Conclusions

The paper has laid out our approach for assessing systemic trade interconnectedness using network analysis and the IMF’s DOTS database. Our results uncover several stylized facts offering additional insights into the changing patterns of global trade over the decade 2000-2010.  We also have shown possible applications of our approach to gain a better understanding of trade dynamics across world regions and the overlapping of trade and financial sectors of systemic importance in the top 25 jurisdictions. Our approach lends itself easily to a wide range of analytical exercises addressing specific global trade issues, as well as global (trade and financial) interconnectedness issues.

The use of DOTS has lent robustness to our analysis by providing uniform data for 169 jurisdictions representing almost 100 percent of total world trade in both the year 2000 and the year 2010. Additionally, the quarterly updating of DOTS makes it possible to recalibrate our findings to track global trade developments on a timely basis.

From a policy perspective, jurisdictions hosting both systemic trade and financial sectors would seem to be the natural focus of risk-based surveillance on cross-border spillovers and contagion.  The analysis underscores that these jurisdictions display the strongest inter-sectoral interconnectedness to the global economy. As such, they have the highest potential for transmitting disturbances to other jurisdictions or to systemic stability via either the trade or financial channel or indeed both channels simultaneously. These jurisdictions would thus seem to warrant particular attention and further analysis on the risks associated with their activities, especially when carried out through systemically important financial institutions and nonfinancial corporations.

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Excerpts:

When King Abdullah bin Saud, the current ruler of Saudi Arabia, came to power in August 2005, he wasted little time in demonstrating his vision for the country’s future. His first official overseas visit, in January 2006, was not to U.S. president George W. Bush, U.K. prime minister Tony Blair, or German chancellor Angela Merkel — but to Chinese president Hu Jintao.

The meeting reflected both countries’ desire to forge closer economic ties. Before King Abdullah went on to other emerging markets, including India, Malaysia, and Pakistan, he and President Hu signed an agreement of cooperation in oil, natural gas, and minerals. This agreement built on existing relationships between the countries’ national energy companies, Saudi Aramco and Sinopec, which had formed a partnership in 2005 to construct a US$5 billion oil refinery in eastern China’s Fujian province. In 2011, they signed a memorandum of understanding to build a refinery in Yanbu, on the west coast of Saudi Arabia. Sinopec is also engaged in a joint venture with Saudi Arabia’s petrochemicals giant SABIC; in 2010, they began producing various petrochemical products in a $3 billion complex in the city of Tianjin in northeast China, and have recently announced that they will build a $1 billion–plus facility there to produce plastics.

[...]

But a closer look reveals a separate trend that could shift the economic focus away from the West. Emerging markets are building deep, well-traveled networks among themselves in a way that harks back to the original “silk road,” the network of trade routes between East Asia, the Middle East, and southern Europe, some dating to prehistoric times and others to the reign of Alexander the Great. Most of these routes were central to world commerce until about 1400 AD, when European ships began to dominate international trade.

Today’s new web of world trade is broader and more diverse than the old silk road. It is a network among emerging markets all over the world, including China, the Middle East, Latin America, and Africa. It is a path not just for expanded trade in goods, but for short-term and long-term investment and the transfer of technological and managerial innovation in all directions. Witness, for example, China’s investments in Africa, where the construction of roads, railways, and communications infrastructure provides revenue to China’s state-owned enterprises and also facilitates China’s access to the continent’s natural resources and its consumers. Or consider the fact that in 2009, China surpassed the U.S. to become Brazil’s primary trading partner; bilateral trade between the two countries grew more than 600 percent between 2003 and 2010, from $8 billion to $56 billion. Also in 2009, the Korea Electric Power Corporation, a state-owned South Korean firm, won a $40 billion contract to build nuclear reactors in the United Arab Emirates (UAE), beating out French and U.S. companies that had bid on the opportunity. And in 2010, Russia and Qatar announced that they would work together to develop gas fields on Russia’s Yamal Peninsula.

[...]

