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Can Emerging Economies Afford a “Green” Recovery from COVID-19?

Can Emerging Economies Afford a “Green” Recovery from COVID-19?

The dramatic slowdown in industrial production, energy demand and transport activity in the first quarter of 2020 has led to significantly lower levels of air pollution, sparking debate over whether the coronavirus outbreak will lead to long-term shifts in consumer and industrial behaviours that could reorient economic policy towards sustainable development goals. 

However, rising public debt, combined with significant capital outflows and reduced exports, will make financing green investments a challenge for many emerging markets as their governments seek viable strategies for kick-starting their economies once the disruption from the pandemic subsides.

A report by the International Renewable Energy Agency (IRENA) projected that accelerating investment in renewable energy could underpin the global economy’s COVID-19 recovery by adding almost $100trn to GDP by 2050.

In addition to helping curb the rise in global temperatures, the IRENA report claims that ramping up investment in renewable energy would effectively pay for itself over the long term, by returning between $3 and $8 for every $1 invested, and quadrupling the number of jobs in the sector to 42m over the next three decades.

While welcoming direct spending on infrastructure as a tool for stimulating economic growth after the coronavirus crisis, Thura Ko, managing director of Myanmar-based YGA Capital, cautioned that green energy projects should still be vetted carefully to ensure they are well planned and cost-effective.

“This is particularly important if the government has had to resort to emergency sources of funding, such as borrowing, grants or even quantitative easing. Certainly, if a green energy initiative makes sense and is efficient, then the government should initiate investment there – but not all green energy initiatives are efficient,” Ko told OBG.

As governments consider the role that investment-linked to sustainable development goals could play in post-pandemic stimulus measures, recent polling data indicates that voters across emerging and developed economies are broadly supportive of a “green” economic recovery from COVID-19.

In a survey conducted by Ipsos across 14 countries in April, 65% of respondents said it was important for their government to prioritize climate change mitigation actions in their post-COVID-19 recovery strategies. The figure was as high as 81% in India and 80% in China and Mexico, and fell as low as 57% in the US, Germany and Australia.

Green commitments in the “yellow slice”

Almost all countries globally have ratified the 2015 Paris Agreement, committing them to reduce carbon emissions with the aim of ensuring that global temperatures do not rise more than 2°C above pre-industrial levels.

This includes all countries in the “yellow slice” of the global economic pie: those high-potential emerging markets that makeup Oxford Business Group’s portfolio.

The 10 countries of the ASEAN bloc are committed to collectively meeting 23% of their primary energy needs from renewable sources by 2025.

However, the transition towards renewables in South-east Asia is complicated to some extent by the region’s plentiful reserves of coal, which are viewed by some policymakers as a reliable and cost-effective option for quickly scaling up generation capacity to meet domestic power demand.

Prior to the outbreak of COVID-19, China and Japan were ready sources of finance for coal-powered energy projects in the region, but there are some indications that this is changing.

In April, two of Japan’s largest banks – Sumitomo Mitsui Banking Corporation (SMBC) and Mizuho – announced commitments to curb their financing of new coal power projects under renewed pressure from environmental groups.

Since January 2017 Mizuho, SMBC and fellow Japanese bank Mitsubishi UFJ Financial Group have accounted for 32% of direct lending to coal power plant developers, so Japanese banks’ decisions to rein in lending to the segment will create a significant gap in the financing ecosystem for such projects.

Elsewhere, GCC countries have made steady progress in adding to their renewable energy capacities, in tandem with efforts to diversify their economies away from dependence on hydrocarbons.

The UAE has been at the forefront of this transition and is now home to approximately 79% of installed solar photovoltaic capacity across the GCC’s six members. The country aims to generate 44% of its domestic power needs from renewable sources by 2050, the highest proportion in the region.

Meanwhile, 10 countries in Latin America and the Caribbean – led by Colombia – have set a regional goal of meeting at least 70% of electricity needs from renewable sources by 2030.

In Africa, where 600m people still do not have access to electricity, IRENA has proposed grid interconnections and the development of regional energy corridors as viable mechanisms for extending low-cost wind and solar energy to all countries, as well as enabling cross-border access to hydropower and geothermal energy.

Funding the transition

While climate change can be viewed as a systemic risk to the long-term development of emerging economies, it remains to be seen if governments in such countries will go beyond prior commitments to incorporate large-scale investments in green energy and infrastructure into their post-COVID-19 recovery strategies.

With business and household demand expected to remain depressed for some time after the worst health effects of the crisis subside, policymakers will be required to enact further policy measures to stimulate economic activity.

“If stimulus packages simply return countries to where they were before COVID-19, we will face the same problems tomorrow that we faced yesterday: low productivity, high pollution, and locked-in, carbon-intense economic structures,” Stéphane Hallegatte, lead economist of the World Bank’s Climate Change Group, told OBG.

“The most efficient stimulus packages will be the ones that are designed to create many jobs and support economic activity over the short term, but also get economies on track for rapid and sustainable growth post-COVID-19. Countries can use this spending to make them 21st century-ready by investing in developing the skills of their population, but also in a modern, zero-carbon infrastructure system and a healthy environment.”

If required investments can be catalyzed, green energy and infrastructure development can be particularly effective at addressing depressed demand because they can create a relatively high amount of jobs while also laying the foundations for sustainable long-term growth.

World Bank data indicates that mass transit projects, building retrofits to enhance energy efficiency and renewable energy plants are much more effective at job creation than fossil fuel projects. Looking further ahead, such projects should contribute to lower air pollution, which should simultaneously help to lower mortality rates and boost labor productivity.

Unlike the situation after the 2008-09 financial crisis, the cost of renewable energy generation is now competitive with fossil fuels, meaning fewer trade-offs between short-term pains and long-term gains when evaluating renewable energy investment decisions.

However, Hallegatte recognizes that many energy and public transport projects take a long time to prepare, and argues that they should be added to stimulus packages now – possibly by reviewing and updating existing plans – for the benefits to start being felt in six to 12 months.

He added that emerging economies could explore various avenues for financing such projects, including the state budget, offering attractive incentives to private firms and requesting support from multilateral finance institutions.

Looking further ahead, redirecting fossil fuel subsidies towards more productive and sustainable areas of the economy, as well as introducing energy or carbon taxes, could become part of the tool kit for channeling investment towards green infrastructure.

Private equity (PE) could also prove to be an effective alternative source of funding for green infrastructure projects, as many funds are now assessing new strategies for the recovery phase, but they are likely to become more discerning about where to allocate capital.

“PE funds will be even more selective and scrutinous than before. Underlying business prospects in a post-COVID-19 environment must be clear and visible. A link to sustainable development goals can add to the investment appeal – particularly in relation to an eventual exit – but this does not detract from the need for a business model to be robust and clear,” YGA Capital’s Ko told OBG.

For Ulrich Volz, director of the SOAS Centre for Sustainable Finance, emerging economies should also look at developing their domestic capital markets in order to become less reliant on foreign portfolio investment, which tends to migrate quickly towards developed market assets at the first hint of a crisis.

By doing so, they would be better placed to fund domestic investments through domestic savings, which in the past have predominantly been invested in advanced countries for relatively low returns.

“Some will claim that, in times of crisis, developing and emerging economies won’t be able to afford the ‘luxury’ of green or sustainable investments, but this is a very short-sighted view,” Volz told OBG.

