China’s tariff loophole

Chinese manufacturers looking to sidestep US tariffs and shorten pandemic-ravaged supply chains have found the perfect solution: Mexico.

Plants and warehouses are sprouting up south of the US border as companies take advantage to proximity to the world’s biggest consumer market. 

“If you want to do good business with America, you must have something close to the market,” says a Chinese furniture manufacturer with operations in Mexico.

That isn’t Mexico’s only selling point. Thanks to the country’s free-trade pact with the US and Canada, a chair made in Mexico can travel across the border duty-free, whereas one shipped to the US from China would be hit with a 25% tariff.

Chinese investment in Mexico jumped to $271 million in 2017, when Donald Trump took office threatening a trade war. The pandemic’s supply-chain snarls and the angst caused by Chinese President Xi Jinping’s tech crackdown have catapulted yet more Chinese companies across the Pacific, with investment in Mexico.

Chinese companies aren’t the first to seek shelter from US tariffs in Mexico. Japanese automakers began opening plants in the country in the 1990s in response to a barrage of import restrictions that began under Ronald Reagan.

Firms from China have faced some operational challenges in Mexico. The US-Mexico-Canada Agreement, which replaced NAFTA, requires that a higher proportion of the value of any good must come from North America to qualify for tariff-free treatment. But Mexico doesn’t boast extensive networks of suppliers across many industries, making it trickier to source materials.

Some of the new arrivals have other issues to contend with as well. Chinese investors say their Mexican workers are more inquisitive than those at home. “Mexican people always ask why ‘Why should I do this?’ ‘Why should I do that?’”. “They want to understand the reason.” Another difference: Workers in Mexico generally won’t clock 16-hour days, like employees in China are willing to do.

Source: Bloomberg


Most liveable cities in the Middle East and Africa

Living conditions are improving – but familiar problems remain

Some 99% of people in the United Arab Emirates (UAE) have received at least two covid-19 vaccine doses, the third-highest rate in the world. That helped the country avoid full-scale lockdowns in 2021 and, so far, in 2022. Abu Dhabi and Dubai, its two major cities, have largely remained open for business since the first wave in 2020. Their relatively quick recovery is one reason why the cities rank first and second respectively in a survey of “liveability” in the Middle East and Africa by the EIU.

The EIU’s global index judges 172 cities – up from 139 last year – on five categories: 

–           culture and environment

–           education 

–           health care 

–           infrastructure and 

–           stability.

On average, cities in the Middle East and north Africa received a score of 58, compared with 50 for those in sub-Saharan Africa, the world’s least liveable region. (Western Europe, the most liveable region, had an average score of 91.) Though Dubai and Abu Dhabi are top in their part of the world, they rank around the middle globally. Their success with covid was outweighed by lower scores for education and culture. Both cities are still behind Hong Kong, for instance — a city with strict quarantine rules but high scores in other areas.

Despite the low overall ranking, life in the Middle East  and north Africa seems to be improving: the average score for cities in the region is up to 58 from 53 last year as covid restrictions have eased. Doha, capital of Qatar, which will host the football World Cup later this year, climbed six spots in the global rankings (despite continued criticism of its poor human-rights record and treatment of migrant workers). Kuwait City, capital of one of the fastest-growing economies on the Arabian peninsula, jumped nine places, the biggest such improvement in the region.

Cities in sub-Saharan Africa fared less well. Johannesburg, South Africa’s biggest city, remains the most liveable place in the region, but it has dropped five places down the EIU’s rankings. The country’s unemployment rate is at a near record high, blackouts are becoming more frequent and public services are collapsing.

As in last year’s survey, Damascus, Syria’s capital, has the world’s worst living conditions. Under Bashar al-Assad’s brutal dictatorship, some 90% of people in Syria live in poverty. Lagos, the commercial capital of Nigeria, also fares poorly, in part because jihadism and organised crime is widespread. Both cities have seen their scores improve slightly on last year, but not by enough to move them out of the bottom two of the world’s ranking.

Source: EIU


Billions of consumers around the world are seeing higher oil prices seep into the cost of living and wages. 

Filling the petrol or diesel tank soon starts to cost more when crude prices climb, as does airfares, but higher energy costs also boost prices for all the products on store shelves. 

