biggest trade partner.
However, history has shown that trade wars for the USA aren’t always successful, with one in the 1930s excelling the Great Depression to increase unemployment levels to 25 per cent of the country. Whether this latest attempt works or not remains to be seen. Either way, businesses need to employ flexible strategies to prepare for many of the globalisation issues which could affect or destabilise the world’s economy in the future.
With current trade ‘talks’ with China, the US in a not in a great position money wise. According to Congressional Budget Office the US is heading for an annual budget deficit of more than $1 trillion (£707bn) by 2020, on the back of tax cuts and higher public spending.
Although these measures may bring ease to the current economic climate, it’s predicted they will exacerbate long term debt. The Congressional Budget Office believes such debt could amount to similar historical depths, such as World War II and the financial crisis.
This week Finance Monthly asked the experts Your Thoughts on the prospects of long-term debt in the US, and here’s what you had to say.
Andy Scott, leading UK serial entrepreneur and property developer:
With growth and confidence at record highs, unemployment low, and at best guess being mid-point through the economic cycle, Trump should be fixing the roof of his house while the sun is shining for the benefit of his children's generation and beyond. The temptation to focus on voter incentives to win a second term in November 2020 and to try out his unproven trickle-down policies for the few, seems short sighted from the President.
With a trade war underway, it appears banking on increased growth and mass job creations from tax cuts, whilst not tightening the already loose belt elsewhere, and not paying as you go, seems at best optimistic and at worst, reckless.
Deficits are nothing new, having run one every year since 2002. However, what should concern those of us with hopefully 30-40 years left on planet Earth is that even the most upbeat forecasts - taking into account no impact from any external factors (which seems highly unlikely given the confrontational leadership style) - show that not only are we heading for the trillion dollar deficits, but they are likely here to stay, and become the norm over the next decade. A legacy surely no one wants to be remembered by?
The US should think more long term otherwise the next generation will be burdened with more debt meaning lower growth, more tax, reduced services, higher inflation and ultimately fewer employment opportunities.
Josh Saul, Investment Manager, The Pure Gold Company:
Whilst there are clear and obvious benefits to having tax cuts with higher spending such as driving economic growth over the short-term, the question we should ask is, at what cost? the problem is that we are kicking the can down the road.
The Pure Gold Company has seen a 74% increase in US nationals investing in gold this year compared to the same period last year citing fears that escalating US debt will in the long run make the US and it’s economy vulnerable to fiscal shock. Our clients are concerned that given the high debt to GDP ratio, the US may have problems paying back its loans and this could increase the interest that the US will have to pay for the amplified possibility of default. The issue here is that the US having to pay more interest further accelerates the debt problem and with the dollar in the firing line – repeat problems like the current trade war with China put the US on the back foot. Our clients who are currently purchasing gold are concerned that over the next 20 years the social security trust fund won’t cover retirement benefits and the US will have to raise taxes and curtail benefits in order to cover various short-term monetary requirements. Incidentally this notion of escalated debt has doubled since 1988 and if you look at the gold price – that’s increased by 200%.
Our clients do not necessarily look at their investment having grown by 200% but instead it takes more currency to purchase the same ounce of gold. Therefore, our clients purchase gold to maintain their dollar’s purchasing power and with the US debt being the highest in the world they are not merely looking at the next 4 years but instead the next 10 – 20 years.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Beijing recently retaliated the US’ extensive list of around 1,300 Chinese products it intends to slap a 25% tariff on.
The White House claims the intentions surrounding these tariffs are to counter the ‘unfair practices’ surrounding Chinese intellectual property rights.
In response, China has escalated the trade war to an extent none expected, targeting over 40% of US-China exports.
However, the question is, will these tariffs, from either side, affect the backbone of their nation’s economy? What else might be impacted in the long term? This week’s Your Thoughts hears from the experts.
Roy Williams, Managing Director, Vendigital:
In order to mitigate the impact of tariffs and maintain profitability, it is essential that businesses with global supply chains give thought to restructuring their operational footprint and where possible, pursue other market or supply chain opportunities.
With China warning that it is ready to “fight to the end” in any trade war with the US, UK businesses should be in preparing for a worst-case scenario. In addition to China’s threat to tax US agricultural products, such as soybeans being imported into the country, the EU has warned that it may be forced to introduce tariffs on iconic American brands from US swing states, such as oranges, Harley Davidsons and Levi jeans.
In order to minimise risk and supply chain disruption, businesses that trade with the US should give careful thought to contingency plans. For example, importers of US products or raw materials should review supply chain agility and may wish to consider switching to alternative suppliers in parts of the world where there is less risk of punitive tariffs.
On the other hand, for exporters from the UK looking to reduce the impact of tariffs, it will be important to focus on the cost base of the business and consider diversifying the customer base in order to pursue new market opportunities. To a certain extent, this is likely to depend on whether businesses are supplying a commodity item, in which case the buyer will be able to switch to the most cost-effective source. If a buyer does not switch it may indicate they have fewer supply options than the supplier may have thought.
