Trade Wars leading to demise of post WWII global trade structure ...

Global geopolitics and policy making are playing their hand through the consumption of soyabeans, washing machines and PIGS.

Yes, you heard it right.

The story began with the Trade with Trump strategy and has seen US at loggerheads with most of its EXIM trade partners threating NAFTA and incapacity of WTO to resolve global egos marred with Trump-o-nomics and Xinomics.

In July 2018, US slapped tariffs in Chinese goods ranging from consumer goods and food products including tobacco, chemicals, and metals, citing reasons for unfair market practices. The situation has seen escalation since the discussions of product dumping and undercutting. 

Currently, US is looking at impacting $1 - 3 Trillion of imports and in a wake to try and promote the local production and growth. Let’s look at the some of the interesting commodities which might have an economical global impact in terms of growth, innovation and food!

A steep 30% tariff on Solar panels is going to impact the already regressive agenda of renewable energy globally. China is the largest manufacturer of solar panels and with the current 30% tariffs to be reduced to 15% after 4 years might impact the uptick in renewable energy coming in from solar power.

Almost 75% of the solar panel installation in the US comes from Asian countries and the tariffs are going to impact the innovation investment proposals for the solar industry in the US and the world.

Washing machines has seen tariff pegged at 20- 50%, which has a market of $5.1 Billion in US. Non US companies are holding a more than 50% of the market share because of cheaper and affordable competition. Interestingly, the tariffs on steel and aluminium will be a double whammy for the segment as the pressure of cost is going to mount.

Reports highlight that China exported more than 22 million washing machine units to the US in tune of $3 Billion in 2017.

The companies have been warned earlier too and have started taking action to avoid the situation. LG is already building its first US facility in Tennessee which would be operational by 2019. Samsung’s South Carolina facility is already producing 1 Mn units starting this year. Eventually, the impact is expected pare down with US sales being bolstered up but the wound would sustain for the years to come.

Soyabeans make up to $14.2 Billion of the agri-exports to China from the US. It’s the largest US goods exported to China. Interestingly, this gap is made up by strong supply, as Brazil has harvested a bumper crop this year. The soyabean futures prices have dropped by more than 18% and continues to be a concern in wake of strong supply. China makes up for 1/3 of the global demand for soyabeans as it uses the oilseed for its animal feed, more specifically PIGS !

According to FAO, China produces 60% of the total pork production of the world and 3/4 of the total meat consumption in China and by 2022, these numbers are going to rise by a minimum 50% upside. China imported 93.5 million tonnes of soybeans in 2016/17.

This calls for another stellar story another time but in wake of the tariffs, it’s interesting to see how commodity markets and pricing respond the alternate animal feeds such as canola and sunflower.

Policy makers hopefully keep this in mind, that, these alternatives have a shelf life and an 

traditional history of standard production mean. This means that sudden overconsumption will lead to higher livestock input cost than sustainable pushing inflationary trends in the wind. 

Alternatively, this will spur research and innovation in animal fodder industry involving duckweed and algae, which will spill into newer foodstock manufacturing in world of gastronomy too (humans included).

Coming back to the trade war, Malaysia, Vietnam, Indonesia and too a certain extent India is turning out to be major location benefactors of the situation, as lot of manufacturing companies are now moving production out of China and Hong Kong.

Tariffs on Steel and Aluminum are going to be a salvo not directed at cheaper steel but at the trading partners of US. US is the highest importer of steel, almost at 9% of global steel figures and top three steel partners are Canada, Brazil and S. Korea. 

The alleged ‘overcapacity’ stated by Trump is an accusation for China, which it is trying to mitigate by making it difficult for its steel trading allies. 

Statistically speaking, the world has an excess steel production and is going to increase its capacity ferociously in a market which is going to experience marginal demand growth for the next 10 years. The only anomaly could be huge infra investment driving consumption in developing countries or crippling down of supply chain systems by invoking geopolitical manipulation of EXIM market.  

Trump intention to protect American companies run a huge chance of impacting the American production and margins, which were a result of cheaper input cost from cheaper steel. This might end up impacting jobs to the tune of more than a lakh workers across automobile manufacturing and construction.

I feel that there is going to be inevitable impact from the trade war but the damage from it is more in thought process and policy making rather than $ values. 

The major blow would be to the belief systems which helped setup institutions such as WTO and other world bodies and the many regional international free trade pacts and agreements spawned after the WWII. 

