A Problem of Unstressful US Bank Stress Tests

♠ Posted by Emmanuel in Americana,Europe at 5/04/2023 04:35:00 PM

 Each day brings news of a distressed US bank about to take leave for the Great Central Bank In the Sky. Aren't US banks supposed to be safer now with the advent of greater macroprudential regulation? A common way to gauge the soundness of banks is through the use of stress tests that simulate how these financial institutions would fare in the wake of financial, well, stress. While Americans bicker about whether the 2019 loophole exempting midsize banks holding between $100 to $250 billion in assets from stress testing led to their currently precarious situation, even that may not have saved them.

Comparatively speaking, stress tests conducted Stateside may not be sufficiently rigorous in simulating scenarios that are detrimental to financial sustainability. It is fairly obvious that the higher rates we have these days are causing mismatches between what banks earn and what they must pay out. Oddly, however, recent US stress tests have not involved rising but rather falling interest rates. See the illustration above and commentary from the Peterson Institute:

But it’s not only for 2023 that this feature appears. Indeed, every severely adverse scenario used by the Fed since 2015 has the 3-month Treasury bill rate ending up at 0.1 percent. Many historic episodes of severe economic downturn have indeed been accompanied by low interest rates, as the Fed used its policy tools to support aggregate demand. But it is a bit strange that not since 2015 has a stress test involved rising interest rates.

One of the advantages of stress testing the banks every year is that their robustness to a variety of contrasting stresses can be assessed. Just repeating a broadly similar scenario year after year misses the opportunity to provide supervisors with potentially important information on vulnerabilities. It can also result in policymakers assuming that the banks are robust to more types of shock than is really the case.

Yet pointlessly repeating a broadly similar scenario each year is exactly what the Fed has been doing, as we can show here.

Have other regulatory authorities been administering stress tests as lax and unrealistic as American ones? Thankfully for the rest of the world, the answer is no. The European Central Bank--and remember that Switzerland is not an ECB member for those thinking of a certain defunct bank--has done its homework by simulating interest rate rises just as we are experiencing now:

Overall, our [ECB]  analysis shows that the euro area banking sector would remain broadly resilient to a variety of interest rate shocks. That would hold also under a baseline scenario of an economic slowdown in 2023 with the risk of a shallow recession, such as the scenario included in the December 2022 Eurosystem staff macroeconomic projections. Profitability would increase overall, driven by [higher] net interest income. However, provisions would also increase, reflecting potential difficulties for borrowers. Results for the overall impact on solvency remain on average fairly muted with great heterogeneity across banks, within and across different business models

The same hold true for Australian banks. Down under, their stress tests have likewise gamed out the implications of higher interest rates:

Higher inflation and higher interest rates could lead to larger credit losses despite continued, albeit slower, economic growth. The stress testing model can provide insights into the magnitude of potential credit losses and how important they could be for the capital positions of large and mid-sized banks. The model applies two principal stresses to examine the resilience of the banking system to higher inflation and interest rates:

1. Higher inflation and higher interest rates on mortgages squeeze households’ real incomes, making it more difficult to service debt, which could lead to more defaults and larger credit losses for banks. Similarly, higher input costs and higher interest rates passed onto business loans can make it more difficult for businesses to service their debts, potentially leading to higher default rates (see ‘Chapter 2: Household and Business Finances in Australia’).
2. Higher interest rates typically reduce the prices of housing and commercial property that are held as collateral by banks against their loans, which increases LGDs as well as PDs on loans.  

Having conducted these sorts of tests well before 2023, Australian banks look to be on firming footing.

While we hope that contagion does not spread to the Eurozone and the land down under, it certainly bears questioning why US stress tests did not involve scenarios involving deteriorating financial conditions due to sustained central bank rate rises in the face of persistently elevated inflation. While the subject matter can come across as esoteric, such things do impact Joe Average since taxpayers will ultimately foot the bill for cleaning up the mess caused by unstressful stress tests giving false comfort to financial authorities about the soundness of banks they regulate.  

