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.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

China's Belt and Road Initiative is the most ambitious infrastructure project in modern history. It spans over 60 countries and will cost over a trillion dollars. The plan is to make it easier for the world to trade with China, by funding roads, railways, pipelines, and other infrastructure projects in Asia and Africa. China is loaning trillions of dollars to any country that's willing to participate and it's been a big hit with the less democratic countries in the region. This makes the BRI a risky plan as well. But China is pushing forward because its goals are not strictly economic, they're also geopolitical.

March started off with a bang when US President Donald Trump announced that his administration will impose steep tariffs on imported steel and aluminium in order to boost domestic manufacturing, saying that the action would be ‘the first of many’. This has brought about threats of retaliation by a number of the main US allies and the fear that Trump’s extreme protectionism may destroy the post-World War II trading system and result in a global trade war. Claiming that other countries are taking advantage of the US, the 45^th President seems confident about the prospects of a global trade war, tweeting: ‘Trade wars are good, and easy to win’ a day after his initial announcement. Although the tariffs are stiff, they are considerably small when seen in the context of US economy at large. However, the outrage that his decision has fuelled and the fact that China has already taken steps to hit back signal global hostility and economic instability.

The Response

Donald Trump’s decision from the beginning of March was followed by a chain of events, including the EU publishing a long list of hundreds of American products it could target if the US moves forward with the tariffs, the US ordering new tariffs on about $50 billion of Chinese goods and China outlining plans to hit the United States with tariffs on more than 120 US goods. In an attempt to soften the blow, the White House announced that it will grant exemption to some allies, including Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea. Trump gave them a 1 May deadline to work on negotiating ‘satisfactory alternative means’ to address the ‘threat to the national security of the United States’ that the current steel and aluminium imports imposes. Trump said that each of these exempted countries has an important security relationship with the US. He also added:  “Any country not listed in this proclamation with which we have a security relationship remains welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports of steel articles from that country”.

China vs. the United States

China is one country that is not listed. However, by the looks of it, China is not a country that will be discussing “alternative ways to address the threatened impairment of the (US) national security”. Instead, they fire back. China is the main cause of a glut in global steel-making capacity and it will be hardly touched by the US’ import sanctions. However and even though they do not want a trade war, they are ‘absolutely not afraid’ of one. Following Trump’s intentions for tariffs on up to $50 billion of Chinese products and the proposed complaint against China at the World Trade Organization (WTO) connected to allegations of intellectual property theft, China's Ministry of Commerce said it was "confident and capable of meeting any challenge”.

In response to Trump’s attacks, the Asian giant published its own list of proposed tariffs worth $3 billion, which includes a 15% tariff on 120 goods worth nearly $1billion (including fruit, nuts and wine) and a 25% tariff on eight goods worth almost $2 billion (including pork and aluminium scrap). Despite their actions, China’s Commerce Ministry urges the US to ‘cease and desist’, with Premier Li Keqiang saying: "A trade war does no good to anyone. There is no winner."

Is Trump going to win?

During his presidential campaign, one of Trump’s promises was to correct the US’ global imbalance, especially with China, however, it seems like his recent actions are doing more harm than good. Even if his tariff impositions result in a few aluminium smelters and steel mills in the short term, they risk millions of job losses in industries that rely on steel and aluminium; potentially endangering more jobs than they may save.

A country’s trade patterns are dictated by what the country is good at producing. China is known to be the world’s largest producer of steel, whilst steel is simply not one of the US’ strengths. Steel produced in America is 20% more expensive than that supplied by other countries. Naturally, it makes sense for US-based manufacturers to prefer buying their steel from overseas. Once Trump’s suggested tariffs are added onto steel and aluminium shipments from abroad, they will worsen US’ trade deficit and will impact the stock market. In an article for Asia Times, PhD candidate at the University of California at Berkeley Zhimin Li explains: “Domestic companies will inevitably suffer from higher input costs and lose their competitiveness. As a result, they will become less able to sell to foreign markets, leading to a deterioration of trade balances for the US.”