The countries of the Gulf Cooperation Council (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE — represent one regional powerhouse whose relationships with emerging peers can offer valuable insights into the way such alliances are forming. In the last five years, ties between the GCC and the BRIC countries (Brazil, Russia, India, and China) as well as the “Next 11” countries (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam) have expanded strongly. (See map.) The speed with which the new silk road is being constructed between the GCC and these other rapidly emerging economies is a clear indicator of the GCC’s rising importance. Even the recent unrest in the Middle East, which included a few of the GCC nations, has not impeded the Gulf’s global ambitions.

[...]

The GCC is also noteworthy because of its traditionally strong relationships with the U.S. and Europe. The Gulf nations have to maintain their relationships with these large but relatively stable economies while fostering new relationships with the high-growth economies in emerging markets. This balancing act could lead to a new set of policies and ambitions in the region, with significant implications for companies that hope to enter this market, and for the nations (which include the U.S., China, Japan, and most of Europe) that compete for the GCC’s oil and gas resources and have a vested interest in ensuring that regional security issues do not destabilize global oil prices.

[...]

The bonds between the GCC countries and the BRIC and Next 11 nations are growing stronger — a development that Western countries to date have viewed with trepidation, fearing that a zero-sum game will leave them cut off from increasingly significant consumer markets and sources of natural resources, goods, and services. But in an interconnected world, unexploited opportunities await players all over the globe.

The fact that these emerging alliances are still in their infancy means that companies and governments in the U.S. and Europe can act now to formulate a response. In doing so, they will need to recognize that the weakening of their own economies during the financial crisis has undermined their historical advantages in the GCC region and has enhanced the appeal of fast-rising emerging markets. To succeed, then, developed economies will need to capitalize on the strengths that their emerging competitors cannot yet match. For example, the U.S. and Europe are still world leaders in terms of building the capabilities and infrastructure that are crucial for innovation, and they have a history of helping GCC countries develop these assets as well. Many of the region’s oil companies relied heavily on contributions from their international partners in their early years, exchanging access to oil resources for foreign talent and technology. This trend continues today: For instance, King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia, has formed a partnership with U.S.-based Cisco Systems to create a regional Cisco Networking Academy, which is intended to ensure that the university’s students are prepared to succeed in the digital economy. Companies in developed countries can also build on their extensive global supply chains to easily integrate new partners — whether as suppliers or as customers.

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There are historic opportunities for greater openness and citizen participation in economies across the Middle East and North Africa (MENA) that, if strongly managed over the transitions ahead, could see a significant boost to economic growth and living standards in the medium term.
This is the analysis presented on My 24, 2011 in the World Bank’s Regional Economic Outlook: MENA Facing Challenges and Opportunities. The report notes that current economic disruption in many MENA countries is translating into lower growth in the short term (now forecast at 3.6 percent for 2011 down from 5 percent) but that opportunities in the medium term offer new hope for an inclusive and sustainable development that has not before been seen in the region.

“The rich experience from countries that have undergone political changes suggest that short-term disruptions to economic growth and social  tensions are inevitable,” said Shamshad Akhtar, World Bank Vice President for the MENA region.  “However, transition offers an opportunity for countries to break with the past and set course in a newer direction.  A first order of priority is to offer the right signals to restore public and private investor confidence which, in MENA, calls for ensuring respect and citizen dignity through inclusive social policies, a fundamental change in governance frameworks and swiftly restoring macroeconomic stability.”

The report finds that by the end of 2010, MENA countries had largely recovered from the global financial crisis, and growth rates had been expected to reach pre-crisis levels in 2011. Events in early 2011 which led to swift regime change in Tunisia and Egypt, and ongoing challenges in Bahrain, Libya, Syria and Yemen, have affected the short-term macroeconomic outlook and the status and speed of economic reforms in the region.

“The effects of reform tend to follow a J-curve, where things get worse before they get better. Experience from other countries which have made successful transitions has shown an initial decline of 3 to 4 percent in the first year but quickly recovering,” said Caroline Freund, Chief Economist for the MENA region.