UPDATE 1: Also see Krishna Guha's commentary in the FT. He warns that while the ECB did conduct asset side stress tests (e.g., holding low-yielding securities), it did not test how vulnerable Eurozone banks were to depositor flight like what has happened Stateside. That said, European depositors tend not to move their money around.

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The Trials and Tribulations of Friendshoring

♠ Posted by Emmanuel in Trade at 5/03/2023 06:19:00 PM

At least Chinese state media's take on the topic is obvious.

Puns on the term "offshoring"--moving one's production facilities abroad, or having foreign-based concerns manufacture components for you--have proliferated. Some time thereafter came the term "reshoring" to denote moving back production to where something was once manufactured. (A US firm moving its plant back to America from China would be the most obvious example.) 

Now we have the slightly more convoluted term "friendshoring" care of Treasury Secretary Janet Yellen. Like reshoring, friendshoring concerns moving production to locales more favorable to the company in question. For instance, if you had a plant in China, you may be moving it to Mexico to avoid Communist Party persecution of foreign firms through discriminatory regulation. Hence, both reshoring and friendshoring concern moving business activities to where authorities are more favorably disposed. However, the difference is that while reshoring is moving production back to where something was once made, friendshoring does not presume moving back, and the destination can be anyplace where authorities are amicable. That is, your risk of being put out of business by some Western-hating foreign autocrat is mitigated.

Or is it? There are a number of viewpoints out there regarding whether friendshoring is actually beneficial. The consulting firm Korn Ferry cautions that this practice may instead create enemies among countries you have chosen to leave. It boils down to the extent to which companies want to involve themselves in international politics:

“Friend-shoring can be extremely risky,” says Tom Wrobleski, co-leader of Korn Ferry's Supply Chain Talent Optimization practice. “You’re picking sides and can unintentionally forge bad blood with other countries.” In the long term, this could backfire if the country your company relies on—for lithium for batteries, say, or precious metals for computer chips—feels alienated...

The puzzle grows still more complicated when it’s infused with values and politics, says Wrobleski, who says these considerations play an important role in the decision-making process. “There must be balance between political alignment and the actual reason for doing business in a particular country,” says Wrobleski. 

Speaking of politics, the Wall Street Journal adds that the wider effect of firms choosing sides by classifying the world into friends and foes through their location decisions could result in the fragmentation of global supply chains. "Unfriendly" countries may feel antagonized and choose to keep to themselves more. In so doing, key commodities and burgeoning markets that were previously open for business may become increasingly unavailable.  This situation may partly explain the higher inflation being experienced worldwide nowadays. In economic jargon, diminished global economic integration increases trade frictions and therefore the ease and cost of doing business worldwide. 

Weighing matters, Raghuram Rajan urges us to "just say no" to friendshoring. Insofar as many poor countries are led by authoritarian figures who may come across as business unfriendly to Western firms, development may be hampered:

The benefits [of trade between rich and poor countries] are obvious. Final products are significantly less expensive, so even the poorest people in rich countries can buy them. At the same time, developing countries participate in the production process, using their most valuable resource: Low-cost labour. As their workers gain skills, their own manufacturers move to more sophisticated production processes, climbing the value chain. As workers’ incomes rise, they buy more rich-country products...

If any forthcoming friend-shoring mandates were to apply such a broad categorisation, they would have devastating effects on international trade. After all, friend-shoring will typically mean trading with countries that have similar values and institutions; and that, in practice, will mean transacting only with countries at similar levels of development...

The benefits of a global supply chain stem precisely from the fact that it involves countries with very different income levels, allowing each to bring its comparative advantage to the production process, PhD researchers from one, for example, and unskilled assembly-line workers from another. Friend-shoring would tend to eliminate this dynamic, thereby increasing production costs and consumer prices. While some labor unions would welcome the reduced competition, the rest of us would regret it.

