Mission Grey Daily Brief - November 12, 2024
Summary of the Global Situation for Businesses and Investors
The global order is shifting as Donald Trump wins a landslide victory in the US and Germany's coalition government collapses. This marks a shift from neoliberalism to economic realism, with national security considerations taking precedence over market interests. Trump's protectionist policies and China's state-directed capitalism are intensifying geopolitical competition, pressuring businesses to make investment decisions through a geopolitical lens. The era of peak globalisation is behind us, and companies face a choice between rival IT infrastructures, markets, and currency systems. Trump's proposed tariffs and trade war threats are causing concern and uncertainty for many countries, especially those with close trade ties to the US and China.
Trump's Return to the White House and the End of the Neoliberal Era
Donald Trump's return to the White House coincides with the collapse of Germany's coalition government, signalling a shift in the global order. The German government coalition fell apart over disagreements regarding the debt brake, with former Finance Minister Christian Lindner advocating for neoliberal staples such as tax relief, deregulation, and fiscal discipline, while Chancellor Scholz pursues "economic realism", acknowledging that market-driven solutions may no longer work in a world disrupted by geo-economic competition.
Following Russia's invasion of Ukraine, Europe and Russia have economically decoupled, and while a complete decoupling of Western economies from China remains impossible due to extensive interdependence, the Biden administration has turned to export controls, investment restrictions, and a subsidy-driven industrial policy. China's state-directed capitalism is surging to the technological frontier through heavily subsidised industrial policies, threatening industries worldwide.
Trump's protectionist policies and China's state-directed capitalism are intensifying geopolitical competition, pressuring businesses to make investment decisions through a geopolitical lens. The era of peak globalisation is behind us, and companies face a choice between rival IT infrastructures, markets, and currency systems. Diversification, especially in high-tech sectors, is accelerating, potentially leading to competing economic blocs.
Trump's Tariff Plans and the Potential Impact on Global Trade
Trump's proposed tariffs and trade war threats are causing concern and uncertainty for many countries, especially those with close trade ties to the US and China. Trump has threatened to impose tariffs of between 10-20 per cent on all goods coming into the US, and up to 60 per cent on those coming from China, which could trigger global trade wars on a scale we've never seen before.
Indonesia's businesses are concerned that restrictive trade policies from the US will incentivize Chinese producers to divert large quantities of goods to Southeast Asian markets and create barriers for Indonesian exports to the US. Indonesia is China's largest trading partner and the US is the second-largest export market for Indonesian goods, so these policies could significantly impact Indonesia's economy.
Indonesia's government is taking steps to minimize the negative impact of the change of US administration, including pushing for trade deals, diversifying export markets, and improving competitiveness. More regional trade agreements are necessary to navigate the expected wave of protectionism, as such deals would cement a strong foundation for Indonesian businesses to brace for the shift of US policies.
Taiwan's Position in the US-China Trade War
Taiwanese companies with bases in mainland China are in a hurry to relocate back to Taiwan or elsewhere if Donald Trump imposes high tariffs on China. This highlights the delicate position Taiwan finds itself in as it navigates the US-China trade war.
Mexico's Response to Trump's Threats
Mexico is bracing for the challenges ahead as Donald Trump eyes a return to office, with Trump's constant threats on tariffs, massive deportations, and cross-border trade putting the country in a difficult position. Mexico has a new leader, Claudia Sheinbaum, who is more ideological and less pragmatic than the former Mexican president, Andrés Manuel Lopez Obrador.
Sheinbaum's administration could face particular pressure to address US concerns regarding immigration and drug trafficking, and her recent moves to centralize government power by diminishing independent regulatory bodies could violate US-Mexico-Canada Agreement (USMCA) terms, giving Trump grounds to push for trade renegotiations, especially regarding the auto industry and supply chain regulations.
Mexico hopes for peaceful trade dynamics, but experts argue that optimism should be tempered by a realistic understanding of Trump's national security-focused policies, which often prioritize economic protectionism.
Further Reading:
Eoin Burke-Kennedy: Ireland’s €54bn exposure to Trump’s tariff plan - The Irish Times
How A Second Trump Term Could Strain U.S.-Mexico Relations To The Breaking Point - Reform Austin
Indonesia’s businesses fear deluge of Chinese goods after Trump takes office - asianews.network
Trump Wins Big, Germany’s Coalition Falls—A New Global Order? - Social Europe
Themes around the World:
US-China Trade War Opportunities
The ongoing US-China trade tensions present India with opportunities to enhance its manufacturing capabilities and attract foreign investment. However, India has struggled to capitalize on the 'China plus one' strategy, with competitors like Vietnam gaining more traction. Strategic policy adjustments are necessary for India to effectively leverage this geopolitical shift.