“Also encouraging is that successful countries saw significant and fast improvements in voice and accountability, some of the very things that underpin the MENA uprisings. We need to learn from history’s successful transitions and carefully manage the short-term downturn which is where we are focusing our best efforts now. While the challenges are many, the opportunities are more.”

More excerpts and link to full report here.

Allow TradeFlow21 to say that this arrangement stinks! It reeks of exploitation – of “unfair” trade. The fair-trade associations need to be investigated for their illegal price-fixing. Consumers should not tolerate this. While willing to pay a premium for a supposed better coffee and to support farmers, there is absolutely no reason for consumers to perpetuate a rotten system. With advancements in wireless communications and social media, TradeFlow21 is hopeful that technology and software can be leveraged to level the playing field.

Bank of China Ltd., one of the country’s four major state-owned banks, has opened trading in the Chinese currency to customers in the U.S., representing a symbolic endorsement by Beijing of foreign trading in the yuan.

Until the middle of last year, the buying and selling of yuan, had largely been confined within China’s borders by the country’s strict capital controls. Trading in the yuan has ballooned in Hong Kong since Beijing first opened it up to offshore trading this past July.

Bank of China’s move is the first by a state-owned institution into yuan trading in the U.S. The move could also alleviate some worries that China may quickly reverse its decision to open up trading.

Bank of China, which is 70%-owned by the government, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches. While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a significant stamp of approval by China on the expansion in yuan trading.

[...]

Before opening up a yuan account in the U.S. with Bank of China or any other bank, potential users should consider the exchange-rate risk, experts say, given the uncertainty over the pace of appreciation of the currency. Also, potential users should compare the kind of service fees charged by different banks on yuan accounts.

Mr. Li said the yuan business is “one of the top priorities” for Bank of China’s U.S. operations. “We see bright future for the business,” he said. Bank of China’s Hong Kong subsidiary has been the sole clearing bank of renminbi banking business in Hong Kong for the past seven years.

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TradeFlow21 managing partner Steven Towns recently reviewed Trade Myths: Globalization has left trade balances behind, a profound book weighing in at all of 75 pages with an additional ten pages of charts that bust the same myths already exposed in prose. The author, Dr. Enzio von Pfeil, is a Hong Kong-based investment adviser and fund manager. A regular in the financial media in Asia, he is a former chief regional economist at leading London-based investment banks in Hong Kong. Enzio has long studied matters related to trade, and fortunately for those looking for perspective not readily found in the mainstream media, particularly in the U.S., he has penned Trade Myths. Of the five trade myths he discusses, in each instance, Enzio explains how misguided and anachronistic beliefs about trade could lead to an impaired U.S. economy with a simultaneous jump in interest rates having widespread repercussions. The book review begins below followed by Q&A.

The first myth is that “imports kill jobs.” Enzio readily dismisses this as self-serving for politicians wanting to avoid inconvenient truths. In short, politicians (the key subjects of Enzio’s work), rather blame outside forces for their constituencies’ economic troubles, rather than acknowledge failing policies in areas such as education, and matters such as burdensome taxation.  Enzio questions how the U.S. can be expected to increase its headline trade surplus as it employs fewer people in manufacturing. And, it turns out that as imports rise, so does employment, primarily in services. Yet, if all so-called “unfair” imports were banned, America’s multinational corporations (MNCs) would suffer heavy blows since their foreign-made products could not be imported back into the U.S.; and most imports would have to be substituted by local production, resulting in higher costs, in turn pushing up inflation and thus forcing interest rates higher, which would reduce investment and slow job creation (if not resulting in massive job losses), while the higher cost of capital would sink the housing and capital markets.

The second myth is that “exchange rates drive trade,” which is again self-serving for politicians. The argument that if other countries’ exchange rates were stronger, America would not have a deficit, does not hold water, explains Enzio, since a devalued U.S. dollar brings trouble of the kind explained above.  In fact, it’s comparative advantage, not exchange rates that really drive trade.