He continues: “Moreover, more expensive manufacturing materials will translate to higher prices at the cash register, putting upward pressure on inflation and prompting the US Federal reserve to raise interest rates even more aggressively than anticipated. This will add to investors’ anxiety and foster an unfavourable environment for equities.”

Looking at it all from China’s perspective doesn’t seem as scary or impactful. The tariffs on metals wouldn't hurt Chinese businesses considerably, as China exports just 1.1% of its steel to the US. But steel tariffs are not as significant as the coming fight over intellectual property.

On the other hand though, China has the power to do a lot to infuriate Trump. One of the products that the country depends on buying from the US are jets made by the American manufacturing company Boeing. However, Boeing is not China’s only option - they could potentially turn to any other non-US company such as Airbus for example. The impact of that could be tremendous, as in 2016 Boeing’s Chinese orders supported about 150 000 American jobs, according to the company’s then-Vice Chairman, Ray Conner.

China could also target American imports of sorghum and soybeans, whilst relying more on South America for soy. NPR notes: “Should China take measures against US soybean imports, it would likely hurt American farmers, a base of support for Trump.” An editorial in the state-run Global Times argues: “If China halves the proportion of the U.S. soybean imports, it will not have any major impact on China, but the US bean farmers will complain. They were mostly Trump supporters. Let them confront Trump.”

The list of potential actions that can threaten the American economy goes on, but the thing that we take from it is that the US could well be the one to lose, regardless of where China may apply pressure. So, is businessman Donald Trump, in an attempt to cure America’s international trade relations, on his way to be faced with possible unintended consequences and do more damage than good? Are his seemingly illogical policies threatening to make Americans poorer, on top of firing the first shots of a battle that no one, but him, wants to fight? Will this lead to hostility in the international trading system that will affect us all?

We’ll be waiting with bated breath.

With this week’s market commentary from Rebecca O’Keeffe, Head of Investment at interactive investor, Finance Monthly learns about global markets, the US-China trade war and about recent activity in the M&A sphere.

A turnaround in Asian markets has seen US futures rise and eased the pressure on European equity markets. The last two months have seen global sentiment become more fragile, but the one thing that has kept markets going is the reliance on investors to buy on the dips. The last week had undermined that position in what was a worrying sign for the wider markets, but investors appear to be feeling slightly more resilient this morning.

Steve Mnuchin has taken on the unenviable task of attempting to resolve the trade dispute between the US and China via negotiation – however, he may be trying to reconcile the irreconcilable. The idea that, as one of the largest holders of US treasuries, China will be expected to help finance the growing US fiscal deficit but is also expected to reduce its trade surplus with the US by as much as $100bn to satisfy Trump’s demands appears to be a major contradiction. The question for investors is whether this adds up.

Another day, another flurry of activity in what has become one of the most vitriolic and antagonistic hostile merger bids since Kraft purchased Cadbury in 2010. GKN and Melrose investors have just three days to wait until the final count is in and much will depend on short versus long term investors. This bid has raised several questions about the difference in UK takeover rules versus other European countries and, irrespective of the result, may provide a catalyst for the Government to review the current rules to make sure they have the right balance between competition and protection.

As you likely already know, China’s e-commerce sector is the biggest in the world right now. Below Finance Monthly speaks to Ronnie D’Arienzo, Chief Sales Officer, PPRO Group, who lists some ways we can all learn from China’s excellent performance in this sphere.

A few weeks back China’s 1.3 billion population celebrated Chinese New Year and the start of the Year of the Dog. The celebrations lasted for sixteen days, starting on New Year’s Eve (15th Feb) to the Lantern Festival on March 2nd. Preparation for the New Year celebrations is known as a ‘shopping boom time’. Many transactions will be completed this week in preparation for the two weeks of celebrations. Interestingly, the majority of these transactions will be completed using local payment methods, specifically e-wallets such as WeChat Pay and Alipay.