On top of diminished trade benefits, Rajan reiterates that friendshoring may encourage protectionism among those being discriminated against. What is a global supply chain manager to do? I'll have more to say about this topic in the future, but for now, it's safe to say that each company will need to weight the benefits of more predictable supply chains with likely costlier production in friendlier locations and the potential loss of market access to aggrieved "unfriendly" countries. 

PS: If you have doubt the admittedly unwieldy term "friendshoring" is real, the IMF is already observing greater FDI among geopolitically aligned countries. The IMF further estimates potentially large efficiency losses due to this phenomenon. 

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ARM Holdings IPO: Ditch UK, Flee to US

♠ Posted by Emmanuel in Japan,Technology at 4/29/2023 09:32:00 PM

SoftBank-ARM was a fine idea at the time; now it's a brilliant mistake.

Hard as it may be to believe given how downtrodden it is now, Japan's SoftBank was once regarded as a formidable presence on the global technology stage. Sure, it always carried a fairly high level of debt, but its principal Masayoshi Son was regarded as an Asian tech visionary in the mold of a Bill Gates or Steve Jobs. Just as Japan, Inc. gorged on buying US properties in the 1980s, SoftBank gobbled global tech shares in the 2000s, culminating in the creation of Vision Fund for venture capital. Launched in 2017, the Vision Fund's losses have dragged down Softbank as of late. Casting such a wide net, some purchases were bound to be successes (like Alibaba) while others were duds (like WeWork). Unfortunately, it seems SoftBank has had more of the latter than the former. 

Arguably SoftBank's crowning purchase was the UK's ARM Holdings for $32 billion in 2016. Based in the college town of Cambridge, ARM licenses leading-edge microchip designs used in almost all of today's smartphones. Such licensing revenue is huge. However, ARM has been shopped around for a number of years now to help resuscitate its parent company's finances. 

From an international political economy standpoint, what is interesting is that ARM has chosen not to make its initial public offering (semantically a re-offering) on the London Stock Exchange where it was listed prior to SoftBank's 2016 purchase. Spurning national pride, it has chosen to list in the United States. So much for UK government entreaties to lure ARM back home, at least financially: 

“After engagement with the British Government and the [Financial Conduct Authority] over several months, SoftBank and Arm have determined that pursuing a U.S.-only listing of Arm in 2023 is the best path forward for the company and its stakeholders,” Arm CEO Rene Haas said in a statement. Arm did not completely rule out the possibility of listing in London in the future, saying it was “proud of its British heritage” and may consider a subsequent listing in the U.K. at a later date. It provided no further details.

The decision comes despite intensive lobbying efforts by the British government to persuade the chip designer to list its shares in the U.K. capital. With 6,000 staff globally and 3,000 based in the U.K., Cambridge-based Arm is widely regarded as the jewel in the crown of the British tech industry.

The company is a major force in the semiconductor market, licensing its microchip designs to some of the world’s largest consumer tech manufacturers. Around 95% of smartphones globally, including the Apple iPhone, contain Arm-based processors.

London has relaxed its listings rules in an effort to attract leading global tech companies to go public in the U.K. It faces barriers, with venture capitalists complaining of a lack of understanding of often loss-making tech ventures.

Although the soon-to-be defunct Softbank-ARM linkup has many interesting angles to it, there are two of particular note here: The fall of Masayoshi Son who though the world was his (tech) oyster is one. Another is the London Stock Exchange's inability to attract tech IPOs. With many of its listings consisting of traditional industries like energy and finance, the UK reputation as an investment destination for technology could literally have received a shot in the ARM. But alas, it has just been announced that ARM will soon list Stateside a few weeks after the UK was spurned:

SoftBank Group Corp's chip maker Arm Ltd has filed with regulators confidentially for a U.S. stock market listing, Arm said on Saturday, setting the stage for this year's largest initial public offering. The IPO registration shows that Softbank is pressing ahead with the blockbuster offering despite adverse market conditions, after saying in March that it planned to list Arm in the U.S. stock market.