“Growth that is not sustainable undermines long-term development. The COVID-19 crisis shows how risks that seem very far away and abstract can hit us with a vengeance. I would hope that sustainability risks will receive even more attention because of the current crisis.”

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This article originally appeared on oxfordbusinessgroup.com. Republished with permission.

section 232

Commerce to Investigate Expansion of Section 232 Tariffs on Steel to Include Imports of Electrical Transformer Steel

On Monday May 4, 2020, the Department of Commerce issued a news release announcing the start of a Section 232 investigation on imports of “Laminations and Wound Cores for Incorporation Into Transformers, Electrical Transformers, and Transformer Regulators.” This investigation is effectively an examination of whether or not to expand the current Section 232 tariffs on steel to include these products.

The announcement indicates that imports of the steel incorporated into the specifically identified transformers “are being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.” According to Commerce, it had received “inquiries and requests from multiple members of Congress as well as industry stakeholders,” to start this investigation. Similar to other 232 investigations, the Bureau of Industry and Security will conduct the investigation and request comments in a Federal Register notice that will likely be published soon.

Quoting Commerce’s press release – “transformers are part of the U.S. energy infrastructure,” and “laminations and cores made of grain-oriented electrical steel are critical transformer components. Electrical steel is necessary for power distribution transformers for all types of energy—including solar, nuclear, wind, coal, and natural gas—across the country. An assured domestic supply of these products enables the United States to respond to large power disruptions affecting civilian populations, critical infrastructure, and U.S. defense industrial production capabilities.” It is also important to note that grain-oriented electrical steel (“GOES”) was subject to antidumping duties and countervailing duty orders for several years but there are no current antidumping and countervailing duty orders on GOES.

Based upon the proposed schedule, the secretary of Commerce will notify the secretary of Defense of the investigation, as required by statute. In addition, it stated that the “Department of Commerce will conduct a thorough, fair, and transparent review to determine the effects on the national security from imports of laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators.”

In January 2020, Commerce expanded the scope of the Section 232 tariffs on Steel and Aluminum to include certain other derivative products on products such as nails and thumbtacks without conducting an investigation such as the one now seemingly being proposed. The trade remedies team at Husch Blackwell LLP represents clients now challenging that expansion in the U.S. Court of International Trade. In initiating this new investigation, it appears that Commerce has recognized that it may be on shaky ground for its earlier expansion of section 232 tariffs on steel and aluminum and may be willing to provide a fuller procedure for comments and input from interested parties.

Regardless of the procedures, however, if affected U.S. companies cannot locate the steel they need domestically, and the tariffs make importation of steel to manufacture downstream products, then the only option is to source from other countries. Thus, we expect that numerous companies will file comments on this new round of expansion of national security tariffs.

__________________________________________________________________

Nithya Nagarajan is a Washington-based partner with the law firm Husch Blackwell LLP. She practices in the International Trade & Supply Chain group of the firm’s Technology, Manufacturing & Transportation industry team.

Jeffrey Neeley is a Washington-based partner with the law firm Husch Blackwell LLP. He leads the firm’s International Trade Remedies team.

global trade

Global Trade Talk: Reconfiguring US-China Supply Chains for a Post-Coronavirus World

Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities. This article focuses on the conversation between Jack Perkowski, JFP Holdings Ltd., and Keith Rabin, KWR International, Inc.

___________________________________________________________

Hello Jack, how are you? It has been a long time since we last talked. Before we begin, can you tell us about your background and current activities?

After graduating from Harvard Business School, I went to work on Wall Street, joining Paine Webber, where I served for 20 years and ended up running the Investment Banking Department. I then decided to do something different for a second career and became interested in Asia. That led to a trip to Hong Kong in 1990 and my moving there in late 1991. I quickly decided within Asia, China was the key driver, and in 1992 made my first trip to the Mainland.

At that time, China’s auto market was small and fragmented. They were manufacturing about 500 thousand vehicles a year, but it was clear the country wanted to develop a large auto industry. However, foreign companies were slow to enter because volumes were too small, so to encourage investment, the government allowed foreigners to have majority ownership in automotive components companies. That is now allowed in most industries in China, but at the time, auto components were the only industry where this was permitted.

I decided to do a roll-up buying majority ownership in a dozen leading auto component companies; putting them under one umbrella; introducing new management and quality systems. To test whether this could work, I visited 100 factories in 40 cities, and concluded it was a viable strategy. I then went back to Wall Street and raised $150 million over the Christmas holidays in 1993 to fund the company. In February 1994, I founded ASIMCO Technologies, an automotive components company focused on China’s emerging auto market. A year later, we raised another $150 million. Over several years, we invested $300 million, which is a lot of money even today. In 1995, though, it was a very large sum.

ASIMCO evolved into a company with 12,000 employees, 17 factories and about a billion dollars in sales. In 2009, ASIMCO was sold to Bain Capital, and I started JFP Holdings, which helps foreign companies to determine whether there is a market in China for their product, service or technology. We also help Chinese companies to expand in overseas markets. We are very hands-on, undertaking research, and then helping our clients to effectively develop and implement their strategies and ongoing business operations.

Almost ten years ago we published an interview with you titled “Profiting from China’s Domestic Economy” concerning China’s rise over several decades to become the world’s second-largest economy. Can you talk about China’s emergence and the role it now plays in the world economy?

China’s growth has been very rapid and it became the world’s second-largest economy about the time we spoke in 2010. Its GDP was about $1.3 trillion in 2001 when it joined the World Trade Organization (WTO) – and over the past 20 years, it has grown by more than tenfold to about $14 trillion. In contrast, the US remains the world’s largest economy, at about $22 trillion.

Japan, which had been in second place, is now third, at about $5 trillion – so there is quite a drop from second to third place. Therefore, if you are a company looking for growth, China is very important. It is hard to see how in coming decades a company can maintain or build a global leadership position if it does not have a meaningful presence there. This is reflected in the Fortune 500 list, which now has as many Chinese firms included as from the US.

Per capita income in China has also risen to around $10 thousand a year. That, however, is a bit misleading, because it is an average. It includes an emerging middle and upper class of more than 500 million people, which is about 1.5 times the entire population of the US. These people largely live in major cities and are rapidly increasing their consumption. McKinsey, for example, estimated [1] last year that China delivered more than half of global growth in luxury spending between 2012 and 2018 and is expected to deliver 65% of additional spending into 2025.

This is important. US companies and policymakers need to think of China – not only in terms of manufacturing and sourcing – but also as an important driver of global growth. Therefore, while we need to address the dangers of being over-reliant on China in our supply chain, we also must remain aware of China’s growing global market share, so we can benefit and participate in a fair, constructive and competitive manner.

It is true that China’s economy is increasingly driven by consumer demand. It has also become an important source of R&D and innovation – trends that have risen dramatically since we last talked. Can you talk about this phenomenon, where China stands, and what it means to the US and companies and investors?

Unlike many who located factories in China as a way to reduce the costs of US production, I did not set up ASIMCO as an export company. Our emphasis was on becoming an important part of the local auto market. At the same time, we worked with foreign companies such as Bosch, Caterpillar, and others that sourced components in China, but viewed that as an extra revenue source and a way to ensure our factories could produce to international standards. Lowering labor costs was certainly a factor, but not the central element of our strategy, as I knew costs would rise as China developed. Toyota, for example, is a company that takes a similar view and doesn’t really embrace cost alone as a strategy. It has always wanted its suppliers to make components locally where possible so they can be close to where they are being used. That has been our approach as well.