The Chinese e-commerce market is booming; research from PPRO Group found the market is worth a staggering $865 billion with growth rates higher than - the total UK e-commerce market. So how can UK businesses take advantage from China’s healthy ecommerce market? PPRO Group has pulled together seven considerations for UK retailers, when looking to attract the attention of the Chinese consumer.

1. Each year, Chinese e-commerce grows by more than the total amount of the entire UK e-commerce market

In 2018, Chinese e-commerce will grow by $233.5 billion. That’s $30 billion more than the total value of all goods bought online in the UK.

2. Chinese online shoppers spend $208 billion a year using credit cards which UK retailers don’t accept

96% of Chinese credit cards are issued by local schemes and only 4% of all online transactions in China are made using international credit cards, such as Mastercard and Visa. If retailers don’t support local schemes, they’re cut out of a $200 billion market.

3. Don’t miss out on $650 billion of online spend using alternative payment methods

Every year, Chinese consumers buy $650 billion worth of goods using local bank transfer apps, e-wallets, cash-on-delivery services and other locally preferred payment methods.

4. Every year, Chinese online shoppers spend over $100 billion just on clothes

Fashion is the most popular item for Chinese online shoppers. Each year, Chinese online clothing sales are worth more than the entire UK fashion industry.

5. One Chinese e-wallet has more users than there are people in the EU

The Chinese e-wallet WeChat Pay has 980 million users compared to 500 million people in the whole of the EU. In 2017 alone, WeChat Pay was used by Chinese consumers at an average rate of 1 million transactions per minute.

6. M-commerce in China is worth $173 billion

Every year, the Chinese spend almost $200 billion from their mobile phones. And with China spending $400 billion on 5G, the number of mobile users is set to rocket in the coming years.

7. 40% of all global e-commerce sales are made in China

The Chinese share of all global retail sales is around 30%, but for e-commerce sales, it’s 40%. And that number will grow as more people come online.

Want to sell to the world? Start with China.

Why be content with almost $2 billion when your net worth can be multiples more simply by moving your company from one stock exchange to another?

In this clip from 1999, Jack Ma delivers a speech to 17 friends in his apartment to introduce Alibaba and lay out his plan to compete with US internet titans.

JADE+QA is an International design studio, founded by British Architect Martin Jochman Dip Arch, ARB (UK) RIBA based in the UK, Hong Kong and Shanghai. In 2013 Martin, who is the original Concept and Scheme Design architect for the Shimao Wonderland Intercontinental Hotel in a Quarry, signed contract with the developer Shimao to complete the design and overview the construction. Since then, Martin’s studio JADE+QA has designed a number of high-profile projects in China and South East Asia.

 Prior to setting up JADE+QA, Martin has had over 25 years of UK and international design experience as an Associate and Design Director with an international design consultancy winning numerous national and international competitions and awards. He has worked in the UK, Europe, Dubai, Hong Kong and China on many high-profile projects, including the Jumeira Beach Hotel, the Wild Wadi Waterpark in Dubai, Tianjin TEDA towers, Wuhan Pebbles mixed development and other important landmarks. Here he discusses the construction sector in China and the work that his company has done thus far. 

As a professional with over 25 years of experience in design and construction, what would you say attracted you to the field?

I come from artistic background with both of my parents being creative artists . This has obviously influenced me from early age to look at professions which could combine my interest in arts with other subjects  I was interested. Architecture thus became quite obvious answer and I have therefore chosen this profession quite early in my life for my future occupation.  I have been very fortunate to have had an opportunity to study at an excellent architectural school in Bristol and this creative environment has reinforced my resolve to become architect. To me Architecture is more than just a profession. It becomes almost an obsession, where each new design project is a new adventurous challenge, testing one’s ability to come up with new innovative solutions. No design problem is ever same. I am happy to say that even after almost 40 years, I am still excited and filled with trepidation when facing a blank piece of paper to start sketching new concept ideas.

What would you say are currently the biggest challenges in the field in China?