The irreparable damage of germination of doubt and toeing the international trade system has served the global trade for more than 7 decades, the shakeup of the belief systems would be a shattering thought.

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In right earnest, hypothetically, if the trade war escalates and goes to a full blown global fallout, we would see the emergence of more bilateral and group trade agreements, moving away from pacts resulting from regional proximity to more common goal trade agreements between nations. Very interesting coalition would be in order. Here is me coming back to the fabric of reality now. :)

There might be some noticeable impact to the global GDP growth, resulting from the fall in investment except the rearrangement and shuffling of the tariffed goods from US to other countries. The commodity prices will take a strong correction but eventually the demand-supply scenarios will pan out. The impact on global commodity prices might be to the tune of a 20% on a YoY scale at best. 

The major blow would be the resultant of this war which might be a spiral down in terms of investment and innovation in new risky ventures in energy products and smart planet and innovation around the efficiency of current products. This is destined to push the global economy and the larger corporations behind by 10-15 years.

Evolving Environment and the World

On World Environment Day, 5^th June, it is more so poignant that I am scribbling these notes on world sustainability and its possible mitigating strategies. 

The increasing spewing of greenhouse gases by progress of civilization will eventually alter the planet. 

Period.

The first step to fix a problem is to acknowledge it. The world needs to action upon strategies which can delay the inevitability or give a chance to self-healing abilities of the planet to reverse it.

In the last few score years of growth, the world has seen extraordinary erosion of the climate situation and studies conducted by GISS shows how the CO2 emitted has a direct correlation to the global temperature anomaly.

Figure Alongside: Greenhouse gas forcing and global temperature anomaly. Image courtesy : GISS.

The other huge problem is a more political play for countries and increasing geo-political power play for regional blocks.

The humongous subsidies provided for the usage of fossil fuels which is a major impediment in the change towards renewable energy. Such subsidies are channelized by giving up productive investments in public welfare and by incurring public debt, which discourage the investment scenarios by technocrats and corporate. Subsidies alter the behavior of the market participants, consumers, producers and mediators alike playing havoc with the market pricing forces and its evolution.

This indeed deters investors as it pressure down the potential return scenario by investors or companies, who would be pioneers or early adopters in the scenario to explore the renewable energy market.

In a study by the fiscal affairs department of the IMF, the global subsidies accounted for more than 6% of the world GDP and to the tune of more than USD 5,000 Bn annually. The need of the hour is to rise above the strategical and geo-political fossil fuel power play.

The world is now trying to tackle the situation by coming together on reduction of the Co2 emissions. With inconclusive results from Copenhagen climate conference, a few major economies reluctance and US withdrawal from Accord de Paris doesn’t show a very strong promise for a coordinated action movement.

Positively, there are pockets of change underway, majorly being, the consumer moving from energy agnostic to energy literate.

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Few economics such as China, India and the Middle East are gung-ho on the solar PV market and its ever-increasing scope, rightly so. Estimations by various studies pegs Solar Photovoltaic installed capacity to be generating 1,764 GW and 1,840 GW respectively by Greenpeace and Bloomberg by 2030.

Saudi Arabia’s ACWA Power record for the 300 MW, Skaka IPP PV solar project is a landmark on its own.

The innovations and disruptive technological advancement do not stop just right here, emerging areas such as electricity generation, smart grid and storage are seeing a whirlwind of changes and ideas which challenge our existing paradigm of thought processes.

Thanks to corporates, research universities, PE investors and Asset Management firms who have seen the opportunity to encourage or be an early mover to patent and promote such initiatives. It is very critical for large energy firms to look at these opportunities and turn these innovations into viable and commercial realities from prototypes.

The next wave of competition will undoubtedly be fought in this battleground of innovative patents and scaling up the discoveries to the consumers at the most affordable price.

The technologies of methane dissolution and retreating of GHG gases is going to be another frontier. Till now the cost of implementation economically and socially was very low but in the coming years, we will see companies pushing these research as the cost of GHG emission increases and starts heavily impacting the shareholders.

Well I couldn’t just help by ending the thoughts without delving to the use of distributed ledger technology (DLT) and how it would benchmark data, records and its source bringing in transparency, parallelly creating new social and economic systems for companies to adapt and adopt.

The DLT calls for another story of its own right as the technology has the potential to manage/ streamline the carbon currency. It has its own deterrents as corporations wouldn't want a open auditable accounting system for such reporting, but the society would make a run for this tech in about a decade.

 

I intend to continue with the strain of thoughts …

Do comment below on what you want to hear more about.