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 The top Federal tax rate has been reduced to 37%, however, they have also withdrawn a number of favourable deductions that were previously available – resulting in only a marginal change in the effective tax rate in many cases.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.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
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.
Analysts currently expect the Bank of England to hike interest rates in May, but some are opposed, claiming the market is misjudging the BoE’s plans. Bond market guru Mohamed El-Erian says the potential rate hike is "far from a done deal."
Last week the BoE left interest rates on hold, adding to suspicious they may raise them in May. After all, the BoE has been hinting at increased rates since last November’s hike.
This week Finance Monthly asked experts: What are the indications? What's the BoE's plan? What are your thoughts on future implications?
John Goldie, FX Dealer & Analyst, Argentex:
Carney and Co. were not expected to spring any surprises last week, opting to keep interest rates on hold again, much as the consensus had suggested. While the vote to retain the current status of the asset purchase facility was unanimous, there were dissenting votes from serial hawks, McCafferty and Saunders, who saw that the time was right for the Bank to raise interest rates to 0.75%. Many of the major banks have brought forward their forecast for a hike to May, though Bloomberg's interest rate probability tool sets this likelihood still at only around 65%. Commentators are certainly warming to the idea, but most believe that it will be almost another year before a subsequent hike is carried out.
This may be underestimating the path of inflation, wage prices and - importantly – overstating Brexit concerns. Carney has repeatedly suggested that Brexit remains one of the greatest challenges to their forecast models, however, the price action in Sterling already belies a growing optimism, or acceptance, that the economic impact of the 2016 referendum is far less negative than suggested by the major players prior to the event. With a transition agreement in place, a move into the critical trade negotiations is a huge step forward even if it brings us to a position with the greatest potential for deadlock.
With headline inflation remaining high and now wage prices heading in the same direction, the UK's second hike in just over a decade will indeed come next time around. Furthermore, with a May hike enacted, the door will then open for a second hike of the year in Q4, an eventuality that the market is yet to price in. With Brexit concerns reducing on the growing optimism that a transition agreement will provide the time and space for a trade arrangement to be thrashed out, the prospect remains for Sterling to trend higher in the weeks and months to come.
We have been bullish on GBPUSD for more than a year now and even with such a consistent trend higher in the last 12 months, the pound remains historical cheap by nearly any measure. There will be times when negotiations with the EU falter, and with it Sterling will stutter, but with a focus on the policy outlook from the central banks and a long-term chart to hand, the medium-term future continues to look bright for the pound.
Samuel Leach, FX trader and Founder, Samuel & Co. Trading:
When the BoE begins to hike interest rates the main concern I see is the impact this will have on over indebted consumers. I have been paying close attention to UK unsecured consumer debt, which is currently at all-time highs of more than £200bn. Furthermore, the annual growth rate in UK consumer credit is 10% a year which is considerably higher than household income growth (2%), therefore a very concerning place to be. These are unsustainable levels now and an interest rate hike could tip these consumers over the edge. Particularly, those on interest rate tracker mortgages. This will then have a ripple effect on businesses as consumers rein in spending to pay off their debts.
For entrepreneurs it is damaging because funding is an issue as it is, let alone with higher interest rates as it will put off potential investors. The first thing businesses cut back on is risky investments and purchases, so entrepreneurs and small businesses will see the biggest brunt of it in my opinion. For the financial markets we should see strength come into GBP. That, combined with the soft Brexit announcement we had earlier last week could push GBP back towards 1.5 – 1.6 against the USD.
Markus Kuger, Senior Economist, Dun & Bradstreet:
The Bank of England vote to hold interest rates is not surprising, as recent figures indicate a moderation in inflationary pressures. However, with wage growth finally picking up, our analysis suggests that interest rates are likely to increase later in 2018, despite the tepid real GDP growth figures.
Based on our current data and analysis, we are maintaining a ‘deteriorating’ risk outlook for the UK but this could change to ‘stable’ depending on the outcomes of the EU summit this week. If the 28 EU leaders agree on the much-needed transition period until December 2020, the risk of a hard Brexit in March 2019 will drop significantly. That said, implementation risks remain high and the long-term future of EU-UK trade relations are still unclear. Against this backdrop, a careful and measured approach to managing relationships with suppliers, customers, prospects and partners is key to navigating through these uncertain times.
Jonathan Watson, Market Analyst, Foreign Currency Direct:
The Pound spiked up following the latest UK interest rate decision which saw GBPEUR and GBPUSD touch fresh levels as the recent improved expectations were realised. Whilst Inflation had fallen slightly lower than expected it remains above target and rising wage growth too has given the Bank of England a freer hand in raising interest rates.
Rising growth forecasts for the UK also add to the increasingly rosy picture for the UK, progress on Brexit with the agreement of the transitional phase has also added to the buoyant mood. Whilst the current stance of the Bank is for a rate hike in May any serious changes in economic data could derail that.
A rate hike in May is now very likely but with that looking so likely, the Pound may not move much higher. The next 6 weeks of economic data ahead of the decision on May 10th will now be pored over for any signs of either caution from, or indeed signs of further hikes down the line. It would seem likely that with the UK and global economy forecast to grow further in 2018 and 2019, the Bank of England will continue to need to manage rising Inflation as the economy grows.