Bottom line – to benefit from growth in China you need to be there. That is the only way to truly understand and participate. When we began, potential Chinese customers told us they would not take us seriously unless we had a factory there. That is important. The Chinese understand networks and supporting firms follow production. This leads to investment, infrastructure, and development of auxiliary industries and innovation within the supply chain. Academic institutions also respond and take steps to train engineers and others with the critical skills needed. This leads to advanced research and an ability to apply technologies and launch success stories. These make investors comfortable and provide additional benefits – which have value not only in China – but in other markets around the world.

With respect to innovation, few Americans realize how rapidly China is developing in areas including digital technologies, consumer payments, e-commerce, and services. In some areas, it is becoming more advanced than the US and we can learn from them. It is important to keep this in perspective and to balance the need to address trade issues and strengthen and safeguard our supply chain with the need to remain present and involved in this increasingly important market. This is the way we can sustain and advance growth and our global competitiveness.

At the same time, there is a legitimate concern in the US about Chinese technology. I spoke to a group of tech executives and investors in Jackson Hole last year. All they wanted to talk about was China’s development of 5G. While there are security implications if Chinese 5G equipment is installed in the US, you can’t blame China for taking steps to move up the value chain. The US also needs to upgrade our capacity and competitiveness – and our ability to develop the products, services, and supply chains that are needed moving forward.

China’s growth has heightened its political ambitions and in recent years we have seen growing tension in the South China Sea, the pursuit of the Belt and Road Initiative, control over rare earth metals, rising tariffs and trade disputes, blockage of Huawei and a generally more competitive posture than in the past. This has strained bilateral relations with the US and led to anxiety in Asia and other countries. What does this portend for China and US-China relations moving forward? Considering these developments and backlash over China with coronavirus what changes are we likely to see from China in respect to its trade and bilateral relations with other nations and multilateral institutions?

China joined the WTO in 2001 and there has since been a sharp uptick in every economic measure. Its economy has grown about ten times and the country has clearly benefitted from globalization. Meanwhile, the US and the rest of the world looked the other way as many Chinese policies and business practices during this period have been in violation of international trade practices. We have been like two ships passing in the night. No one, regardless of who was in the White House, wanted to address contentious trade, IPR, technology transfer, and other key issues.

Every year there was a state dinner or two and leaders of each country would shake hands, but important issues were never discussed in a direct, constructive way. President Trump has done this for the first time and the dynamics have changed. Up until the coronavirus, however, most of the world considered the Trade War as “Trump’s Trade War,” but the virus has caused trillions of dollars of damages throughout the world, and now many more countries will be concerned about China’s behavior. This will place more pressure on both Chinese companies and the government – and the country will have to adjust. At the same time, China’s leadership is going back to its more authoritarian roots, and no one likes that —least of all the Chinese people.

While many of China’s relationships with other countries are likely to be more confrontational going forward, I remain optimistic. At the beginning of the year, a phase one US-China trade agreement was signed. When it came out, many said the US did not get what it needed, and others said it was like the “unequal” treaties China entered with western powers in the 19th and early 20th centuries. I knew it could not be both and read through it.

Everyone has focused on the provision that says China will buy significant merchandise from the United States over the next two years, but the agreement also deals with IPR, currency manipulation, and other key issues. Most importantly, it includes an arbitration mechanism that provides for quarterly meetings between the US Trade Representative and China’s Deputy Prime Minister where issues of non-compliance are discussed and resolved. To me, this seems like a better approach than trying to take Chinese companies to court.

The real question is will the phase one deal be implemented? In my view, the economic devastation that has resulted from the coronavirus ensures that it will. The US and the Trump Administration want the purchases to go through and China wants tariffs to be lifted. So both sides are under pressure to comply. In a curious way, while our countries are at odds at the governmental level – there are real incentives to work through these important issues – which many in China also would like to see resolved. As a result, I believe the virus will help to build consensus and facilitate the implementation of the January 15th agreement.

The COVID-19 coronavirus is having a dramatic effect on global health as well as the global economy and China. What is the current situation in China? How has the virus affected its economy, and can we trust the data that is emerging? What lessons can we draw from the Chinese experience and what changes might result in respect to US-China and global economic relations and trade moving forward?

I don’t know the exact number of cases and deaths in China, and you can certainly fault their transparency and failure to alert the rest of the world. But, once China recognized the seriousness of the virus, the government imposed draconian measures within its borders that could not be applied here. For example, in the US you cannot rope off and restrict millions of people or undertake the kind of contact tracing and restrictions seen in China.

In this way, China was able to arrest the spread of the virus but nonetheless took a big hit in the first quarter. The second quarter will also not be great. China is, however, implementing stimulus measures – not the roads, bridges, and the infrastructure spending we saw after the 2008 financial crisis – but measures to increase the development of 5G and other technologies that were outlined as key industries in the country’s “Made in China 2025” plan.

As a result, China is likely to have a strong second half. The IMF predicts 1.3% annual growth in 2020. This is certainly down from the double-digit growth enjoyed over recent decades, but it is still positive. The bottom line is, while China is still practicing social distancing, imposing precautions, and incurring hardships, the country is largely back to work. We know that because we deal with businesses and factories all over China, including Hubei province where the virus originated. From what we see, the factories are close to full production. China was the first to take the hit, and it is now the first to recover. Beginning in the third quarter, we think growth will pick up and China is likely to see a V-shaped recovery.

For decades the US embraced China’s rise, and production moved there so companies could reduce costs, raise profitability, and access a new, large emerging market. That began to change with growing concerns over jobs, income inequality, and supply chain security. This sentiment accelerated as President Trump began to impose tariffs and even more now with the coronavirus. The result is more serious talk about bringing jobs and production back to the US. Is this possible and what would it mean for US companies, policymakers, and our economy?

It is definitely possible. A lot of production in the US moved to China in recent decades and the pendulum went way too far in that direction. Many jobs were lost; there was social dislocation, and the security of supply chains for a number of key products has been endangered. At the same time, while the US still possesses research and development advantages, foreign-based supply chains, industrial infrastructure, technical expertise, and networks place us at a disadvantage when it comes to implementation and development.

Much of the offshoring was motivated by the search for lower labor costs – but I think tax and regulatory issues in the US also played a role. So, while we need to address environmental concerns and keep to high standards, we must make the country more attractive if we are to bring companies back. This is particularly true in industries where there needs to be a US presence. That is something that has become even more apparent as trade and political disputes further aggravate this imbalance, and now with the coronavirus, logistics and transportation disruptions have caused inventories to run low.

We are also seeing and helping clients and companies to shift production out of China to Southeast Asia and other emerging markets. This is being done to optimize and diversify supply chains, maintain cost competitiveness, minimize tariff exposure, and to allow access to these growing markets. This is true not only for the US but also for Chinese, Japanese, Korean, European, and other firms. What considerations should companies consider as they reconfigure supply chains and their approach to international markets?

Every company needs to use this time to reexamine its supply chains to determine where they are vulnerable. If they don’t do that – they are simply not doing their job. Governments need to do that as well. If you don’t want the pharmaceutical and other critical industries and materials dependent on China or other nations, it is not enough to criticize foreign practices. You also have to provide real alternatives and incentives to bring production back here. This is true both from an inventory as well as an investor and national security standpoint.