Businesses with products involving high levels of intellectual property and high costs to change are likely to hold onto their export contracts. However, they could face negotiation pressure from their customers. They should also bear in mind that barriers to change will be lost over time and customers can in almost all cases find alternatives, so preparation is key.
Access to reliable business management data can also play an important role in mitigating risk; helping firms to identify strategic cost-modelling opportunities and react swiftly to any new tariffs imposed. In this way, enabling businesses to access real-time data can help them to continue to trade internationally, whilst keeping all cost variables top of mind.
While a trade war would undoubtedly introduce challenges for businesses with global supply networks, it could nevertheless present opportunities for those that are well prepared. For example, with prices of Chinese steel likely to fall dramatically, UK importers of steel could consider striking a strong deal before retaliatory trade measures are introduced.
George S. Yip, Professor of Marketing and Strategy, Imperial College Business School, and Co-Author of China’s Next Strategic Advantage: From Imitation to Innovation:
The US has had huge trade imbalances with China for years. So why retaliate now? Yes, President Trump is a new player with strong views. But it is no coincidence that the US is finally waking up to the fact that China is starting to catch up with it in technology. This catch up has many causes:
- The huge investment by the Chinese government in fundamental and applied science and technology. For example, China now has the world’s largest supercomputers and its many declared science objectives include dark matter, artificial life, and nanoscience.
- The return to China of Western trained scientists, lured by both government incentives and economic opportunities. For example, Royole, a Chinese world leader in flexible display was started by Bill Liu, a Stanford PhD in electrical engineering, who chose to return to China to set up his new company partly because of the massive presence of automakers, a primary customer group.
- Chinese companies have learned from their Western joint venture partners, partly because of the enforced transfer of intellectual property to which President Trump is objecting. The sky is literally now the limit for China, having launched a mid-sized passenger jet to compete with Airbus and Boeing.
- China’s huge home market as well as its enormous exports now support investment in R&D that can be rapidly monetised via commercial products. Even Japan, in its heyday, failed in its attempt to challenge Airbus and Boeing.
- Chinese companies are now using their financial power to acquire Western companies for their technology. For example, in 2016, Midea acquired Kuka, one of Germany’s leading robotics companies, much to the anguish of the German government. The economic ideology of most Western governments means that Western technological crown jewels are mostly unprotected from foreign acquisition.
So, it is no surprise that the US tariffs apply mostly to technology-based Chinese exports such as medical devices and aircraft parts. In contrast, China is retaliating with tariffs primarily on US food products. While such tariffs will hurt politically, they will not hurt strategically.
Rebecca O’Keeffe, Head of Investment, interactive investor:
President Xi’s speech overnight appears to have struck the right tone, providing some relief for investors who have been buffeted by the recent war of words between Trump and China over trade. While there was already an overwhelming sense that Chinese officials were keen to achieve a negotiated settlement before the proposed tariffs do any lasting damage to either the Chinese or US economies, today’s speech was the clearest indication yet that China is prepared to take concrete steps to address some of Trump’s chief criticisms. The big question is whether President Trump will now take the olive branch offered by Xi’s conciliatory approach and dial down the rhetoric from his side too.
Corporate profits have taken a back seat to trade tensions and increased volatility over the past few weeks, but as the US earnings season starts in earnest this week, they will take on huge significance. Equities received a huge boost when the US tax reform bill was signed into law in December and investors will want to see that this is feeding through to the bottom line to justify their continued faith. A good earnings season would do a lot to regain some equilibrium and provide some much-needed relief and calm for beleaguered investors.
Richard Asquith, VP Indirect Tax, Avalara:
Last week’s Chinese tariff escalation response to the earlier US import tariffs threat was far stronger than many would have expected. It now looks likely that the world’s two most powerful countries, and engines of global growth, will enter a tariff war by June.
China’s retaliatory tariff threat last week is targeting products which account for about 40% of US exports to China. However, the US had only singled out Chinese goods accounting for 10% of trade. This makes the next move by the US potentially highly self-harming since, if it matches China, it will mean big US import cost rises on foods and other key Chinese goods. It will also mean less vital technology access for China.
The Chinese have also shrewdly singled out goods produced in the Republican party’s heartland constituencies. This will close the US government’s options on further measures. The Chinese have also refused to enter into consolation talks in the next few weeks until the US withdraws its initial tariff threats. This type of climb-down is unlikely to be forthcoming from the current US administration.
Whatever the outcome, China is now seeking to paint itself as the champion of globalisation and liberalisation of markets. It has already offered lower import tariffs on cars, taking the sting out of US claims of unfair protections to the domestic Chinese car producers.
This all means that we are in a stand-off, and the proposed tariffs from both sides are locked in for introduction in the next two months. This could be hugely damaging for a global economy recovery that is, after many years turgid performance, looking very positive. Global stock markets are already in flight at the prospect of no quick resolution and the fear of a reprise of the calamitous 1930s Smoot–Hawley Tariff Bill escalation.
We now have to see which side will blink first.
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