Global Trades

Over the past couple of years, the US and China have been engaging in a trade war. While neither party has been openly aggressive, both parties have been pushing and vying for dominance. Then came talk of a trade deal between the two titans that many hoped would calm markets and allow the world economy to push forward with business as usual. This trade deal has been on and off the table repeatedly, sending global markets swinging wildly. But in January 2020, the trade deal, or at least the first phase of it, was signed.

But what does it entail and is it really going to change the status quo or is it just a tool to comfort world markets while the two titans continue their “tug of trade”? In this article let’s look at some of the biggest winners and losers of the US-China Trade Deal.

The Winners

Donald Trump – Trump is a clear winner in this whole drama. He can now claim that he’s settled the trade war and approach the 2020 election with yet another feather in his hat. Most Americans do actually agree that China trades unfairly, but also generally support free trade and are against tariffs. In fact, the Republican Party’s loss of seats in congress in 2018 can be attributed to the trade war and tariffs.

Xi & China – The Chinese president Xi Jingping and the Chinese government as a whole could possibly be the biggest winners of the US-China Trade Deal as they’ve largely agreed to terms that they themselves offered the US, earlier on in the process. This includes loosening market access to US financial and car firms. Xi Jingping and the CCP have also saved face in having not simply “bowed-down” to the US’s demands.

Emerging Markets – Whilst tariffs have been halved on over 120 billion dollars’ worth of goods, most of the higher duties which affect upwards of $360 billion of Chinese goods and $100 billion of US exports to China, remain in place. This will continue to fuel the boom in emerging markets such as Vietnam, Taiwan, Mexico and others as manufacturers look to economize and take advantage of transhipment arrangements. Many believe, Vietnam will emerge as the biggest winner.

The Losers

Farmers and Manufacturers – Under the new trade deal, China is expected to boost purchases in manufacturing, services, agriculture and energy by $200 billion from 2017 levels over two years. But it’s doubtful as to whether these figures will be achievable. China has also stipulated that this increase is dependent on “market demand” so, who knows. US farmers have been heavily impacted by Chinese tariffs and many have entered bankruptcy, prompting a federal bailout.

Average Americans – Manufacturers hit by tariffs are being forced to reduce their workforces. In the long-term, the US may likely reroute supply chains to avoid China altogether, but that is an expensive endeavour. An expense that will have to be borne by everyday Americans.

China Critics in Washington – For years groups and individuals in Washington have been crying foul about China’s business practices. But under the trade deal, China has agreed to new protections for intellectual property and both parties have agreed on a mechanism to resolve disputes arising out of intellectual property infringement, amongst other issues. In fact, failings in this area were one of the triggers of the trade war. But who’s to say if these commitments are any different to commitments China has made and reneged on in the past.

Still, with things appearing to be settled, there is less for China critics to harp on about and, presently, it seems like they may need to otherwise occupy themselves.

Will it Last?

There is no way to say for sure. However, some kind of understanding between the two global titans is better than no understanding at all. Given the track record of both sides, though, it is reasonable to assume that either the trade deal will continue with some tension or completely fall apart at some point. Either way, as always with geopolitics and global trade, there will be winners and there will be losers.

The world is helplessly watching as India’s COVID-19 situation deteriorates. While the loss of life and disruption to ‘everyday India’ is tragic in and of itself, the economic ramifications of the second wave could also be significant.

Business Activity Back to August 2020 Levels

At the time of this writing, as infection numbers surge, Karnataka, Kerala and Assam have also imposed severe restrictions, while Maharashtra and Delhi remain under lockdown. In this atmosphere, the Nomura India Business Resumption Index (NIBRI) has suffered its largest fall, week-on-week, to 75.9 for the week ending April 25^th 2021. The last time the NIBRI was at these levels was in August 2020, while the first wave was still wreaking havoc.

GDP and Impact to the World Economy

According to Oxford Economics, a global forecasting firm, India’s GDP forecast for 2021 has been reduced from 11.8 percent to 10.2 percent. According to a release, the firm said, “India’s escalating health burden, faltering vaccination rate, and lack of a convincing government strategy to contain the pandemic have prompted us to downgrade our 2021 GDP growth forecast.”

Another report by Amanda Glassman, Executive Vice President and Senior Fellow at the Centre for Global Development notes that, the global economy may lose up to USD 9.2 trillion, if vaccination drives in developing countries, such as India do not progress rapidly and steadily. With India being South Asia’s largest and the world’s 3^rd largest economy, poor growth or worse, economic contraction, could have serious ramifications on the entire global economy.