U.S. IPOs, excluding listings for special purpose acquisition companies, are down about 22% to a total of just $2.35 billion year-to-date, according to Dealogic, as stock market volatility and economic uncertainty put many IPO hopefuls off.

Arm plans to sell its shares on Nasdaq later this year, seeking to raise between $8 billion and $10 billion, people familiar with the matter said. In a statement, which confirmed an earlier Reuters report on the planned IPO, Arm said the size and price range for the offering has not yet been determined.

The Matthew Effect is alive and well in tech, I guess. Given the UK's self-inflicted harm over Brexit, it is not unexpected that one of its national champions would prefer to list in the capital- and tech-intensive United States which already has many of tech's top firms. Maybe the UK will get a consolation prize of a secondary listing a few years down the road, but for now, it has come up empty.

5/19 UPDATE: The ARM sale probably couldn't come sooner as the SoftBank Vision fund has just announced a scarcely believable $39B loss.

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The IMF, Team Transitory & You

♠ Posted by Emmanuel in Bretton Woods Twins at 4/26/2023 07:27:00 PM

I have a confession to make in being on board "team transitory", or the belief that the recent (global) increase in inflation is due to largely temporary factors. As these factors fade, we are set to resume the previous economic environment of relatively benign inflation. On the demand side, these temporary factors include increased demand for consumer goods as people stayed more at home due to the pandemic. Economic stimulus provided by rich countries to their citizens further fueled this demand. On the supply side, disruptions in goods production, transportation and retail also arose due to the pandemic. More demand + less supply = inflation.

Meanwhile, critics of the idea that high inflation is transitory argue that there have been changes in the world economy which contradict the transitory idea such as the emergence of a major war on the European continent--the first since the end of WWII--causing strains in the availability of commodities like energy and grains. Also, prices of not only goods but also services should be factored in since the latter have increased, too. In other words, inflation is becoming entrenched and is not a temporary phenomenon. 

Little-noticed in this debate is the International Monetary Fund (IMF) weighing in recently with its most recent take on the matter. According to the IMF, there were longstanding economic phenomena well underway before the pandemic that point to lower inflation whose momentum will be very difficult to overcome. These include: 

• Total factor productivity falling significantly, which lowers economic output;
• Demographic changes resulting in fewer persons of working age (and more retirees), which also reduces economic output;
• For developed countries at least, inflows of capital from developing countries in search of more secure returns. 

While there too are factors pushing up rates such as running sizable national budget deficits (that have to be funded by offering higher returns to lenders), the overall picture in the developed world is of declining rates, on the balance. Here is another IMF chart:

 

Absent some unforeseen modern-day productivity boom or baby boom, you would generally expect rates to trend downward in the developed countries. As they become older--like China whose population is already falling outright--developing countries should follow the same path. Add in other factors the IMF found also lead to lower rates such as elevated and rising inequality--rich people tend to save more and spend less--as well as the decreasing labor share of income--leaving workers with less disposable income--and the picture for rate moderation is compelling. 

On this matter at least, I think this IMF research is spot on, with some caveats. We are not quite sure when current (transitory) inflation pressures let up precisely, but they will eventually be swamped by stronger factors favoring lower rates. Aging and diminished productivity along with a handful of other factors will lead us back to a low rate economic environment once more. You have to be brave to bet otherwise.

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Geo/Econ Challenged: UK in CPTPP?

♠ Posted by Emmanuel in APEC,Europe,Trade at 3/31/2023 01:27:00 PM

The UK will soon join this group, but does it really matter?

It has somehow come to pass that the UK has now joined an Asia-Pacific trade agreement. OK, so the free trade agreement in question is not the US-led Trans Pacific Partnership, but rather the US-absent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Moreover, the Pacific is vast: the world's largest ocean is said to contain over half the world's waters. Still, an undeniable fact is that the UK is not in the Pacific. (The last time I checked, it also belonged to this group called the "North Atlantic Treaty Organization".)