Workers seek higher wages to compensate for a loss in their purchasing power.

These are what economists call second-round effects, and they can in turn further raise prices. 

If this feedback is large and sustained, a wage-price spiral could emerge, with wage growth and inflation rising over an extended period.

As the chart below illustrates, when overall inflation is already high, like it is at present, wages tend to increase by more in response to an oil price shock. 

This finding, based on a study of 39 European countries, may reflect that people are more likely to react to price increases when high inflation is visibly eroding living standards.

The larger the second-round effects, the greater the risk of a sustained wage-price spiral through a feedback loop between wages and prices. 

If large and sustained, oil price shocks could fuel persistent rises in inflation and inflation expectations, which should be countered by a monetary policy response.

As our chart shows, the risk of such a dynamic tends to be greater when the overall inflation rate is already high. 

For example, wages increase by 0.4% when underlying inflation is higher than 4%, one year after a 10% increase in oil prices, but increase by less than 0.2% otherwise. 

When overall inflation is higher, people tend to be more alert to price increases of all stripes and seek higher compensation for oil price rises. 

However, differences between high and low inflation periods narrow in the second year. 

These results impart two messages on the current situation, one concerning and the other reassuring.

Of concern is how current high inflation could increase the risk of energy prices causing sizable second-round effects and a sustained increase in inflation, which includes pushing up inflation expectations. 

To head off such a risk, central banks will need to respond firmly.

What’s reassuring, is the chart shows that even in a high-inflation environment, wages stabilised after a year rather than continuing to rise at a steady clip. 

In other words, there was a wage level but not a wage inflation increase.

To the extent that central banks remain adequately vigilant, current high inflation could still cause higher compensation for the cost of living than usual but need not morph into a sustained increase in inflation.

This article first appeared here.


How Africa Can Escape Chronic Food Insecurity Amid Climate Change

Climate change is intensifying food insecurity across sub-Saharan Africa, where Russia’s war in Ukraine and the pandemic are also adding to food shortages and high prices.

Climate events, which destroy crops and disrupt food transport, are disproportionately common in the region. 

One-third of the world’s droughts occur in sub-Saharan Africa, and Ethiopia and Kenya are enduring one of the worst in at least four decades. 
Countries such as Chad are also being severely impacted by torrential rains and floods.

The resulting rise in poverty and other human costs are compounded by cascading macroeconomic effects, including slower economic growth. 
A new IMF policy paper examined how fiscal and financial policies and reforms such as technology transfer can reduce this damage and help countries adapt.

Food supplies and prices are especially vulnerable to climate change in sub-Saharan Africa because of a lack of resilience to climatic events, food import dependence, and excessive government intervention.

Most people live in rural agricultural and fishing communities that can’t afford infrastructure to protect them from adverse weather. 

For example, they depend on rain to water their crops, and less than 1% of arable land is equipped with irrigation.

Weather-sensitive domestic food production results in heavy reliance on imports, with some 85%  coming from outside the region. 

While food imports can provide a buffer to domestic shocks, inflation spurred by weather shocks in regions where imports are produced can be passed on to consumers. 

Similarly, weather events that raise the cost of transportation are also passed on. 

The resulting high food-import costs can erode foreign reserves and weigh on exchange rates, contributing to more rapid price gains.

Against this backdrop, governments often try to help by intervening in agricultural production and food distribution. 

Untargeted interventions can be inefficient and weigh on national budgets, inflate food prices, impede competition, and reduce crop yields. 

For example, price controls and numerous and lengthy regulatory processes contribute to shortages by disincentivising food production, storage, and trade. 

Similarly, subsidies for fertiliser and seeds drive overuse and suppress crop diversification.

On the other hand, targeted government involvement can have merit, such as supporting research and development in building resilience and agricultural productivity. 

Prioritising policies around those that best protect the poor will be key amid financing and capacity constraints.

Fiscal and financial policies

Protecting food production and distribution from weather events begins with climate-resilient infrastructure. 

This type of public investment also creates jobs and can catalyse private investment.

Consider, for example, solar power that facilitates irrigation, water access, and temperature control for food storage. 