There are several major challenges that a foreign architect has to overcome in China. Firstly, the contractual process differs quite a lot from the UK practices. Whilst the overall principles of the design process are same, the contractual relationships, especially not giving the architect full authority to implement his design direction and the disjointed nature of the design/client team can be quite counterproductive.

Quite often, the “foreign’ architect, who relies on a Local Design Institute to submit the drawings for approval, is only given a limited scope, producing a Masterplan only or a Concept and Scheme Design, without the continuity of involvement in the construction detailing and construction itself.  Communication and difficulty with coordination between the various parts of the project team can also contribute to the lack of overall control over the design process. This has great impact on the quality of the resulting building that ultimately depends on the quality and experience of the client and his management team.

We have been lucky to have had very experienced and professional clients, whose teams have avoided this situation - especially with our hotel projects in the Shimao Quarry Hotel, where the quality of the client’s management, both during the design and on site, has been exceptional.

The second major issue has always been the quality of workmanship on site. Again, as with design, the contractual authority of the designer is missing, with primary driver for the project being the budget and speed of construction. This often leads to cutting corners and reduction of the build quality.

What are some of the key issues that you and your client frequently face in relation to Chinese regulations? 

A number of Chinese regulations, especially in design of residential buildings, limit the design scope of a given project. For instance, orientation of residential buildings only in north/south direction, so they end up being arranged in regimented grid pattern, which doesn’t allow for the variety and richness we expect in our residential layouts in the UK.

For instance, our innovative ‘Vertical Shikumen’ residential concept for Shanghai was declared ‘suitable for Singapore, but not for Shanghai”. The regulations of internal bathrooms and kitchens also determine the overall residential planning and character.

However, on the other side , in our Shimao Quarry hotel, the local Authority in Songjiang has been impressively flexible and has allowed, in this building, which as an ‘upside down’ skyscraper with no  precedent, certain regulations  (such as the seismic and structural codes and fire regulations) to be reinterpreted and justified from the first principles.

What incentives are in place to encourage foreign participation in the construction sector in China?

The major incentive has been the Government’s creation of so-called “Wholly Owned Foreign Investment” companies that enable foreign individuals to establish enterprises in China. This is the basis for operation of my studio in Shanghai.

The Chinese Government  has recognised the value of learning from the experience of what they call “ Foreign Experts” and foreign participation is welcomed by clients, who seek experienced foreign designers to help produce more innovative and ‘international landmark’ buildings. It is a matter of ‘Face’ to have a foreign architect on board and having a ‘Name’ designer often helps to push the project through the Government approvals much quicker.

What mechanisms do you use when identifying risk and opportunities in the early development process of projects? 

Important tool for identifying the risks and opportunities is a thorough analysis of all aspects of the design project. This is in fact a standard part of the design process, but is often skipped or simplified.

The most important factors in order to be able to come up with the ‘right’ solution are:

-Understanding the site and its physical (orientation, topography, access, existing landscape, environmental character, water etc.) and non-physical character. (cultural, historical, emotional context).

-Equally important is understanding the client’s requirements and thus, being able to translate them into physical volumes and plans that can then be arranged on the site.

-Finally, an important factor is understanding the local  requirements, mainly the building densities, maximum heights , percentage of the green areas and other factors determining the size and location of the buildings.

All of these factors require detailed analysis, utilizing latest modeling and graphic software and internet research methods.

How has technology changed the architecture sector in recent years?

The design process in architecture has benefited from the ‘digital revolution’ by enabling complex organic shapes of building structures and façades to be designed and constructed, well beyond the capability of architects from only 20-30 years ago – from rectilinear simple shapes to complex curved buildings, that rely for both design and construction on automated computer controlled digital technology. Building and façade shapes produced by architects such as Hadid or UN Studio would have been unthinkable at the time when we designed buildings by drawing in ink on tracing paper on drawing boards with T squares.