Chalk this oddity up to the Brexiteer pledge that leaving the European Union would somehow leave it better off by signing up to FTAs worldwide, and not just with the UK's neighbors. There are a few things to unpack before getting to the significance of this announcement, so here's a quick recap:

• The trade-averse US government has continued post-Trump, meaning the US seems to have no intention of (re-)joining CPTPP. 
• Lacking a firmly "Western" prestige partner, the remaining CPTPP countries likely decided to allow negotiations to proceed with the UK anyway.
  

Now, to the crux of the matter: are there significant economic benefits to be reaped by the UK from this agreement? The UK government estimates that their economy will gain 0.08% as a result over 10 years. 0.08%. To me that seems to be a rounding error instead of a significant gain. Put it down to the UK already having existing FTAs with most CPTPP members and trading far less with these Asia-Pacific nations than with its European neighbors:

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership - or CPTPP - was established in 2018, and includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Membership of the CPTPP loosens restrictions on trade between members and reduce tariffs - a form of border tax - on goods.

However, the gains for the UK from joining are expected to be modest. The UK already has free trade deals with all of the members except Brunei and Malaysia, some of which were rolled over from its previous membership of the EU. And even with some gains in trading the government only estimates it will add 0.08% to the size of the economy in 10 years. The Office for Budget Responsibility (OBR), which provides forecasts for the government, has previously said Brexit would reduce the UK's potential economic growth by about 4% in the long term.

Simply put, joining CPTPP would only claw back, oh, 2% of the economic output lost from leaving the EU. It's as close to non-news as you can get in the economic realm.

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Joe Biden, Oil Trader of the Year 2022?

♠ Posted by Emmanuel in Energy at 12/20/2022 10:36:00 AM

Of all people, Joe's got the magic touch with petroleum?

The endless number of foiled speculators attests to the difficulty of realizing the old adage about how to make money--buy low, sell high. Let's face it: ever-changing markets often result in us doing quite the opposite, and not making money in the process. Now, whenever we are asked to think about who are the least savvy market participants, we often identify governments--or more specifically, government officials. Not being keen market watchers with limited skin in the game--it's taxpayer money they are officially dealing with, not theirs--this sentiment is understandable. 

Well lo and behold: Quartz is now touting President Joe Biden's timely release from the US Strategic Petroleum Reserve (SPR) as the "oil trade of the year." In retrospect, his release at the near-top of the oil market a few months ago helped ease oil prices. Now that oil prices have come down quite a bit, the SPR is now being refilled. Yes, Biden is buying low after selling high:

Instead, it appears the US government made the oil trade of the year: Releasing 180 million barrels of crude from the Strategic Petroleum Reserve between March and the end of this year in an effort to blunt the effect of rising prices, the US government appears to have made about $4 billion, as prices have fallen dramatically over the course of the year.

Selling when crude oil prices were high, the US captured billions in value. By one widely-used measure, the price of crude oil in Texas peaked at about $124 a barrel in March, and the average price during the SPR sales period was about $96; today that oil costs just $73 per barrel. 

These are paper profits, to be sure: The US is still aiming to refill the reserve, and prices may rise as it does so. On Dec. 16, the Department of Energy put out a request to purchase 3 million new barrels of crude, after releasing about 200 million barrels in 2022. There are currently about 382 million barrels still in reserve.

His genial manner has caused Joe Biden to be underestimated throughout his life. Can he now be called a market player as well in his eighth decade? T. Boone Pickens, eat your heart out.

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Apple iPad, Soon Made in Vietnam

♠ Posted by Emmanuel in Southeast Asia,Supply Chain at 6/01/2022 01:44:00 PM

 China's epic recurring COVID-19 shutdowns have frustrated multinational corporations aiming for predictability in their supply chains. Sure, China still benefits from having globally-renowned tech clusters. However, having your production capabilities curtailed again and again due to a handful of (relatively mild) COVID-19 cases doesn't encourage foreign firms, as you would expect.

