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 45th 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.
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/
2016 has been quite a year for global property markets. China’s slowdown, the impeachment of Brazil’s president, the Brexit referendum in the UK and the US presidential election have all contributed to a rather tumultuous year. Will property markets fare any better in 2017? And where precisely are the hotspots that bear watching as the new year unfolds? Ray Withers, CEO of Property Frontiers reveals all…
UK – era of the staycation
In 2009, during the height of the recession, UK residents made 15.5% fewer overseas trips and 17% more domestic trips. Since then British holidays are still gaining in popularity: the number of domestic trips in 2015 was up by 11% on the previous year. The Brexit referendum’s repercussions may well change how we experience summers to come. This is the new era of the staycation.
While residential rental yields are likely to remain strong (outside of London), with so many unknowns house price changes remain tricky to forecast. For UK property investing in 2017, we believe that holiday homes, coastal cottages, and hotels will be popular with investors looking for a favourable stamp duty environment, high yields and insulation from market uncertainty. To maximise returns, look for regions with natural or cultural appeal, unflagging visitor numbers, and an undersupply on the hospitality market.
UK – the hangman loosens the noose on landlords
Philip Hammond’s 1994 election material slipped in a humdinger: ‘hanging for premeditated murder.’ The question is: when it comes to fiscal policy impacting landlords, will the new Chancellor play the hangman or the handyman?
With rock bottom mortgage rates and rent increases of 19% forecast for the next five years, it is still a good time to be a landlord. The lack of supply on the market could well spell a good opportunity for investors. University towns like Bristol and Cambridge and secondary cities like Liverpool, Manchester and Sheffield should remain on the radar for strong yields next year.
Europe – secondary cities withstand shaky politics
Europe’s fractious politics will have a big year in 2017. For an early indication of how those decisions might affect property markets, look to Italy and Austria in the aftermath of their December 2016 votes. The defeat of Renzi’s constitutional referendum in Italy, for example, could cause problems for struggling banks and infect the wider economy, including impacting mortgage lending.
The victory of the liberal over the far-right candidate in Austria’s presidential election, however, favoured stability and European integration. Given that Vienna is unlikely to end its seven-year streak atop Mercer’s global quality of living ranking and its housing market is just 20% owner occupied, the result may well safeguard the city’s growing reputation as a buy-to-let hotspot.
Other cities we think merit attention for high yields in 2017 include Lisbon (thanks to tech clusters and the historic centre), Utrecht (enjoying the Netherlands’ continent-beating 6.57% yields but without Amsterdam’s bubbly prices), and Barcelona (still down on its peak, with growing business appeal).
Europe – Brexit’s beneficiaries?
When (if?) Britain triggers Article 50 in 2017, will we see bankers transfer en masse from London to Amsterdam and startups relocate from Manchester to Hamburg? While large scale migrations are unlikely, the pressure will be on for British cities to reassert their global appeal if the property market is to bounce along at 8% growth again in 2017.
European cities will be putting up a strong fight, and battling to skim off what talent they can. Frankfurt and Paris will make particularly aggressive bids, but they will need to need to drastically improve their supply of office space if they are to become truly viable alternatives.
We may see a new trend for Brits doubling up their holiday or retirement homes as tickets to visa-free travel. Spain and Portugal could see a steep upswing in applications for their ‘golden visas.’
North America – punching above its weight?
The US rocketed past the UK as the stage for the biggest political upset of 2016 with the election of Donald Trump. The S&P Case-Shiller home price index ends the year at a new record peak and such punchy growth will likely continue into 2017. Even if the market proves to be overheated, more responsible lending means a sub-prime-scale implosion is a very distant possibility.
The other theme of US house price growth, its patchy distribution, may also become more pronounced. New York home values appear comatose in comparison to Portland and Seattle, where prices grew by 12% and 11% respectively in the year to September. Yet lunatic price hikes across the border in Canada, make even those numbers look comparatively demure; Toronto closes out 2016 leading the Teranet and National Bank of Canada index with an insane growth rate of 34.6%.
Further afield
South America may become a less daunting investment prospect in 2017, with Brazil and Argentina poised to shake off the political deadlock of last year and Colombia coming closer to peace. Our pick for an enticing investment target is Peru, where a new business-friendly government could revive the property boom and Lima’s hotel market should benefit from fast-growing visitor numbers, a generous tourist spend, and limited supply coming on to the market.
In Africa and the Middle East, the price of oil has played havoc with economies. Property markets could well see a boost if the price of oil rallies in 2017. This could benefit countries like Ghana and Uganda, where the economies are sufficiently diversified to avoid the pitfalls that accompany surprise discoveries of oil. Land development is already rife in their respective capitals of Accra and Kampala.
Investors have been glued to Iran’s gradual unfurling onto the global stage and will continue to look on in 2017, though caution is advised until President Trump’s official stance makes itself clear.
In Asia, Indonesia and Vietnam are making encouraging moves to attract foreign investors, and boast the economic growth to back it up. 2017 will be crucial for testing how well these new rules work in practice, and early birds who plan appropriately could catch the juiciest worms.
China might decide to employ state intervention for the forces of good to re-jig its land imbalance and loosen the notoriously prohibitive hukou residency permit system. This would allow demand and supply to better align and let some steam out of the Chinese property market’s swelling paper lantern.
Finally, our client database reveals a growing share of Indian investors contending with their Chinese counterparts as the dominant group of family buyers casting a wider net for safe havens overseas. Though the UK has not lost its appeal, we might expect to see them target regions closer to home as traditional Western markets start to feel more volatile.
(For more information please visit Property Frontier)