The third myth is that “trade balances are a national matter.” While being a convenient line for politicians, it is a risk infected one. Given the interconnectedness of the global economy, viewing trade balances nationally is purely mercantilist thinking and potentially subjects MNCs to host government protectionist retaliation. Alarmingly, a tit-for-tat trade war could lead to actual war. Disturbingly however, it turns out that a closer examination of trade data shows MNCs are responsible for very little of the U.S. headline $700 billion-plus trade deficit. More importantly, when factoring in the value of MNC’s foreign affiliates’ purchases and production, the U.S. has an enormous $2.7 trillion surplus! Enzio explains that America’s highly successful MNCs are the root cause of the “bad” trade deficit, not “bad foreigners.” Among his other keen observations is that when backing out the domestic activity of MNCs in China, the latter runs a global trade deficit of $1.7 trillion compared to a headline surplus of $260 billion!

The fourth myth is that “America’s trade deficit is ‘bad.’” This follows myth number three and in short, reiterating what was said about myth number one should politicians ban MNCs from operating abroad, the outcome is likely to be an “economic 9/11.” Two keys to this myth are that non-U.S. MNCs are more than ready to take market share from U.S. MNCs; and it doesn’t necessarily require a ban on U.S. MNCs operating broad, since U.S. politicians angering a host country such as China could result in the same dire consequences. Enzio wonders just how disaffected U.S. MNCs would respond in terms of their political contributions.

The fifth and final myth is that “foreigners finance America.” Once again, he regards this as a political ploy (whether deliberate or naively inadvertent) playing on vulnerability and blaming foreigners for ills. Should foreigners be banned from holding government debt or if they dumped their holdings, the outcome could mirror the fallout from the sub-prime crisis. However, taking a step back, Enzio enlightens readers on two fronts. The first being one must review just who the foreigners that own U.S. debt are and what percentage of the whole it comprises. Interestingly and also surprisingly, Enzio explains that news reports are misleading, since foreigners as a whole owned 25% of Treasuries outstanding in 2006, but of that an increasing amount is held by private investors (such as hedge funds and also MNCs) as opposed to institutions or governments, thus lessening the impact if there were ever any dumping. Data suggests a very strong correlation since 1970 between the growth of FDI and the “foreign” ownership of Treasuries. The other point here is that even if foreign holders were to dump Treasuries, there is no other market that offers the depth, liquidity, and sophistication of the U.S. Enzio notes that the size of the U.S. bond market is greater than the EU, UK, Japan, and Switzerland’s combined.

The remainder of Trade Myths includes an explanation of the drivers of trade flows, the history of the economics behind trade, and Enzio’s suggestions for how to remediate the discussion of trade. His first suggestion concerns myth number three or specifically, antiquated (mercantilist/nationalist) trade balance accounting, and how it needs to be modernized. His second suggestion involves tax solutions for helping the working class. And adding to that, his third suggestion relates to the necessity of improving the quality of the U.S. workforce by way of better vocational and pre-college education. In closing, while Enzio duly noted that political self-interest can prevail during economic downturns, this reader was compelled to reflect on an earlier quoted passage from the late Professor Daniel Boorstin, which Enzio recaps in stating: [America's] politicians/leadership recognizing the U.S. itself is the largest stakeholder in the globalized economy will be the necessary first step in the process of transforming mindsets about America’s trade balances and trade policies.

Q&A:

ST: What are your thoughts on the latest “currency manipulation” talk out of Washington, especially since the situation seems to be worsening with growing bipartisan support in both Congress and Senate?

Enzio: This cheap talk has to be seen against the backdrop of mid-term elections in America. It also has to be seen against the backdrop of Congressional “stimulus” packages which have resulted in 10% unemployment rates – and in 20% unemployment rates for males who are 30 – 55 years old. Another backdrop is that charade of the Treasury report on currency manipulation. Everyone bandies around the “glories” of purchasing power parity; I, for one, have severe methodological problems with this bit of nationalistic chauvinism. It is interesting that the one country whose currency has fallen the most uses this, the U.S. You never hear serious intellectual debate coming from Germany, Japan or Switzerland about how “overvalued” their currencies are – yet, they keep generating huge and growing trade surpluses.