Industries will not, however, come back to where they were in the 1970s and 1980s. The world has changed and we are now far more integrated than we were in the past, both in terms of supply and demand. While the need to address this issue has been clear for some time, US-China trade tensions and the coronavirus have accentuated the need to readjust. Until recently, companies were content to leave production in China as investments and this capacity was already in place – even though many factories were set up at an earlier time when labor costs in China were lower and conditions less developed.  Now, however, as it has become clear how dependent we are on foreign supply, there is more incentive to reevaluate. In many cases, customers, stakeholders, and investors will demand it.

Some of that production will come back to the US, but where cost remains a key determinant, much of it will go to other countries, such as those in Southeast Asia. A concern I have, however, is these countries are so much smaller than China there is a limit to how much production can be shifted there. There is also less opportunity to sell into the local market. Depending on the industry and location, infrastructure and services may also be lacking.

For example, in China, about 25 million vehicles are now manufactured annually, and there has been substantial investment into forging, casting, and other needed functions. These are expensive operations that are hard to replicate. At the same time, Southeast Asia is relatively close, and we are seeing interest from both foreign and Chinese companies to move at least part of their operations there. Because they offer an opportunity to diversify, countries like Vietnam are benefitting from the shift. Other Southeast Asian countries also provide benefits and need to be examined.

A major obstacle in moving jobs and production back to the US is the need to rebuild and upgrade infrastructure as well as our educational, immigration, and healthcare systems to provide the skills and environment needed to allow the transformation that must unfold. What steps need be taken by the US, state, and local governments if we are to rebuild our manufacturing capacity and to both repatriate production that moved offshore and new trade and investment back to the US?

We definitely have the ability to compete. We need to rebuild parts of our economy, but the cost and scope of a large national infrastructure program will be huge and complex, as is education, immigration, and healthcare reform. I believe, however, these goals will be achieved over time.

We also possess many advantages. For example, we are now an energy exporter and able to supply ourselves at low relative costs. Our universities and capital markets also provide strength.  The largest obstacle I see is the need to reduce regulation and institute favorable tax policies.  Addressing the devastating impact of the coronavirus on small businesses, which employ the vast majority of our population, is also now a major, if not our most important, priority. We need to get these people back to work ASAP.

Over the years, we have worked for many economic development agencies as well as private developers to facilitate their efforts to attract trade, investment, and business activity within a range of sectors. Drawing from your experience, what advice can you give to US companies and economic development agencies seeking to attract foreign trade and investment and business partners to enhance their businesses, local economies, and international competitiveness.

There are certain things economic development agencies can do tax-wise to provide incentives and create a welcoming business environment. At the same time, it is especially important to clearly and effectively position themselves to demonstrate competitive advantage and why their cities or states are attractive destinations, while also demonstrating their support for companies who relocate there.

When you travel around China, as we did when we arrived, local authorities roll out the red carpet. They make you feel wanted and have an interest in supporting your development. In contrast, I recently accompanied a Chinese manufacturer to a US Midwestern State as they contemplated setting up a facility there. One of their requests was to meet with local officials. The company we were working with was at first unsure who to meet with but eventually set up a meeting.

The officials were very nice, but it was clear this was unusual and they were not accustomed to meeting foreign companies. They were unsure of what they could contribute and did not seem to understand why they were there. In China, local governments are much more determined and willing to play an active role in wooing investment. In a sense, they try to be partners with businesses that base within their jurisdictions. That seems almost a foreign concept here.

As a result, US companies and economic development agencies should be more active and aggressive – to reduce barriers, provide incentives, and demonstrate an interest in attracting businesses that want to base in their city or state. They also need to demonstrate clear reasons as to the benefits of the location – so decisions are based more on value than on cost alone.

Thank you Jack for your time and attention. Look forward to following up soon.

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Keith Rabin serves as President at KWR International, Inc., a consulting firm specializing in international market entry, site location and trade, business, investment and economic development; as well as research and public relations/ public affairs services for a wide range of corporate and government clients.

[1] https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/China/How%20young%20Chinese%20consumers%20are%20reshaping%20global%20luxury/McKinsey-China-luxury-report-2019-How-young-Chinese-consumers-are-reshaping-global-luxury.ashx
bear

The Bear is Back: A Global Pandemic

The U.S. stock market fell into a bear market on March 12, 2020, ending the bull market that began in 2009. The bull market had begun on March 9, 2009, and peaked on February 19, 2020. The S&P 500 rose 400% between 2009 and 2020, the Dow Jones Industrials rose 351% between 2009 and 2020 and the NASDAQ Composite rose 674% between 2009 and 2020. However, since February 19, 2020, we have seen dramatic declines in all three.

Figure 1. S&P 500, 2009 to 2020

The GFD US-100 Index provides coverage beginning in 1792. By our calculation, there have been twenty-four bull and bear markets since 1792 with four occurring in the 1800s, seventeen in the 1900s, and three in the 2000s. The worst bear market was in 1929-1932, led by an 89% decline in the Dow Jones Industrials. Two prior bear markets in this century both had declines of 50% in 2000-2002 and 2007-2009. By comparison, previous bear markets, such as those occurring in 1987 and 1990, only lasted a few months before a bounce-back.

What is interesting about this current bear is how quickly and how sharply it hit markets throughout the world in response to the spread of the Coronavirus. This was a quick, simultaneous financial pandemic in every nation of the world. In many countries, the 2020 bear market is simply a continuation of the bear market that began in 2018.

The extent of the bear market in 22 countries and for global indices is provided in Table 1 which uses data from the GFDatabase. The table shows the date of the market top, the value the index hit on that date, the change from the previous market low, the current value of the market, and how much each market has fallen since the top in 2018 or 2020. The only major market in the world which has not fallen into a bear market this year is the Chinese market, the country where the coronavirus originated. However, the Chinese market had already been in a state of decline since 2015.

Figure 2. Shanghai Stock Exchange “A” Shares Index, 2010 to 2020

So far, global markets have fallen by around 30-40%. The question is, how much more are the markets likely to fall?  Will this be a short-lived bear market as occurred in 1987 and 1990 or a more extended bear market as occurred in 2000-2002 and 2007-2009?

Figure 3. United States 10-year Bond Yield, 2010 to 2020

It should be noted that fixed-income markets have already hit their bottom in the United States. This occurred on March 9 when the 10-year bond fell below 0.5% as we had previously predicted in the blog “230 Years of Data Show Rates Will Soon Hit 0.50%.” Yields have slightly risen since then. Moreover, the Shanghai Index bottomed out on February 3, 2020, when the stock market reopened after the Chinese New Year and has not participated in the worldwide sell-off. Both of these indicate that this bear market will not continue for an extended period of time. We will update Table 1 on a regular basis so our readers can follow the changes in this COVID bear market.