In the heady days of the fast building boom here in China, there was a quest for the most unusual ‘Landmark’ shapes. Clients were competing for the most innovative building forms, enabled by the new technology  and the examples of the resulting architecture, both good and bad, can be seen all over China. The CCTV building in Beijing, The Bird’s Nest Stadium, Beijing Airport terminal, Shenzhen Airport terminal, our Wuhan Pebble Towers and even the Shimao Wonderland Intercontinental Hotel in a Quarry are the examples of such architectural style.

Other developments are in the sustainability and ability for humans to interact with our buildings. Sustainability is a very important element of building design and, here in China, is now taken very seriously, with the US LEED system of evaluation and local Chinese 4-star system, being frequently used to produce buildings which will contribute to the environment, by saving energy, water and promoting biodiversity.

Interactivity in architecture is also enabled by the ‘digital  revolution’ through incorporating smart controls which help to automate the building services, ranging from heating, ventilation, to lighting, security and communication and controlling more mechanical aspects of the external envelope of the building such as sun shading, external lighting and cleaning the façade.

Can you detail any current projects that you are working on? What are some of the key issues that you are facing in the process of assisting with them?

Shimao Wonderland Intercontinental

As mentioned, our most important project is The Shimao Wonderland Intercontinental, known as the Quarry Hotel. This project, which I designed in 2006, and has been ongoing for over 11 years now is a unique resort hotel situated in a disused ‘brownfield site’, 90m deep  partially water filled quarry. The hotel, developed by Chinese developer Shimao, shall be operated as a 5-star resort by Intercontinental Hotel Group and when completed, will be their flagship project in China. The hotel  which cascades down 90m rocky cliff face features 338 luxury guest rooms with number of them as duplex suites with the lower levels located under water, facing a large tropical aquarium. The central feature of the building is a vertical glass ‘waterfall’ atrium containing the observation lifts to take the guests to the lower levels. The hotel, with its unique location, is a first truly ‘underground’ structure and features a number of innovative and sustainable features. Obviously, such unusual location brings many technical challenges that needed to be overcome during the design and construction process.

Moganshan Jo Lalli Resort Hotel

Another one of our interesting project, currently under construction, is the Jo Lalli Resort Hotel in a beautiful mountainous region of Moganshan, near Hangzhou. Here the challenge has been to create a landmark building - that is the ‘visiting card’ for the operator, but at the same time, fits seamlessly into the outstanding natural environment without going against it. The inspiration for the form and materials has been directly the natural environment, utilizing local materials and building scale and massing that is compatible with the unspoiled beauty of the site itself. The hotel will feature large banqueting facility, restaurants and bars, in addition to 50 guestrooms.

Website: http://www.quarry-associates.com/

Arun Roy is the Chief Financial Officer of CHERVON North America Inc. CHERVON is one of the world’s top 10 manufacturers of power tools, outdoor power equipment and related products. Although the company’s Global headquarters is in Nanjing, China, it has locations across USA, Canada, Europe, and Australia too. Here Arun talks to Finance Monthly about the company’s North American branch, his role as a CFO and the current business climate.

Can you tell us a bit more about CHERVON?

 The company has always been committed to helping build a better world by building better tools. We focus on hand-held portable power tools, stationary bench tools, laser and electronic equipment and outdoor power equipment. With world-class R&D, testing and manufacturing capabilities; collaborating sales & marketing groups; industrial design professionals and service teams throughout the world, we are able to provide satisfying solutions that meet or surpass our customers’ expectations. Over more than 20 years, CHERVON has earned its reputation for continuous innovation and dedicated pursuit of professionalism. Today, CHERVON-built products are sold by more than 30,000 stores in 65 countries. We pride ourselves on being a TOP 10 player in the global power tool industry.

Tell us a bit about your career path prior to becoming the CFO of CHERVON North America?

I started as a Management Trainee with the German Automotive Parts Manufacturer Robert Bosch in India, 26 years ago. Over the years, I worked in different functional areas, such as Corporate Finance, Internal Audit, Human Resources, Supply Chain and Manufacturing operations in India, China, Europe and USA. My last role was Chief Operating Officer for the SKIL/SKILSAW Brands. My journey at Bosch was an interesting one, as it broadened my perspective and taught me to be a better “people person” through the various teams I led in different parts of the world.