ST: Although it’s mostly “cheap talk” at this point, there’s a palpable escalation of angst in the U.S., meantime while there seems to be firm resolution in China (re. a desired gradual appreciation of the yuan). Do you think another Smoot-Hawley type tariff and a subsequent devastating impact is a possibility?

Enzio: Absolutely not. I don’t think that Congress would be that short-sighted. But I can see its members chasing the WTO with all sorts of law suits, depending upon which constituencies these Reps and Senators are representing.

ST: Changing directions then, tell me, is trade balance accounting consistent among the U.S. trading partners, and what, if anything, is being done to modernize the accounting?

Enzio: Yes, everyone uses the same, 16th century framework. Thus, all trade balances are measured in terms of national borders. This was logical in the 16th century, when there were very few MNCs and when mercantilism was common practice.

ST: Okay, so let’s assume that politicians accept your suggestions and everyone now recognizes that the U.S. has a massive trade “surplus” when factoring in activity of U.S. MNCs’ overseas affiliates. In your opinion, what then is a healthy amount or range of debt-to-GDP? Does or should this vary much across borders, given idiosyncrasies within countries (Japan comes to mind)?

Enzio: It is not as much the ratio per se as it is who is financing that deficit. If the foreigner really is financing that deficit, then the country that is borrowing the money is vulnerable to the foreigner pulling their funds out. But a second point also is relevant: what is the currency of the fiscal deficit? If it is a small currency, then the foreigner, in fact, can pull out. But in the case of the USA, the dollar is the world’s dominant currency, so that reduces the leverage of the foreigner. Furthermore, if American politicians accepted that their own MNCs are very much “at fault” for America’s geographical trade deficit, their whole mindset would change from: “how can we punish ‘bad’ China, to: how can we re-invigorate our own competitiveness?”

ST: For my last question, I want to get your thoughts on if we recognize the massive trade surplus in the U.S. and correspondingly the huge deficit in China when backing out MNC activity, does this change the ongoing U.S.-China trade and currency arguments?

Enzio: Absolutely. Were MNCs’ balances to be included in such “global” trade balances between China and America, then Americans would be asking their very own politicians just why American MNCs are producing more and more abroad instead of back home in the United States. Answer: the politicians have, in their quest to get re-elected, made many expensive promises. That means that taxes and regulations have increased, courtesy of politicians’ desire to get re-elected. The upshot is that the U.S. (like Europe and Japan) have “priced themselves out of the market” in terms of costs and regulations. As a second fusillade primarily against U.S. politicians: instead of focusing on what could make America more competitive – namely, pre-college vocational training – those very politicians who rail against “bad and dangerous” China have a mendacious record when it comes to vocational education policy in America.

Thus, were my points regarding America’s global trade surplus and China’s global trade deficit to be heeded, then this rubbish about exchange rates “really” affecting trade flows would wilt in the face of much more important competitive considerations, e.g. domestic tax as well as regulatory regimes, along with (vocational) education policy. Laconically, you cannot import a car repair; you need a qualified local to repair that Mercedes that you have imported from Germany. Were exchange rates really as important as some politicians claim, then why do Germany, Japan and Switzerland – whose currencies have appreciated fourfold against the dollar since 1970/71 – all have trade surpluses (as I mentioned in your first question)?

ST: Thank you for your time, Enzio.