Table 1.  COVID Bear Market Statistics for 22 Countries and 4 Regions

 

Country

Index

Market Top

Value

Change

Market  Low

Value

Change

Asia
Australia All-Ordinaries 2/20/2020 7255.2 133.16 3/23/2020 4564.1 -37.09
China Shanghai A Shares 6/12/2015 5410.86 165.15 12/27/2018 2600.05 -51.95
Hong Kong Hang Seng 1/26/2018 33154.12 80.98 3/23/2020 21696.13 -32.76
India BSE Sensex 1/14/2020 41952.63 82.79 3/23/2020 25981.24 -38.07
Japan TOPIX 1/23/2018 1911.31 59.77 3/16/2020 1236.34 -35.31
Singapore FTSE ST All-Share 1/24/2018 877.87 40.38 3/23/2020 540.6 -38.42
South Korea Korea SE Price Index 1/29/2018 2598.19 57.21 3/19/2020 1457.64 -43.90
Taiwan Taiwan Weighted 1/14/2020 12179.81 56.41 3/19/2020 8681.34 -28.72
Europe and Africa
Belgium All-Share 4/13/2015 13859.94 104.31 3/18/2020 7202.21 -48.04
France CAC All-Tradable 2/12/2020 4732.14 56.27 3/18/2020 2888.89 -38.95
Germany CDAX Composite 1/23/2018 625.19 50.07 3/18/2020 363.83 -41.80
Italy FTSE Italia All-Share 2/19/2020 27675.06 39.43 3/12/2020 16286.37 -41.15
Netherlands All-Share Index 2/12/2020 904.31 54.15 3/18/2020 574.88 -36.43
Norway OBX Price 9/25/2018 523.06 70.44 3/16/2020 329.67 -36.92
South Africa FTSE All-Share 1/25/2018 61684.8 246.26 3/19/2020 37963 -38.46
Spain Madrid General 4/13/2015 1203.82 99.78 3/16/2020 608.26 -49.47
Sweden OMX All-Share Price 2/19/2020 732.67 68.35 3/23/2020 478.95 -34.63
Switzerland SPI Price Index 2/19/2020 731.04 140.71 3/16/2020 548.52 -24.97
United Kingdom FTSE-100 5/22/2018 7534.4 99.27 3/23/2020 4993.89 -33.72
Americas
Brazil Bovespa 1/23/2020 119528 217.51 3/23/2020 63451.55 -46.91
Canada TSE-300 2/20/2020 17944.1 51.52 3/23/2020 11228.49 -37.43
Mexico Mexico IPC 7/25/2017 51713.38 206.16 3/23/2020 32936.6 -36.31
United States DJIA 2/12/2020 29551.42 351.37 3/23/2020 18576.04 -37.14
United States S&P 500 2/19/2020 3386.15 400.52 3/23/2020 2236.7 -33.95
United States NASDAQ 2/19/2020 9817.18 58.52 3/23/2020 6860.67 -30.12
Global
Emerging Markets MSCI Emerging Free 1/29/2018 1278.53 85.69 3/23/2020 758.204 -40.7
Europe MSCI Europe 1/25/2018 1926.57 47.52 3/23/2020 1152.698 -40.16
World MSCI World 2/12/2020 2434.95 35.63 3/23/2020 1602.105 -34.2
World MSCI EAFE 1/25/2018 2186.65 46.52 3/23/2020 1354.3 -38.07

 

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Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

How Opportunity Zones Could Help Restore the Economy After COVID-19

The COVID-19 shutdown has created financial setbacks for millions of Americans and their communities, but economic troubles – whether caused by the pandemic or otherwise – don’t hit everyone equally.

“Unfortunately, there are many rural and urban areas across our great nation that have become distressed due to a variety of circumstances and factors – and that was true for these areas even before COVID-19,” says Jim White, founder and president of JL White International and author of Opportunity Investing: How To Revitalize Urban and Rural Communities with Opportunity Funds (www.opportunityinvesting.com).

“These areas cover the entire breadth of our nation and their populations are diverse. Poverty is a condition that does not discriminate, impacting people of every race, creed, color, gender, and age group, though it does strike minorities with far greater severity.”

But despite the problems, White says, those distressed communities have the potential to provide one path back both for the economy and for investors seeking to diversify with alternatives other than the stock market.

How so? Through the Qualified Opportunity Zone program, which Congress created in 2017 to encourage economic growth in underserved communities. The 2017 Tax Cuts and Jobs Acts provided tax benefits to investors who invest eligible capital in these opportunity zones to create retail, multifamily housing, manufacturing or other improvements. To qualify, the areas must meet certain specifications related to such factors as the poverty rate and the median family income. There are more than 8,000 opportunity zones nationwide.

“I believe, as we move forward to reinvigorate the economy, investing in our poorest communities is going to be the right avenue to take,” White says.

White says a few reasons opportunity zones could be an important and effective part of the recovery include:

Improvements to distressed communities will build on themselves. If businesses in the zones thrive, the communities will have more jobs and better salaries to offer. “More people will want to relocate to these areas, which will increase real estate values and breathe new life into local shops and stores,” White says. When residents and business owners are doing well, they spend more money on beautifying their homes, storefronts, public buildings, streets, parks, and monuments. Their infrastructure will improve, crime will decrease, and better health care will be available for residents.

Investors can make money as well as save on taxes. Those who invest can benefit from more than just the initiative’s capital gains tax breaks, White says. They also can see a significant return off their investments.

Investors also can help improve people’s lives. The zones give investors who want to do more than just make money a chance to have a positive impact on low-income urban and rural communities, and the lives of millions of people. “Investments have already worked miracles in several American communities and we are only at the early stages of experiencing their capabilities,” White says.

“These opportunity zones can simultaneously channel economic help to distressed communities, and create an outsized return for investors,” White says. “Both these things will be critically important as we try to bring back jobs and restore the economy coming out of the pandemic. If nothing else, the coronavirus is teaching us that we are all in this together, and that all of us, across the country and globally, must be responsible for one another.”

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Jim White, Ph.D, author of Opportunity Investing: How To Revitalize Urban and Rural Communities with Opportunity Funds (www.opportunityinvesting.com), is founder and president of JL White International. He also is Chairman and CEO of Post Harvest Technologies, Inc. and Growers Ice Company, Inc., Founder and CEO of PHT Opportunity Fund LPX. Throughout his career, he has bought, expanded, and sold 23 companies, operating in 44 countries. He holds a B.S. in Civil Engineering, an MBA, and a PhD in Psychology and Organizational Behavior.

food sector

Food Sector Faces Multipronged Consequences of COVID-19 Outbreak

Brick and mortar, as well as online food chains, are facing the wrath of the current COVID-19 outbreak. The worldwide supply chain includes distribution, packaging, as well as sourcing of raw materials. Lockdowns are disrupting the transportation of packaged foods, prepared foods, non-alcoholic and alcoholic beverages. Before the pandemic, the major growth drivers were growing consumption of ready-to-eat convenience foods among on-the-go consumers.

Shifting lifestyle patterns, rising per capita income, and a growing population have been the prominent growth-enhancing factors associated with the food sector prior to the outbreak. However, shutdowns of restaurants and quick service facilities due to lockdowns have hindered the growth of the food & beverage industry to a large extent.

Online Food Orders Surge as Offline Food Chains Struggle to Cope with COVID-19

In view of the dual nature of the food industry, the impact of COVID-19 is multifaceted on online and offline food chains. The offline food chain comprises of cafes and restaurants that have been shut down across the globe. However, online food deliveries remain operational in most of the regions. The packaged food industry, in particular, is witnessing prolific demand for milk products and shelf-stable foods. As consumers hurry to fill their pantries, the demand is projected to surge even further. Almost every region of the world has been affected by the coronavirus crisis, namely, Asia Pacific, Europe, North America, and the rest of the world. An example of how supply chains were gravely affected is derived from Coca Cola Co.