What goals did you arrive with as a CFO of CHERVON North America?

As I joined CHERVON NA through an acquisition, it was important for me to ensure that the acquired brands stabilized themselves within the CHERVON Network and be a key strategic player in redefining the overall organization to support the desired growth, as well as developing the new roles that we were taking on. It was also important for us to invest in people and processes to help us come to terms with the growing needs of our North American Business.

What is your opinion of the current Business climate?

The business climate is currently cautiously optimistic but at the same time, as a Company, we need to ensure we leverage our market position through continuous and cost effective innovation. The sweeping policy changes in the USA are impactful but need to be studied further to determine the interim impact. Currency and Commodities are back on the radar and will impact procurement strategies, especially for companies with supply chains overseas.

In your opinion, what might the future of financial directors look like in the upcoming years?

The world of Finance and the pace at which business decisions are taken are changing rapidly. Finance Directors are seen as strategic partners of the business and play an important role in the overall strategy of the company.  The role also requires a proactive approach versus a reactive one to ensure that risk is mitigated before the fact.  They need to think of their feet and it is all about speed.

Mid-size companies are becoming global players and forces to reckon with. The expectations of the CFO role are also changing to align with this trend.  We need to be strategic and ensure we partner with the CEO to drive a common vision. It is not all about cutting cost, but about being rational and real, while keeping the long-term vision and objectives of the organization in mind.

Website: http://www.chervon.com.cn/

Your experience encompasses assisting companies with growing their businesses – what attracted you to this area of specialism? How rewarding is this?  

With China’s economic development and growth over the last 20 years, more and more foreign companies have been expanding their businesses into China, either through direct investment or through increasing numbers of cross-border transactions. However, doing business in China has distinctive challenges that must be considered, not only because of the potential language barriers, but also because of various business-related regulations and tax requirements that are unique to the country.

Our consultants at Nexia TS (Shanghai) Ltd provide business and tax advisory services to global clients investing in and/or doing business in China. Our service offerings range from planning, structuring and the setting up of foreign-invested businesses, as well as a focus on tax consulting and advisory for all aspects of Chinese taxation. Chinese company and employment law advisory services are also offered. We are able to provide compliance work that caters to assurance and other statutory needs.

Since we established our practice in China in 2001, we have assisted many international companies with their inbound investments into China, setting up direct presence and fulfilling the domestic regulations. Overall, we find that our experience and expertise with the Chinese regulations and business environment have also benefitted our clients.

How should foreign companies structure their business operations to be as tax efficient as possible when considering expansion into China?

In our experience, we have found that the simplest structures are often the best. It is potentially useful for foreign parent companies to own their Chinese subsidiaries through offshore holding companies in low tax jurisdictions that also had favorable tax treaties in place with China. In many cases, multinational groups use layers of holding companies in their structures. Related party transactions between sister companies and the ultimate parent company were essentially designed to extract profits out of Chinese operations without being taxed. Things have changed since 2008 though, and China has implemented many new regulations intended to ensure that the country receives its fair share of taxes. Where a foreign company sets up and registers a subsidiary in China, it is now usually most tax efficient when the subsidiary autonomously performs its business functions. The more control the China subsidiary has over its operations, the better - especially with respect to participation in the VAT system. Furthermore, more autonomy from the parent company generally results in fewer issues with respect to expense deductibility for corporate income taxes. It is true that profits dividends paid to the subsidiary shareholders are taxed at 10%, or less in some cases, but there is tax savings over attempting to extract profits through royalties or cross-border services that are subject to both withholding tax and VAT. Foreign companies operating in China nowadays must take these issues under consideration.