Not so long ago, I covered Vietnam's emergence as a major assembly hub for South Korea's Samsung [1, 2]. In the years since, it's developed a reputation as a reliable production center for MNCs. It was perhaps inevitable that Apple, frustrated like many others with the PRC's lockdown shenanigans, would look to set up shop elsewhere. Voila! Apple is coming to Vietnam:

For the first time ever Apple is moving some iPad production out of China and shifting it to Vietnam after strict COVID lockdowns in and around Shanghai led to months of supply chain disruptions, Nikkei Asia has learned.

The U.S. company has also asked multiple component suppliers to build up their inventories to guard against future shortages and supply snags, sources said.

China's BYD, one of the leading iPad assemblers, has helped Apple build production lines in Vietnam and could soon start to produce a small number of the iconic tablets there, people with knowledge of the matter said.

To be sure, Apple already makes its wireless earphones in Vietnam. It makes business sense: experiment first with some components, and then shift further assembly work if things go well:

The iPad will become the second major line of Apple products made in the Southeast Asian country, following the AirPods earbud series. The move highlights not only Apple's continuous efforts to diversify its supply chain but also the growing importance of Vietnam to the company.

Also keep in mind that Vietnam is still mostly an assembly hub--stick socket A into socket B sort of mundane work. Many of the components for the "Vietnam-made" iPad will still come from, you guessed it, China. Hence, Apple wants to bolster supplier capabilities in parts of China that have a lower likelihood of being shut down based on the historical record:

To further guard against supply chain disruptions, Apple has also asked suppliers to build up additional supplies of components such as printed circuit boards and mechanical and electronics parts, especially those made in and around Shanghai, where COVID-related restrictions led to shortages and logistic delays. In addition, the company has asked suppliers to move quickly to secure supplies of some chips, especially power-related ones, for the upcoming iPhones.

In particular, Apple is asking suppliers outside of the lockdown-affected areas to help build up a couple of months' worth of component supplies to ensure supply continuity over the next few months. The requests apply to all of Apple's product lines -- iPhones, iPads, AirPods and MacBooks -- sources said.

The next step in Vietnam's development is therefore obvious: to move from assembly to manufacturing components as well following in China's footsteps before it became lockdown land.

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Supply Chain Woes: Hainanese Chicken Rice

♠ Posted by Emmanuel in Agriculture,Southeast Asia,Supply Chain at 6/01/2022 01:02:00 PM

I've been watching Channel News Asia as of late, and a news item that struck me was the Malaysian ban on chicken exports starting this June. It's very much a supply chain issue: as the price (and hence availability) of chicken feed--comprised of grains and soybeans--has increased significantly, Malaysian chicken production has been reduced. Understandably, Malaysia is keen on having sufficient food for its populace before exporting it in this day and age of inflation and shortages. Unfortunately, neighboring Singapore has been negatively affected by Malaysia's impending chicken export ban. 

Hainanese chicken rice is Singapore's signature dish--a staple food in that wealthy Asian nation. Having little domestic chicken production, Singapore is reliant on imports from countries like Malaysia. Given its limited sources, Singaporeans now have to cope with this shortage. Let's begin with constraints on the supply end in Malaysia: 

Malaysia, itself facing soaring prices, has decided to halt chicken exports until local production and costs stabilise. Prices have been capped since February at 8.90 ringgit ($2.03) per bird and a subsidy of 729.43 million ringgit ($166 million) has been set aside for poultry farmers.

Chicken feed typically consists of grain and soybean, which Malaysia imports. But the government is having to consider alternatives amid a global feed shortage. Lower quality feed means the birds are not growing as fast as usual, slowing down the entire supply chain, said poultry farmer Syaizul Abdullah Syamil Zulkaffly.

In turn, Singaporean food stalls have been feeling the pinch. To be sure, there are other sources of chicken such as Brazil. The problem, however, is that Brazil is much farther away than nearby Malaysia, necessitating freezing of chickens to the detriment of freshness and taste:

Singapore, although among the wealthiest countries in Asia, has a heavily urbanised land area of just 730 square km (280 square miles) and relies largely on imported food, energy and other goods. Nearly all of its chicken is imported: 34% from Malaysia, 49% from Brazil and 12% from the United States, according to data from Singapore Food Agency (SFA).