The carbonated beverage giant, sources raw material from China where the outbreak surfaced in early December of 2019. During the initial days of the pandemic, the company faced a great deal of difficulty in managing the frontend of its supply chain. The production, supply, and export of raw materials from China were delayed due to which the company now solely relies on its suppliers in the US for sourcing sucralose. The major companies in the food & beverages industry affected by coronavirus outbreak include Subway Restaurants Inc., Starbucks Corp., PepsiCo Inc., Papa John’s International Inc., McDonald’s Corp., KFC Corp., International Dairy Queen Inc., Dunkin’ Donuts LLC, Domino’s Pizza, Inc., and Burger King Corp. For instance, Starbucks had to shut down about 2,000 outlets in mainland China after the pandemic began to spread like wildfire.

Livelihoods and Lives at Risk from COVID-19 Pandemic

The looming food crisis amid trade disruptions, quarantines, and border closures continues to endanger both livelihoods and lives worldwide. The huge imbalance between supply and demand resulted from economic shock in the midst of the widespread shutdown of businesses. The uncertainty surrounding the eventual retreat of the COVID-19 pandemic is adding to the crisis. Fast and effective measures are required to mitigate the effects of the pandemic on the vulnerable food supply chain.

Nutritious and diverse food sources are in short supply in the wake of the global health crisis. Furthermore, greater food insecurity is prevalent in regions hit hard by COVID-19 such as Spain, Italy, and the US. However, there is still the need for anyone to panic about the food crisis as the world has adequate stock of it. The only problem is making it accessible to every section of the society amid strict lockdown.

What Has the World Learned from History?

The 2007-2008 food crisis offered the world some important lessons which can be utilized to avoid letting a health crisis turn into an indispensable food crisis. Policymakers worldwide are intent on not repeating their mistakes of the past. As the measures tighten around the pandemic, it will be even more challenging to prevent the downfall of the global food system. Logistics bottlenecks are a major challenge facing the globe at present. The global food industry is certainly strained in terms of transport and accessibility.

So far food supply has been sufficient thereby disruptions have been minimal. However, the production of high-value commodities such as vegetables and fruits has declined. Hence, governments, especially in India, aim to restart the agriculture activities in parts during the harvest season.

What Does the Immediate Future Hold for Food Sector?

The food supply chain disruption is expected to continue through at least May 2020 as new cases of COVID-19 continue to rise. Movement restrictions will continue for at least two more months in various parts of world, which is why minimizing bottlenecks will remain crucial for major manufacturers in the food industry. Agricultural production, on the other hand, will be affected by a shortage of veterinary medicines, fertilizers, and other inputs. Moreover, demand for seafood products and fresh produce will continue to decline in view of less grocery shopping and closure of restaurants. In particular, aquaculture and agriculture sectors are among the most adversely affected by the pandemic. Canned seafood and other frozen food products will be on the other hand in demand. The suspension of school meals in emerging nations in India is another area facing the brunt of the COVID-19 outbreak.

One thing is certain: the poorest sections of the society including the migrant workers will be the worst affected by the pandemic. In India, migrant workers are terrified of dying from hunger even before the pandemic can strike. Feeding millions of poor families is a daunting task being faced by the government of India. Individuals continue to contribute their part to help the vulnerable ones. However, feeding them every day requires uninterrupted production and supply of essential food items. The food sector in developing nations will thus certainly face greater strain over the entire system in the foreseeable future.

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Nandini is a senior research consultant working with Future Market Insights (FMI), a global market research and consulting firm. She has been serving clients across Food & Beverages, Pharma, and Chemical domains. Currently leading FMI’s Food & Beverages division, Nandini handles research projects in various sub-sectors, viz. Food Ingredients, Food Innovation, and Beverages. The insights presented in this article are based on FMI’s research findings on Impact of COVID-19 on Food Sector Industry of Future Market Insights

pandemic

How Entrepreneurs can Respond to the Coronavirus Pandemic

Within the past couple of weeks, communities across the U.S. have taken swift and drastic action to slow the spread of coronavirus (COVID-19). Schools have been closed, events canceled, and businesses have changed their day-to-day operations.

In times like these—where the stakes are high and everything is rapidly changing, it’s hard to know exactly what to do. That’s especially true for entrepreneurs, who have to manage their business and care for their employees as well as themselves, their families, and their communities.

With that in mind, here are four ways small business owners can stay informed, prepared, and ready to respond.

Stay informed

New stories are breaking every few hours and official recommendations are constantly developing. With so much information out there, it’s easy to get overwhelmed … which can either lead to hours spent scrolling through the news, or tuning it out simply because it seems impossible to filter through everything.

Since it’s important to stay up to date, try putting together a roster of reliable resources you can use to stay on top of the latest news for yourself, your family, and your business—without necessarily spending a lot of time chasing down information.

Here are a handful of sites that might make worthwhile additions to your list.

Health organizations: The Center for Disease Control and the World Health Organization have a suite of medical resources, regular updates on the coronavirus, and guidance for how businesses, schools, and other organizations can protect the health of their communities.

National business organizations: The US Chamber of Commerce is regularly sharing updates and resources focused on businesses and the economic impact of the coronavirus, while the Small Business Administration has resources including employer guidelines, information on their disaster loan program, and a directory of local business organizations.

State and county governments: Local health and business departments are working to take swift action and keep their communities informed as they respond to the coronavirus. Checking in with them can be a great way to understand what’s going on in your community and what services they are offering in response. You can typically find their websites through a quick search.

Look for resources that can help

The sweeping changes we’re seeing in response to the coronavirus are, inevitably, having massive social and economic impacts. With schools closed, events canceled, restaurants vacant, and many other businesses dealing with closures or reduced demand, many people are dealing with reduced income or economic uncertainty.

At this point, nearly everyone is significantly impacted in some way. As a result, we’re seeing government and community organizations come together and try to find new ways to support each other.

If you, or someone you know, is facing challenges as a result of the coronavirus, look for resources that might help. And if you’re not sure where to look, start by checking with your local newspaper or news outlet, or contacting your state or county government for advice.

Here’s a general overview of programs that are already available or in progress:

-Although most schools are closed, many of them are still offering meals to children who rely on school lunches.

-Food pantries are doing their best to adapt to the changing needs of communities.

-The federal government is working to pass response packages that offer economic support to families, communities, and businesses.

-The Small Business Administration is offering resources, including disaster loans, for small businesses.

-Many state and local governments are offering financial relief for small businesses, including tax deferments, grants, legal assistance, and loans.

It’s likely that more and more resources will become available as time goes by. These programs all exist to help businesses, families, and communities get through challenges and bounce back from them, so don’t hesitate to use them.

Find ways to adapt

There are a lot of businesses that are especially hard-hit by the coronavirus. Travel, restaurants, entertainment, events … the list goes on.

And although it would be ridiculous to suggest that all these businesses can mitigate their losses by smart planning and marketing, some are finding ways to cushion the damage a bit. For example, some restaurants are closing their tables but offering delivery or pickup instead. Retail shops are focusing on ecommerce efforts.

If you’re seeing a substantial drop in business, take some time to brainstorm. Talk to other entrepreneurs in your community (perhaps via a virtual meetup). Look for new needs and opportunities, and see if there’s a way your business can pivot or stretch to fill them.

Challenges and obstacles can lead to innovation and new opportunities, if you’re prepared to meet them.

Support your community

It’s a tough time right now. Although many groups are hit harder than others, practically everyone is feeling the strain one way or another.

That’s why, if you can, it’s more important than ever to volunteer, donate, and find other ways to support your local businesses and communities. Here are just a handful of ideas:

-If local restaurants sell gift cards, consider buying one (or a handful) to show your support. You can also look for small independent retailers who offer delivery or online sales instead of turning to bigger businesses.