1. Do your homework: learn something about your target country; no, you don’t have to learn Arabic, but do learn some greetings; and understand that the Middle East is not only what you see on CNN or the evening news (usually scenes of violence or of money in Dubai). Note that relationship building is especially important.
2. Be culturally sensitive: both the business week and business hours are different in the region, with SUN – THUR and later hours the norm; Friday is mosque day (communal prayer). Remember, the region has a long, rich history and people want to be treated as equals with the West. Also, be ready to drink a lot of tea. Don’t expect much, if any, alcohol.
3. Learn even a little about political issues: Arab/Israel (eventually your local business partners may inquire of your opinion); government sanctions (U.S. businesses face certain restrictions such as in Iran); and illicit payments (referring to bribery, which U.S. companies are prohibited by law from engaging in — and it’s not necessary to do business, says the Ambassador).
4. Patience needed: don’t present the image of being in a hurry, a rather common stereotype of Americans. Can’t expect to fill your order book right after leaving the airport; doing business begins with relationships.
5. Use the U.S. govt.: the Dept. of Commerce, embassies and consulates all have information and resources available to U.S. companies looking to do business overseas.
6. Think about security: while the Middle East is not the 24/7 violence portrayed on the news, recognize that like anywhere it is important to be aware of your surroundings; you can’t do business if you’re uncomfortable. Review State Dept. travel warnings; contact the consulate if you are planning an extended stay.
7. Find a local partner: “most important” step when targeting a market; may be an agent, representative, or a distributor; a local partner can also facilitate with any cultural sensitivities that may arise.
8. Consider intellectual property issues: as with any market you enter, ensure that you’re intellectual property rights are protected. Don’t assume protection if you’ve only registered in the U.S.
9. Beware of the “V” word: don’t make promises regarding immigration visas to the U.S.; issue may eventually arise with local business partners; U.S. concerned with security and immigration, but serious commercial implications if business lost to more “open” European markets, for instance.
10. Understand M.E. buyers’ criteria: quality is king, and there’s a willingness to pay, but it’s not everything (can’t charge too much premium); also looking for service and personal relationships. Preference to do business or at least interact with more senior ranking company representatives.
11. Be prepared to compete: true of any market, but there are some distinct advantages/disadvantages for U.S. exporters. The former include existence of free trade agreements in select regional economies. The latter is largely in light of European competitors (proximity and longevity).
12. Be realistic, be bold, and be patient (see #4), as you strive for success.

Along with his “12 Rules,” Ambassador Donnelly also mentioned the importance of foreign currency exchange rates. He advised that business counterparts in the Middle East are sophisticated with forex, and the fluctuations in the dollar can impact business since for example, euro-denominated goods or services may be priced more or less favorably. On that note, TradeFlow21 is continuously tracking economic and capital market developments, and we look forward to helping your company engage in business in the Middle East.

1)      demands the cessation of hostilities between Israel and its neighbors, including the creation of a sovereign Palestinian state as the only viable means of resolving the Palestinian question

2)      requires a U.S. policy that summarily rejects those in all quarters who use division and discord as a means of maintaining their “competitive advantage” in the region

3)      dictates that economic development, through investment and trade, be embraced as the preferred path to establishing a more stable, secure world for all

In his long-awaited speech on American-Muslim relations today in Cairo, President Obama responded, arguing that

1)      “America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity and a state of their own”

2)      “as long as our relationship is defined by our differences, we will empower those who sow hatred rather than peace…conflict rather than cooperation…this cycle of suspicion and discord must end”

3)      “on economic development, we will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries…I will host a summit on entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world”

Thank you, Mr. President.  The partners of TradeFlow21 will join you in the cause to build a prosperous, secure Middle East through commerce and trade.  Let us now begin our work.

Necessity demands the cessation of hostilities between Israel and its neighbors, including the creation of a sovereign Palestinian state as the only viable means of resolving the Palestinian question.

Necessity now requires a U.S. policy that summarily rejects those in all quarters who use division and discord as a means of maintaining their “competitive advantage” in the region.

Necessity dictates that economic development, through investment and trade, be embraced as the preferred path to establishing a more stable, secure world for all.

For over 60 years, the Middle East, which is comprised of over 20 nations spanning Northern Africa in the west to Southern Asia in the east, has been defined by conflict and oil. This is a new era. Real GDP non-oil growth in the region, which is projected to expand by more than 3.5 percent this year, suggests that Middle Eastern nations are actively pursuing commercial diversification as they seek to become full partners and competitors in the global economy. It also presents tremendous export opportunities for companies who want access to an emerging market of 500 million consumers.

The world is waiting for President Obama to signal a new turn in U.S. – Middle East relations where strategic alliances are built principally on commerce and trade. The partners of TradeFlow21 welcome such a change as both vital and necessary.