For foreign companies operating in China without setting up a registered entity, there are also tax-related considerations. It is important to properly structure these transactions. For those that simply sell goods into China, the buyer of the goods handles all of the China-related issues. However, for those that sell services, or a combination of goods and services, into China, it is crucial to minimize the risks associated with being recognized as permanent establishment for corporate income tax purposes, and also to ensure that tax treaty benefits are applied to and recognized by the respective tax authorities. Likewise, VAT now applies to all cross-border service transactions, so proper structuring of the service agreements is essential.

What potential pitfalls face foreign companies who wish to set up a Chinese operation - in terms of staying compliant with regulation whilst wishing to operate under a tax efficient structure? What are the potential consequences of non-compliance?

Many foreign investors assume that setting up an entity in China that relies heavily on related party transactions may be very simple when using special purpose entities. For example, a US company might set up a holding company in Hong Kong, to take advantage of lower withholding tax rates on royalties obtained by selling IP usage rights to its China subsidiary. However, China has closed many loopholes with tax officials scrutinising royalty and other similar agreements. If certain criterias are not met, the royalty payments may not be deductible for the China subsidiary.

Another area often overlooked is how China’s tax rules have changed with respect to the indirect equity transfer of Chinese entities by offshore parties. Considerable paperwork must now be filed in China during such transactions, even if no tax will be assessed on the transfer. Penalties can be quite severe if the offshore transferer and transferee do not comply with the documentation filing requirements.

Since the introduction of the Corporate Income Tax Law in 2008, China’s State Administration of Taxation has implemented many new General Tax Anti-Avoidance Rules that allow the country to pursue foreign companies doing business in China and purposefully setting up the businesses or transactions to avoid Chinese taxation. With the advent of BEPS and increasing global cooperation between countries, it has become much easier for China to pursue such cases.

What tax incentives are in place for foreign companies who may want to establish business operations in China?

Companies within certain specific industries can enjoy corporate income tax breaks, and these industries are normally associated with high-tech manufacturing and R&D. In addition, Chinese local municipal governments attempt to attract foreign investments by offering tax exemption or tax rebates on the portions of VAT or corporate income taxes to which they are entitled. There are also incentives for companies investung in energy-saving and environmental protection facilities, which they can deduct a certain amount of their investments for corporate income tax purposes.

How can multinational companies move finances in an efficient way between their international offices?

Foreign companies with regional headquarters in China’s free trade zones have a few options for moving funds between China and other countries. However, China generally has strict foreign exchange rules in place that limit the movement of funds via profit dividends, loans, or other genuine transactions between the parties. Capital usually cannot be moved out of the country without closing and liquidating the business in China. Companies should plan exit strategies at the time of business setup. However, regulations are always subject to change, so such strategies should be analyzed continuously and updated as needed.

What are your thoughts on China’s One Belt One Road initiative? What’s been the impact of the concept on commodity demand thus far?

Unveiled in October 2013, the One Belt One Road initiative is a development framework aimed at enhancing trade and investment connections between Central and Eastern European countries and Asian countries. It not only plays a role as an important economic link between countries, that also helps to relieve some of the issues that were caused by China’s economic development during recent years, such as overcapacity, falling demand for commodities like steel, investment bubbles, lower rates of return on investment and so forth. The key to success of this initiative also depends on joint participation from other countries to bring in high technology to increase the rate of return on investments, instead of just building roads and bridges and ports, which are the key strengths of China in leading this initiative. The collaborative stance that China places on this initiative is very helpful. For example, it acts like entrepreneurs who would like to set up business with existing infrastructures and available financing.

According to the futures prices on steel and copper traded on the Shanghai Futures Exchange, the dominant Futures prices on steel and copper have been rising since 2016, which means that demand for domestic commodities has been gradually recovering. With more deals and projects announced in the future, we foresee that the demand for domestic commodities will continue to rise further.

What do you think the future impact of the initiative will be?

This initiative in the long run will benefit the global economy as a whole, and help rebuild economic interactions between countries that were in existence before the 2008 economic crisis. It not only increases the routes by which transported goods can reach destination countries around Asia and Europe, but also revitalizes the economies and unlocks potential demand from the One Belt One Road countries.

Website:  https://nexia.com