India-Kazakhstan Mineral Cooperation
India's partnership with Kazakhstan in critical minerals aims to enhance domestic supply chains and reduce reliance on imports. The joint venture for titanium processing reflects a strategic shift towards securing essential resources, aligning with India's broader goals of self-sufficiency and sustainable economic growth.
Japanese Yen and Monetary Policy
The Japanese Yen remains under pressure amid rising U.S. bond yields and geopolitical risks. Speculation around the Bank of Japan's interest rate hikes could influence currency stability and investor sentiment, impacting international trade dynamics and the competitiveness of Japanese exports.
Impact of Tariffs on Trade
The proposed tariffs could escalate into a trade war, affecting US economic growth and consumer prices. Businesses are concerned about the immediate economic repercussions, including increased costs and potential retaliatory measures from affected countries.
Investment Hesitancy in Africa
Despite efforts to strengthen ties with Africa, German investors remain cautious due to perceived high risks. This hesitancy limits opportunities for diversification and growth in emerging markets, impacting long-term investment strategies.
Adani Group's Legal Challenges
The US indictment of Gautam Adani poses significant risks to his business empire and, by extension, India's economy. As a major player in infrastructure and energy, any decline in Adani's operations could have ripple effects on employment and investment, raising concerns about corporate governance and crony capitalism in India.
Supply Chain Diversification Strategies
India's government emphasizes the need for businesses to diversify supply chains to mitigate risks associated with over-dependence on China. This balanced approach aims to strengthen domestic industries while navigating geopolitical complexities, particularly for micro, small, and medium enterprises.
Data Center Investment Potential
Thailand is emerging as a prime location for data center investments due to its robust infrastructure and strategic geographical position. Government incentives and a strong digital economy are attracting international corporations, promising substantial economic benefits and job creation in the tech sector.
Regulatory Changes in Financial Services
The UK is implementing a Critical Third Parties Regime to enhance operational resilience in financial services. This regulatory framework aims to mitigate systemic risks from third-party service providers, impacting compliance strategies and operational frameworks for financial institutions.
Shift in Foreign Investment Preferences
Foreign investors are increasingly favoring the UK over France due to perceived political stability and favorable investment conditions. This shift poses a competitive threat to France, which has historically been a leading destination for foreign direct investment, potentially impacting job creation and economic dynamism.
Military Procurement Surge Post-Hamas Attack
Following the October 7 Hamas attack, Israel has expedited military procurement, including new corvettes and Joint Light Tactical Vehicles. This multi-billion Shekel expenditure reflects a strategic shift in defense priorities, influencing both domestic defense industries and international arms trade dynamics.
Housing Market Pressures
Thailand's housing market is facing significant challenges due to high household debt and declining consumer spending. The government's initiatives to stimulate the sector may not suffice if underlying economic issues persist, potentially impacting real estate investments.
Global Economic Policy Uncertainty
The potential for a shift in U.S. economic policy under Trump raises concerns among international partners. Countries like Japan are preparing for possible tariffs and trade disruptions, which could affect global supply chains and economic stability.
Inflation and Economic Transformation
Japan's transition to a higher-inflation environment marks a significant economic transformation after decades of stagnation. This shift presents both challenges and opportunities for businesses, as rising prices may stimulate investment but also require adjustments in pricing strategies and consumer behavior.
Impact of Austerity Measures
The proposed austerity budget, involving significant spending cuts and tax hikes, has sparked political unrest and could destabilize the current government. These measures aim to address France's high budget deficit but may hinder economic growth and investor confidence, complicating the fiscal landscape and potentially leading to further political turmoil.
Global Economic Policy Shifts
Japan and other nations are preparing for significant shifts in U.S. economic policy under Trump. Concerns over potential tariffs and forced decoupling from China are prompting countries to reassess their trade strategies. The implications of these changes could reshape global supply chains and international trade dynamics, affecting economies worldwide.
IMF Growth Projections
The IMF's projections of slower economic growth in Armenia could impact funding for sports initiatives. As the economy stabilizes, investment in sports may become more competitive, influencing strategic decisions for stakeholders in the sports sector.
Bipartisan Infrastructure Investments
The Biden administration's 'Investing in America' agenda has catalyzed over $1 trillion in private sector investments in clean energy and manufacturing. This initiative aims to enhance US competitiveness, create jobs, and strengthen supply chains, particularly in critical sectors like semiconductors.
Energy Infrastructure Vulnerability
Continued Russian attacks on Ukraine's energy infrastructure pose severe risks to civilian life and economic stability. The damage to power plants and energy systems complicates recovery efforts and impacts operational capabilities across various sectors.