A plate of simple poached chicken and white rice cooked in broth served with a side of greens is a dish beloved by the country's 5.5 million people, and is usually widely available for about S$4 ($2.92) at eateries known as hawker centres.

The SFA has said the shortfall can be offset by frozen chicken from Brazil, and has urged consumers to opt for other protein sources like fish.

Singapore being a wealthy country with more refined tastes, some restaurateurs would rather serve something else rather than frozen Brazilian chicken:

Some vendors have said they will stop selling chicken altogether and instead find alternative dishes – bad news for fans of Singapore’s much-loved dish of poached chicken, served with rice cooked in stock, and chilli dip.

The owner of the popular eatery Tian Tian Hainanese Chicken Rice told the Singaporean outlet The Straits Times that it would stop serving chicken dishes if it could not get fresh supplies. Its founder, Foo Kui Lian, said they would instead “bring back dishes like fried tofu, fried pork chop and prawn salad, but we will not use frozen chicken”.

The Singapore Food Agency has encouraged the public to use frozen chicken, which is imported from countries such as Brazil, or to try alternative meat or fish, and to refrain from buying more than they need.

Singapore's situation has been likened to McDonalds without burgers, but the analogy is not quite correct in that they do have chicken--albeit of the frozen variety. Still, it's another timely illustration of food shortages you encounter nowadays due to supply chain disruptions occurring worldwide.

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Biden's 'FTA-Less' IPEF Asia-Pacific Deal

♠ Posted by Emmanuel in APEC,Trade at 5/28/2022 12:31:00 PM

Japan usually goes along with US economic plans... but how about other Asian countries? 

 

Before Trump, the Republican Party represented the pro-trade American political party--especially in contrast to the trade union-dependent Democratic Party. Although Democratic presidents like Clinton and Obama promoted free trade agreements, they relied on Republican support to push FTAs through. After Trump, 'free trade' has become a dirty term in American politics regardless of party. So how is President Biden to shore up America's presence in the Asia-Pacific after his predecessor Barack Obama proposed the Trans-Pacific Partnership subsequently abandoned by Donald Trump? The answer is... do away with 'free trade' altogether.

I am not sure what appeal Biden's Indo-Pacific Economic Framework for Prosperity [IPEF] offers to Asian countries absent the usual tariff reductions. The details of IPEF are still very much to be determined based on consultations with the proposed participants. At best, it could represent useful technical assistance to others about making their economies more connected, resilient, clean, and fair. At worst, it could actually worsen trade access--especially to the vast American market--by imposing developed country environmental and labor standards on developing countries.  

At this stage, all we have to go on are the following bullet points:

• Connected Economy: On trade, we will engage comprehensively with our partners on a wide range of issues. We will pursue high-standard rules of the road in the digital economy, including standards on cross-border data flows and data localization. We will work with our partners to seize opportunities and address concerns in the digital economy, in order to ensure small and medium sized enterprises can benefit from the region’s rapidly growing e-commerce sector, while addressing issues is such as online privacy and discriminatory and unethical use of Artificial Intelligence. We will also seek strong labor and environment standards and corporate accountability provisions that promote a race to the top for workers through trade [my emphasis].
  
• Resilient Economy: We will seek first-of-their-kind supply chain commitments that better anticipate and prevent disruptions in supply chains to create a more resilient economy and guard against price spikes that increase costs for American families. We intend to do this by establishing an early warning system, mapping critical mineral supply chains, improving traceability in key sectors, and coordinating on diversification efforts.
• Clean Economy: We will seek first-of-their-kind commitments on clean energy, decarbonization, and infrastructure that promote good-paying jobs. We will pursue concrete, high-ambition targets that will accelerate efforts to tackle the climate crisis, including in the areas of renewable energy, carbon removal, energy efficiency standards, and new measures to combat methane emissions. 
• Fair Economy: We will seek commitments to enact and enforce effective tax, anti-money laundering, and anti-bribery regimes that are in line with our existing multilateral obligations to promote a fair economy. These will include provisions on the exchange of tax information, criminalization of bribery in accordance with UN standards, and effective implementation of beneficial ownership recommendations to strengthen our efforts to crack down on corruption.