-Consider donating to your local food bank or Meals on Wheels.

-If you can, give blood. There’s currently a severe blood shortage, and the Red Cross has put together guidelines on donating blood during the coronavirus pandemic.

-Help neighbors who are especially vulnerable to the virus due to age or pre-existing health conditions.

-Find and support local nonprofits whose services are likely to be strained by the virus. The impact is potentially wider-reaching than you might think, but nonprofits that focus on food, healthcare, and housing are a great place to start.

It can be especially challenging to donate or volunteer when you’re feeling anxious or economically strained, but every little bit counts. One thing we do know about the pandemic is that working together, as a community, is critical—so keep looking for ways we can all support each other through this.

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Chelsea Hoffer is a writer at Azlo, an online banking solution for entrepreneurs, where she gathers and shares knowledge about building successful businesses.

trade credit insurance

Trade Credit Insurance & COVID-19

Exporters and sellers in every industry are feeling the effects of COVID-19, and they will look to their trade credit insurance to cover amounts that their buyers no longer can pay.  It has been only ten weeks since the first US resident was reported to be infected with novel coronavirus COVID-19, and the virus has wreaked havoc on businesses in nearly every sector since then.

Trade credit insurance (sometimes called accounts receivable insurance) protects sellers against a buyer’s non-payment of debt, up to a certain percentage – typically 80 to 90 percent of the bill.  Most trade credit insurance policies include a “waiting period” after a bill is due before a policyholder can make a claim, and 180 days is typical. It is expected that the first wave of COVID-19 trade credit claims will arrive by early summer and continue throughout the year. The anticipated surge in trade credit claims will likely be met with forceful efforts by insurance companies to get out of paying claims.

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

Economists predict that the country’s GDP will shrink by 34% in the second quarter of 2020. One of the largest trade credit insurance companies estimates that in a typical market, 1 in 10 invoices go unpaid. Even less than a year ago, an industry association counting the world’s largest trade credit insurance companies among its members (ICISA) reported an 8% increase in amounts covered by insurance, coupled with a 1.5% increase in claims paid.  In other words, more accounts were being insured, leading to more claims for insurance companies to pay.  This increase in paid claims, ICISA noted, occurred “despite favorable economic conditions.”

Economic conditions have certainly taken an unfavorable turn since then.

With a worldwide pandemic that has brought the global economy to a nearly grinding halt, sellers in every industry will be unable to pay bills as they come due. Trade credit policyholders will be making more claims – and they will be making those claims to insurance companies whose investment accounts are suddenly worth much less than they were three months ago.

Insurance companies selling property and liability insurance have already staked out their positions on why policies supposedly will not cover COVID-19 losses. There is good reason to believe their trade credit counterparts will respond similarly.

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Trade credit policies generally promise to indemnify a buyer for a specified percentage of unpaid amounts that become due and payable during the policy period. Trade credit insurance is intended to protect a seller from non-payment caused by many things, including a buyer’s default, insolvency, or inability to pay because of catastrophe or acts of God.  Policyholders will have strong arguments that buyers who default on payments because of COVID-19 impacts are amounts that the trade credit policy promises to pay.

But policyholders should be wary of insurance company efforts to break those promises. The following are some expected challenges based on concepts addressed in many trade credit insurance policies.

Non-disclosure

Trade credit insurers often raise the defense of “non-disclosure” to avoid paying claims.  The argument goes that if the insurance company had known about some fact or another, it would not have sold you the policy it did.  In some jurisdictions, insurance companies can void policies altogether if they successfully prove that a representation or omission in the application process was “material,” meaning it caused the insurance company to take a position it would not have taken otherwise.

In the COVID-19 context, policyholders should expect challenges to what they knew about the creditworthiness of the buyer at the time of contracting.  Insurance companies may blame a buyer’s failure to pay on facts about the buyer that are unrelated to coronavirus, arguing that the policyholder failed to disclose things about the buyer that would have changed the insurance picture.  Some insurance companies analyze and investigate a buyer’s creditworthiness before underwriting the risk.  In those cases, an insurance company will have a harder time using non-disclosure to avoid its obligations.

But in response to any non-disclosure challenges, policyholders will want to look to the insurance company’s prior conduct in similar circumstances. Had they insured contracts involving the same seller before? Has the newly “material” information been asked of the seller before? While it is fact-intensive and likely time-consuming to establish, an insurance company’s previous conduct or silence can go a long way toward discrediting a non-disclosure argument.

Prior Knowledge

Depending on the specific policy period and payment dates, trade credit insurance companies may attempt to raise a “prior knowledge” defense to get out of paying a trade credit claim.  Insurance covers risks that are unforeseen at the time the contract is made. Insurance companies will likely seize on the evolving nature of the coronavirus pandemic to argue that sellers had “prior knowledge of facts or conditions” that would alert them to a buyer’s nonpayment.

Any response to the argument that a seller was aware that COVID-19 would impact the buyer’s ability to pay will need to take into account the dates of key pandemic events, both global and local. The dates of COVID-19 actions in the buyer’s home state or country will also likely be at play. As with a response to a “non-disclosure” defense, combatting a “prior knowledge” defense is highly fact-specific.

Policyholders may find that the “reasonable expectations” doctrine of insurance interpretation aids them in this scenario. In many jurisdictions, insurance policies must be interpreted to give effect to the reasonable expectations of the average policyholder. It is fair to say that most policyholders reasonably expect their insurance policies to respond to the losses following the sudden and unprecedented spread of COVID-19, whose impact was not appreciated at the time the policy was entered.

Challenges to the Underlying Sales Contract

While the defenses of non-disclosure and prior knowledge rely largely on what was said, done, or known during the application and underwriting process, policyholders should also anticipate challenges to the insured sales contract.

Trade credit insurance policies contain several provisions that limit insurance company obligations if the underlying sales contract is not compliant with the insurance policy.  Successful challenges to the validity of the contract – such as that it was never properly executed or that the transaction at issue was not covered by the insured contract – may jeopardize coverage. Some policies specifically exclude coverage if there is any “express or implied agreement . . . to excuse nonpayment.”

To avoid or rebut a challenge about the sales contract itself, trade credit policyholders should take special care to follow and apply the payment terms and credit control provisions in the contract. While there is no policy exclusion for being a conscientious seller, be prudent in your communications with buyers about your payment expectations.

Like so much about the legal impact of COVID-19, coverage for trade credit insurance claims stemming from COVID-19 losses will be fact-specific and potentially hard-fought. Trade credit policyholders should give prompt notice of their claim, document their losses, and prepare to respond to any insurance company challenges with the assistance of their broker or trusted insurance expert.

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Vivian Costandy Michael is an attorney in the New York office of Anderson Kil P.C. and a member of the firm’s Insurance Recovery Group. Through jury trials, summary judgment, mediation, and settlements, Vivian has helped to recover millions of dollars in insurance assets under liability and property insurance policies sold to corporate policyholders

resilience

The Importance of Supply Chain Resilience

Acknowledging potential weaknesses in your supply chain before they are exposed by elements beyond your control is of critical value. With current events in mind, managing future supply chain disruptions will be an integral component of corporate strategy. Calling it Supply Chain Resilience, Supply Chain Disruption, or Business Continuity Management (from the ISO 22301 standard) does not affect the necessity of having strategies in place that may make the difference between following or leading in a disrupted economy, and even between surviving or folding.