Not All Doom & Gloom

Despite the serious situation on the ground, some indicators demonstrate that the Indian economy is coping fairly well with the present disruptions and that, if the situation is contained, India could see a fairly strong rebound. Nomura Economists Sonal Varma and Aurodeep Nandi have stated in research notes that they, “Also see signs of the economic pain spreading to the wider economy (power demand, GST e-way bills, railway freight), although the real economic impact still appears small compared to Covid’s first wave and other indicators (labour force participation rate) have remained resilient. With more states extending restrictions, sequential momentum is likely to remain weak over the next month, hurting gross domestic product (GDP) growth in Q2 2021 (April-June 2021).”

Nomura India also observes that the pace of vaccinations can play a major role in mitigating the impact of the second wave. They expect to see the pace pick up over next few months, which should see restrictions easing and demand rising amidst an accommodative fiscal environment.

Indian investors also seem to be pretty upbeat and positive about the economy despite the challenges in India. As of 28^th April 2021, India’s benchmark indices continued to rally, having enjoyed three consecutive strong closes up to this date. At close, the Nifty was up 1.35% and the Sensex, 1.58%.

While some countries are still struggling with the pandemic, on a global scale we are witnessing the revival of supply chains with factory activity booming as the global economic recovery gets underway. PMI Indices in developed economies are all showing expansion for the first time since January as we draw to the end of April 2021 according to IHS Markit. However, purchasing managers in several economies, particularly in the developed world, note that businesses are still struggling to meet deliveries and manage costs in the face of massive shortages.

Taking A Look at the Major Economies

USA – Record highs were reached in April 2021 by US manufacturers and service providers even in the face of major supply chain disruptions that continue to affect production. IHS Markit PMI for the period rose to 62.2, which is the highest since 2009 for this time of year.

UK – As restrictions were loosened, the Flash UK Composite Output Index gained heavily in April. Demand for both goods and services was seen at 60, up from only 13.8 during the same time last year. This is also strongest increase on record since 2013.

Germany – While the Composite Index declined to 56 from 57.3 in March, it has increased by at least 300% when compared with the same period last year. Furthermore, German manufacturers are experiencing a huge surge in demand that is the best on record since 1996.

Euro Area – Orders are at record highs and the Composite Index for the region as a whole rose for a second consecutive month. However, supply chain disruptions are causing delays.

Japan – The country is seeing some expansion in growth for the first time since January 2020, based largely on the strength of manufacturing. Exports rose at the fastest pace since February 2018, though the service sector slowdown continues.

France – After eight months of declines, even France’s manufacturing and services firms have reported expansion. Again, factories and manufacturing are the driving force behind the expansion, though services too contributed.

A Common Thread

While the recovery is certainly underway in these economies and throughout much of the world, the common thread that seems to be inhibiting economic activity is delayed due to supply chain disruptions, which have become a common theme since the onset of the pandemic. While there is progress on this front, a full-scale recovery cannot be mounted until these supply chain disruptions are ironed out. Thus, that should be a focus area for businesses and governments, going forward.

Since 2009, gold prices have been on a roller coaster ride, though nothing as mind blowing as the price of bitcoin. Still, for gold, the changes have been drastic. From highs around 1,900 USD per ounce around September 2011, to less than 1,050 in December 2015, and back to a new high over 2,000 in August 2020, then down again to less than 1,700 in March 2021 and back to over 1,900 in at the beginning of June.

Inflation Woes Driving Prices Up?

In the wake of the pandemic, investors are now more convinced about holding gold in their portfolios for various reasons, especially as a hedge against inflation or worse, the collapse of a national currency. Countries around the world have printed money at a record pace to keep their economies going during the pandemic, and all that excess liquidity has to go somewhere. Even countries like the US have at times printed more money in a single month than in the whole of the last 2 centuries.

At the end of April 2021, US inflation soared to a 13-year high. The case is the same in other major and minor economies. Still, central banks are unable to do anything about it, such as increase interest rates, because that would trigger massive debt defaults. Most governments are merely keeping their economies afloat and avoiding debt crises by providing large scale debt repayment relief schemes and moratorium programmes.

These conditions have put investors on edge, and gold has always been a safe bet in times such as this. Unlike cryptocurrencies, the price swings of gold are small and it is also an asset that has a sort of universal acceptability. Thus, those who are interested in preparing for economic troubles, or at least hedging against inflation, are looking to gold.

Sovereign Reserves Major central banks like those of India, China and Russia have quietly been on gold buying sprees. Even through 2020, Russia’s gold reserves grew by over 7%. The country now has the 4th largest international reserves in the world at close to 600 billion. This is further adding to the case for gold as it appears that even nation states are looking to obtain the precious metal in order to insulate themselves against inflation and potential currency crises. Ultimately, the high demand for gold, coupled with inflation in the US economy and around the world, is likely contributing towards an increase in gold prices along with general USD weakness.