Equally impactful is a flood barrier that protects ports and roads critical to food distribution.

Digitalisation is also crucial. 

It gives farmers access to early warning systems and mobile banking as well as platforms to purchase fertilisers, seeds, or sell produce, helping to connect small producers to large vendors.

Social cash transfers that are targeted and far-reaching help people buy food and rebuild after weather shocks. They further allow families and small businesses to invest in resilience-building equipment and technology. By offering people control of the support they receive these cash transfers are more effective at containing inequality than agricultural subsidies.

Access to finance from private markets can play a similar role to social assistance. 

Raising it requires developing financial markets, which can take time. In the interim, micro-finance or public-private partnerships can help provide credit to people who currently don’t have access through banks.

To this end, establishing collateral through advances in property rights is crucial. 

With World Bank support, Mozambique and Tanzania are expanding title and survey registers and developing digital land administrative services.

 A pilot project in Ghana uses blockchain technology to improve incomplete or missing land records.

Cost-effective structural reforms

Trade liberalisation and import diversification could help stabilise regional food supply and prices. 

Zambia’s big maize harvests, for example, could have helped offset shortfalls elsewhere in Southern Africa if not for a ban on exporting the crop.

Access to larger markets can incentivise investment in agricultural production networks and value chains. 

It can also help spread knowledge —such as how to plant drought-resistant crops — and spur competition. 

One positive step in this direction is the Africa Continental Free Trade Agreement among 54 countries, which covers most goods and services. But progress is slow.

Empowered producer organisations can reach remote climate-vulnerable agricultural communities. 

This would help spread new technologies such as digital pest-control devices and high-yield seeds that tolerate heat and drought and improve climate adaptation training and market information. 

Aggregating production and selling directly to consumers can help to increase negotiating power, which in turn reduces storage costs, lengthens contracts, expands profit margins and opens access to new markets.

By streamlining and better targeting regulations, governments can help farmers build resilience. 

For example, appropriate water-use regulations reduce the cost for farmers to establish and expand irrigation systems. 

Along the same lines, efficient seed registration, like in Kenya, multiplies seed supply and access to resilient seeds. 

Finally, fertiliser testing, labelling, and registration requirements help farmers access contaminant-free fertilisers appropriate for specific weather shocks, soil, and crops.

Financing, capacity development, and transfer of technology and know-how will be key to supporting the policies outlined above. 

With mounting debt and limits to raising taxes, countries in sub-Saharan Africa will need grants and concessional finance. 

Development partners can also support resilience-building research and can propagate climate and financial literacy.

Multilateral institutions, like the IMF is supporting countries in these efforts including through climate-oriented public financial management advice and lending facilities such as their Resilience and Sustainability Trust. 

Soon to be operational, this new lending facility will provide longer-term affordable financing to address climate change and other challenges.

This article first appeared here.


Is a Global Recession Imminent?

Below an extract from a few big names in the latest EFI Policy Note, World Bank.

“The odds of recession in Europe, the United States, and China are significant and increasing, and a collapse in one region will raise the odds of collapse in the others… The risks of a global recession trifecta are rising by the day…” – Kenneth Rogoff, April 26, 2022

“A global recession is entirely avoidable… Even by laxer criteria like GDP growth < 2.5%, global recession is very far from inevitable…” – Jeffrey Frankel, August 25, 2022

“Whether the balance of risks is toward inflation, recession, or a smooth landing from current  turbulence depends on unknowns such as the duration of the Ukraine war…  But a global recession is certainly not inevitable…” – Anne O. Krueger, August 25, 2022

“If these two economies (the US and China) are both in their respective versions of recession,  then that will virtually guarantee a global downturn. Given their current weaknesses and challenges, such a scenario is quite possible… But I am less convinced of this than I probably was a few months ago…” – Jim O’Neill, August 25, 2022

“Notwithstanding the pitfalls of forecasting anything these days, my cracked and worn crystal ball sees a global recession occurring in the next year…. Collectively, Europe, the US, and China make up about half of world GDP on a purchasing-power-parity basis. With no other economy able to fill the avoid, I am afraid a global recession does indeed appear inevitable…” – Stephen S. Roach, August 25, 2022