To identify potential soft spots, a review should not be limited to a single product flow or single supply chain element. For any company, the next big disruption does not have to be a pandemic; it can be something minuscule on a global scale, yet have the same devastating effect on the ill-prepared in particular trade lanes or in a particular industry. Unpredictable is not a reason to be unprepared. Creating supply chain resilience is a holistic exercise that involves more than just a few savvy logistics people. HR, finance, compliance/legal (to name a few) are all stakeholders in a healthy case of business continuity management.

How then to build a strategy? Like any other strategy, the process seems logical: review, assess, and mitigate. In this particular case: 1) review your tradelanes, products, and materials flow by matching them against risk categories (i.e., labor, business risk, global trade, nature, and materials), 2) assess risks for each combination, and 3) mitigate risks by either changing behavior now or planning for alternate (sourcing) options should the anticipated risks become reality.

Trade Lanes and Risk Categories

The relevant components to review within the supply chain include the importing and exporting country or countries, the manufacturing locations, the finished goods, and the (raw) materials. Ideally, for finished goods and materials, the associated Harmonized System (HS) codes are made available. Scratch what does not apply and move to the following step where each of the ‘inputs’ is categorically reviewed.

As mentioned, this should not be an exercise limited to supply chain professionals. For example, labor risks can be associated with the likelihood of strikes, wage volatility, and the availability of appropriate labor resources—not necessarily areas that keep the supply chain brain occupied every day.

In a similar fashion, other resilience elements expand across different areas of expertise. Business risks relate to cybersecurity, corruption, counterfeit products, and the chance of entering into business with bad actors that are on (any of the) denied party lists.

Global trade accounts for the compliance requirements related to the shipment of goods (i.e., licenses, documentation, permits, etc.), associates the products with the various duties and taxes, and identifies if Free Trade Agreements(FTA) apply and how to qualify for preferential treatment.

Arguably the most unpredictable, but not the least expected risk to account for, is nature. It’s important to identify the various kinds of disasters that may hit: natural hazards, pandemics or epidemics, flooding, earthquakes, hurricanes, volcanic eruptions, landslides, or drought can all play parts.

Lastly, consider materials. Understanding the market comes with insights into scarcity, sourcing locations, and price fluctuations.

Risk Assessment

Risk assessments match the input with the risk categories. For example, how vulnerable is the manufacturing location when it comes to labor regulations, corruption, or flooding? Is there an FTA in place that could potentially lower the import duty burden? Where in the supply chain can a cyberattack be most expected? In short, some homework is in order to create a thorough risk profile.

For many components, the sources are readily available, such as the Corruption Index at transparency.org, labor statistics on Statista or NationMaster, or duty rate information from the various global trade content providers (or the WTO).

Building Resilience

As with cyber-security risks (PEN tests) or a regular laptop virus scan, supply chain risk assessments will point out the components that need immediate attention or, in this case, are a high priority for alternate sourcing or routing options. It’s then time to build that resilience.

Look for options by analyzing the market and tradelanes. Mine import and export data to identify alternative sources for goods and materials, even manufacturing locations. Map out alternative routes for products to get where they need to go. Document the reasonable options and share with as many people as possible—preparedness is, of course, an all-inclusive strategy.

Next and where possible: test run! Re-route shipments temporarily or source occasionally from a new supplier; in other words, make sure the alternative options are viable. In addition, communicate with external sources that would be part of continuity plans. Make them aware they are part of these plans; put people or suppliers on a retainer and try to agree on terms before disaster strikes so the projected costs can be anticipated better.

Lastly, keep those alternate plans up to date; otherwise, it may be too late to create and execute on alternate alternative plans.

fear

How to Take Fear Out of the Workplace During COVID-19

Fear. Uncertainty. A growing sense of panic every time the president delivers a national address about the far-reaching effects of the coronavirus.

Chatter around the workplace these days is filled with questions like: Will I get sick? Will I have a job tomorrow? Can I afford to pay my rent?

What can you do when you’re facing fear in the workplace? The good news is that you can turn to four key principles: transparency, financial discipline, trust and respect for people, and a forward-focused approachIf you want to take fear out of the workplace, consider the following steps:

Embrace transparency. “Open-book management” is the idea that everyone inside your organization will be taught to understand the numbers that drive its success. Many growing business owners can be reluctant to share the truth about the financials inside their business. But they don’t realize the kind of risks they take on by doing so. They take on the burden of keeping the business alive — solo. In many cases, CEOs and owners are forced to shut the doors of the business to the shock of their associates, who are then left to wonder if they could have done something to contribute to a different outcome.

That’s why it’s amazing what happens when you have the courage to share the news — good and bad — with your people. Treat them like adults. Get their attention directed toward what they can do to help — versus panicking. Plus, the more eyes you have on a problem, the more ideas you’ll have to solve it. It’s an automatic check-and-balance on the security of your business.

Discuss your cash position. It’s been frustrating over the past few years as we’ve watched startup companies under the guidance of universities, incubators, and even investors embrace the idea that the only way they could grow was to take on debt. Some of you may find yourselves in an over-leveraged position, but that can also be an opportunity to engage your workforce and tell them the truth about the situation. If you do find yourself in trouble, ask your associates for ideas about how they can contribute to cutting costs — and increasing cash flow to the point where you can actually cover your debt obligations. You’ll be amazed at what can happen when you teach your people the rules of the game.

Protect jobs. Attracting talent and retaining it can be tough. We don’t have a future without people. In the not-too-distant past, executives sometimes became idols when downsizing jobs became the new mantra, laying off people at a time they needed those jobs the most. Something similar could happen today. Difficult times can convince companies to resort to layoffs to survive. But it is wise to think differently. Whoever has the most talented workforce will dominate their markets as soon as 2021. The time to get your organization ready for the next upturn is today — not when it’s already arrived. By then, it may be too late.

Get ready for the upturn. As bad and as uncertain as things look today, here’s a secret: it’s actually harder to get a company ready to take advantage of an upturn than it is to prepare for a downturn. Downturns can actually be opportunities to fix things inside your business that you can’t afford to invest the time and resources in when the economy is booming. While it might seem counter-intuitive, the current down market comes as a kind of short-term relief.

It’s giving us a chance to catch up — to make investments in our people and facilities — and to prepare ourselves to capitalize on the economic uptick that we expect to hit in late-2020, early-2021. By then, our workforce should be more stable and productive — and ready to take full advantage of the available opportunities. They have every incentive to do so, because, as owners of the business, they have a true stake in the outcome.

We know how painful things are today. But there’s no reason you can’t also dare to be successful. And learning how to build a culture based on transparency, financial discipline, trust and respect for people, and a forward-focused outlook, is a great place to start removing the fear that’s pervading your workplace.

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Rich Armstrong (www.greatgame.com) is the president of The Great Game of Business Inc., and co-author, with Steve Baker, of GET IN THE GAME: How To Create Rapid Financial Results And Lasting Cultural Change. This book is the how-to application of Jack Stack’s 1992 bestseller, The Great Game of Business. Armstrong and Baker co-authored the update of Stack’s book in The Great Game of Business – 20th Anniversary Edition. Armstrong has nearly 30 years of experience in improving business performance and employee engagement through the practice of open-book management and employee ownership.

Steve Baker (www.greatgame.com) is the vice president of The Great Game of Business Inc., and is a top-rated, sought-after speaker and coach on the subjects of open-book management, strategy, and execution, leadership, and employee engagement. Baker is a career marketing and branding professional and an award-winning artist.