Chinese Consumer Sentiment
Despite economic challenges, there are signs of improving consumer sentiment in China, particularly in urban areas. Increased property transactions and targeted subsidies are fostering a cautious optimism among investors, but the overall economic recovery remains fragile amid ongoing uncertainties.
Global Auto Industry Dynamics
China's automotive industry is poised for a significant shift, with the capacity to produce millions of vehicles for export. This could lead to increased competition in global markets, particularly in the EV sector, as China seeks to leverage its manufacturing capabilities amidst rising trade tensions.
China's Solar Panel Manufacturing
China dominates the global solar panel manufacturing chain, with over 80% market share. However, US duties and tariffs have effectively eliminated Chinese solar equipment from the US market. In response, some Chinese companies have expanded their supply chains in Southeast Asia, allegedly to dodge US levies, leading to tensions with the US.
Challenges in Automotive Sector
Thailand's automotive production is forecasted to decline to 1.5 million units in 2024, the lowest since 2021, due to weak domestic demand and competition from Chinese electric vehicles (EVs). The rise of Chinese automakers in Thailand's EV market poses significant challenges for traditional manufacturers, necessitating strategic adaptations.
Regulatory Changes in Crypto Market
Japan's tightening of cryptocurrency regulations aims to protect investors and promote domestic growth. These regulatory changes could reshape the crypto landscape, attracting compliant businesses while deterring unregistered exchanges, thus impacting investment dynamics in the sector.
Geopolitical Supply Chain Challenges
China's export restrictions on critical minerals have disrupted India's supply chains, particularly in renewable energy sectors. Indian traders have found workarounds via Dubai, but this has increased costs and delays. Long-term reliance on such strategies is unsustainable, highlighting the need for India to enhance domestic manufacturing capabilities.
Supply Chain Disruptions in Lebanon
Israeli bombardments have severely disrupted agricultural exports from Lebanon, threatening food security and economic stability. This situation could have ripple effects on regional supply chains and trade relations.
Japan's Crypto Regulatory Landscape
Japan is tightening regulations on cryptocurrency exchanges to enhance investor protection and promote domestic growth. These regulatory changes aim to foster a secure environment for crypto investments, aligning with global trends in digital finance and innovation.
Technological Innovation in Defense
The war has catalyzed a surge in technological innovation within Ukraine's defense sector, with civilian tech being rapidly adapted for military use. This shift not only enhances Ukraine's military capabilities but also attracts investment in tech startups, potentially transforming the region into a hub for dual-use technologies.
Shift in Energy Policy
Germany's transition away from Russian gas has led to a reconfiguration of its energy landscape. The government is investing in alternative energy sources and infrastructure, impacting operational costs for businesses. This shift is crucial for energy security but presents challenges in terms of investment and adaptation for many industries reliant on stable energy supplies.
China's Stimulus Measures
Recent stimulus measures from Beijing aim to stabilize the economy and boost consumer confidence, particularly in the real estate sector. Fund managers are cautiously optimistic, but the effectiveness of these policies remains uncertain, with a focus on upcoming government meetings for further clarity on economic direction.
Technological Advancements in Energy
The integration of AI and machine learning in inventory management is transforming the energy sector. Companies are leveraging these technologies for better demand forecasting and inventory optimization, which is essential for maintaining competitiveness amid rising operational costs and changing consumer expectations.
Supply Chain Disruptions
The ongoing conflict and military actions are causing significant disruptions in supply chains, particularly in defense and energy sectors. Businesses must navigate these challenges to maintain operations and mitigate risks associated with sourcing and logistics.
Corporate Responses to Trade Policies
Major corporations, including Apple, are actively engaging with Chinese officials to navigate the complexities of trade policies. Their strategies to mitigate risks from potential tariffs highlight the importance of maintaining robust supply chains amid geopolitical uncertainties.
Geopolitical Tensions with China
Ongoing geopolitical tensions and trade restrictions against China may hinder access to critical lithium supplies. As China dominates the lithium processing market, U.S. companies may face increased costs and supply risks, necessitating a reevaluation of sourcing strategies and partnerships in the lithium industry.
International Arms Export Scrutiny
The UK government's review of arms exports to Israel, particularly F-35 components, raises concerns about complicity in potential war crimes. This scrutiny could lead to broader implications for international arms trade with Israel, affecting investor confidence and operational strategies in defense sectors.
India-Kazakhstan Mineral Cooperation
The recent partnership between India and Kazakhstan in critical minerals, particularly titanium, signals a strategic shift in securing supply chains. This collaboration aims to enhance India's domestic capabilities and reduce reliance on imports, aligning with broader goals of self-sufficiency in critical sectors.