In my role as a specialist foreign exchange dealer my clients have been quick to utilise the forward contract option to lock in on the spikes and moves higher for the Pound. Whilst the longer-term forecast has improved lately, the uncertainty over Brexit and the fact the UK remains behind other leading economies in the growth stakes, indicates a risk averse approach. Locking in the higher levels still remains the most sensible option to manage your currency exposure and volatility from the Bank of England and interest rate changes.
Robert Vaudry, Investments Managing Director, Wesleyan:
With two members of the Bank of England’s monetary policy committee voting to raise interest rates it is becoming more likely that at least one increase will take place this year, probably as early as May.
Whether the era of ‘cheap money’ has finally come to an end remains to be seen. Any rise will be welcomed by savers who will potentially see an increase in rates on saving accounts, but the cost of borrowing will increase too. Those on variable mortgages could experience higher interest rates for the first time and need to understand the financial implications this could have. However, it is important to remember that even with the interest rate rises expected, interest rates remain low by historical measures and below the rate of inflation.
It’s also important to not become complacent and we’d advise everyone to remain mindful that there may be uncertainty in the months ahead, especially as stock markets remain volatile.
If you have thoughts on this, please feel free to comment below and let us know Your Thoughts.
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.
Global Witness and leading anti-corruption MP Margaret Hodge have recently called on the UK’s Financial Conduct Authority to take action over the role of RBS and Standard Chartered in handling more than US$2 billion of embezzled funds in a major international corruption scandal. The call comes as Global Witness publishes a new analysis of the role of the bankers, auditors and lawyers in enabling Malaysia’s 1MDB corruption scandal that is likely to have robbed the Malaysian people of an estimated US$4.5 billion.
According to the US Department of Justice the billions embezzled from 1Malaysia Development Berhad (1MDB), a government owned-company, by a variety of people were spent on luxury properties, high-end art and lavish lifestyles, as well as payments to the Malaysian Prime Minister Najib Razak. Most famously, money taken from 1MDB allegedly funded the Leonardo DiCaprio film the Wolf of Wall Street.
Global Witness and Margaret Hodge have written to the Financial Conduct Authority (FCA) calling for it to investigate the role of two UK-based banks, RBS and Standard Chartered, for their oversight of their Swiss and Singapore branches’ money laundering controls. Regulators in Singapore and Switzerland have fined the two banks’ foreign branches a total of $12 million for breaches of anti-money laundering regulations in relation to the scandal. Those investigations were completed over a year ago, with Swiss regulators passing their findings to the FCA at that time. However, there has been no sign of any action from the UK authorities.
In response to Global Witness’ findings, prominent Labour MP Margaret Hodge said: “It is time for the FCA to take firm action to hold banks that handle dirty money to account. The FCA must also explain its apparent inaction over this case, when other countries completed their investigations over a year ago.”
The role of the two banks feature in Global Witness’ new analysis of how a range of banks, lawyers and auditors either turned a blind eye, signed off on suspicious transactions or were simply not obliged by the rules to question origin of funding.
“Our analysis shows that the international anti-money laundering system is not working,” said Global Witness Senior Campaigner Murray Worthy. “The 1MDB scandal would simply not have been possible if the system worked; the financial professionals involved would have spotted this dirty cash and prevented the money from being ever being taken.”
The report concludes that for the banks involved in the 1MDB scandal, this was not a problem of inadequate regulations but a failure of bankers to follow those rules. The banks were either simply not conducting the checks that they were required to do, or they were willing to ignore the risks they saw.
Murray Worthy continued: “The UK should not allow banks based here to handle the proceeds of crime or corruption, wherever they operate in the world. The people of Malaysia are now facing a bill greater than the country’s annual healthcare budget as a result of this scandal – and these banks enabled this scandal to happen.”
(Source: Global Witness)
Following a weekend at the Oscars, a frozen UK and a tax based feud between Europe and the US, Finance Monthly hears from Rebecca O’Keeffe, Head of Investment at interactive investor on the latest global markets news.
Global equity markets are fragile, and investors are wary as the increasing rhetoric over the weekend on tariffs and a potential escalation of a full-blown trade war make it possible that things could get very ugly very quickly. History has not been kind to investors during periods of protectionism and recent tweets suggest that President Trump is leaning in rather than stepping back from threats to unleash a global trade war.
This all makes it very difficult for investors to know what to do. Any global company could instantly and significantly suffer if its principal products suddenly become subject to retaliatory trade restrictions. Downside risks are therefore widespread and elevated, and it will be tricky to find sectors or companies that offer a genuine safe haven against such risks.
The major headache that the EU faces on trade is not the only issue facing European investors this morning as Italy looks to have taken a step to the right and moved towards populism and change. The complexity of the Italian voting system makes it very difficult to establish what happens next and when, but neither of the anti-establishment Five star movement or League parties are an attractive option for markets or the euro. Against this negative backdrop, investors can only be grateful that German coalition talks finally reached a conclusion, with Angela Merkel managing to hold on to her position as long-serving Chancellor, albeit in a fragile alliance.
Larry Summers proposed eliminating high denomination currency to help curb illegal cash transfers. Bloomberg looks at how this would impact a $1 million handoff.