Right now, IPEF is still nebulous enough to be vaporware. For others, there is a possibility that IPEF is largely downside (a grab bag of broadly protectionist US priorities) without upside (enhanced market access especially through lower tariffs).

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Shein and Faster Fashion's Emergence

♠ Posted by Emmanuel in China,Marketing,Supply Chain at 12/21/2021 01:19:00 PM

Much has already been written about the emergence of "fast fashion": clothing retailers that are able to translate trends seen on the world's fashion runways... to a store near you in a matter of weeks. The success stories of Sweden's H&M and Spain's Mango have become the stuff of business legend in upending the fashion industry in recent decades. It was probably only a matter of time that onetime suppliers in China would become the firms at the cutting edge of evolving to customer's whims and desires that move so quickly. 

Younger women should be familiar with China-based online retailer Shein. Reflecting the democratization of fashion brought by the online world, it's not the big fashion houses that set today's trends but rather posts on the likes of Instagram and Pinterest. In keeping with the times, Shein is almost entirely an Internet selling pure play instead of having bricks-and-mortar stores still like H&M or Zara. Rest of the World writes more about this emerging business success story:

Shein eventually expanded to offer apparel for women, men, and children, as well as everything from home goods to pet supplies, but its core business remains selling clothes targeted at women in their teens and 20s — a generation who grew up exploring their personal style on platforms like Instagram and Pinterest. 

Its clothes aren’t intended for Chinese customers, but are destined for export. In May, the company became the most popular shopping app in the U.S. on both Android and iOS, and, the same month, topped the iOS rankings in over 50 other countries. It’s the second most popular fashion website worldwide.

By 2020, Shein’s sales had risen to $10 billion, a 250% jump from the year before, according to Bloomberg. In June, the company accounted for 28% of all fast fashion sales in the U.S. — almost as much as both H&M and Zara combined. The same month, a report circulated that Shein was worth over $47 billion, making it one of the tech industry’s most valuable private startups.

Think of Shein more as an Amazon-a-like instead of comparing it to the established fast fashion names in terms of its business model:

At the heart of these issues is Shein’s aggressive business model. Comparisons to fast-fashion giants like H&M miss the point: it’s more like Amazon, operating a sprawling online marketplace that brings together around 6,000 Chinese clothing factories. It unites them with proprietary internal management software that collects near-instant feedback about which items are hits or misses, allowing Shein to order new inventory virtually on demand. Designs are commissioned through the software; some original, others picked from the factories’ existing products. A polished advertising operation is layered over the top, run from Shein’s head offices in Guangzhou.

Ethical concerns with work conditions in Chinese garment factories aside, Shein's advantage is being able to call on PRC suppliers to shift even more quickly than European fast fashion firms:

For years, European brands like Zara and H&M have embodied fast fashion, shortening the route from runway to storefront from months to weeks. But Shein isn’t chasing runway trends — rather, it often knocks off items seen on TikTok and Instagram, where hype cycles move significantly faster. Whereas Zara typically asks manufacturers to turn around minimum orders of 2,000 items in 30 days, Shein asks for as few as 100 products in as little as 10 days. “They want factories to be much more nimble,” said Lu.

If speed is Shein's competitive advantage, it must adapt to even quicker cycles going forward. Or, will someone even speedier supplant Shein just as it has H&M and Zara (which outran department stores before them)? Something else I thought the article could have shed more light on is how Shein is working around supply chain snags like the US-China trade war, intermittent COVID-19 lockdowns in the PRC, and rising shipping costs.

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