German Elections, Disrupted Supply-Chains & the Economic Impact of US Troops Withdrawing from Afghanistan: What to Watch in Trade Finance this week

Dr Rebecca Harding

16th August 2021: Coriolis Technologies is watching three things at present:

 

German elections

Germany is the world’s third-largest trading economy and has coped with the pandemic well, both economically and in terms of managing the infection itself. Politically it has not coped well, however, and the last 18 months have shown some real fault-lines in Germany’s consensus-based model. The campaign for the election kicked off in all seriousness this past weekend and has already become mired in a smear campaign against the Greens in particular. Olaf Scholz, who is the SPD candidate for Chancellor is leading the pack to replace Merkel even though his party is trailing with only 19% of the vote.

All of this matters – it is the end of an era for Germany, and actually for the world. Angela Merkel has “led from behind” and this worked well until the Financial Crisis. Since then, there have been key questions about the stability of the German financial system, especially since Wirecard and Greensill, about Germany’s commitment to NATO, its relationship with Russia, and most importantly of all in a transatlantic context, its relationship with China. While the outcome of the vote is unlikely to move markets, Germany’s role in the world is at stake in this election. At the moment, the Germans themselves don’t seem to know what to choose – the CDU/CSU’s position has been falling back, as have the Greens and the AfD’s. The “business as usual” candidate, the CDU’s Laschett, is seen as dull, and a younger generation is looking for Germany to take the lead on the sustainability agenda. There is an appetite for reform and the polls suggest that momentum behind that is building. As Olaf Scholz said, “we can’t muddle through anymore” (actually what he said literally was “wir können nicht mehr durchwursteln” (Literally translated, durchwursteln is “through sausage” – my word of the week I think!)

 

Supply Chains/supply chain finance

The disruptions to global supply chains continue and this is a real disruption to how companies are thinking about their inventories and business models. It’s remarkable how long all of this is taking to work through, but if you think that most trade is conducted on a 30, 90 or 180-day process, this is why the impact of supply chain disruptions is taking so long to work through. There are two causes for concern: the first is the legacy of the pandemic: the Delta variant is still sparking port closures in China and last year’s miscalculation of demand by shipping companies alongside the Suez Canal crisis has just left everything in the wrong place around the world. Businesses are still stockpiling in an attempt to get around these issues but the system has still not returned to normal. The second is the geopolitics of supply chains that involve semi-conductors. Our data suggest that the pattern for less trade in semi-conductors pre-dates the pandemic and is more to do with the trade conflict between China and the US. As the “Made in China 2025” agenda accelerates and more reliance is placed in China on its internal market for things like semiconductors, this particular trade flow will become more contested and we can see more disruption more broadly to global supply chains as a result.

The first consequence of this is that freight prices are increasing and this will weigh on market sentiment as longer-term inflationary pressures build. It’s something that falls outside of traditional monetary policy – a hike in interest rates or tapering QE, for example, may have only limited effect on what are “real” economic pressures caused by shortages of supply.

The second consequence is that there will be further pressures on the trade finance sector itself. Supply Chain Finance is struggling to shake of the reputational damage caused by the Greensill scandal; physical disruptions to supply chains delay documentation and payments as well as making deals harder to construct in the first place and subject to potential delays as well creating funding shortages. The “just in time” model of inventory financing.

 

Afghanistan

This seems like a major miscalculation by the US and the humanitarian and political costs are incalculable. Biden’s foreign policy intentions have been called into question and this will affect the rest of his Presidency.

There are several ways in which this provides a more vulnerable context for trade. The first is the threat of another migration crisis. This is a story that is brewing and the Germans are already worrying about how the situation will affect the outcome of their elections. It was the migration crisis in 2015 that catalysed much of the economic nationalism behind the trade wars of the Trump era. This is a real cause for concern.

Second, this could become a flashpoint for the US-China conflict. Afghanistan’s trade is predominantly with Pakistan, Iran and the UAE, although unspecified areas and commodities are a strong feature of its trade as well. The US and China export roughly similar amounts to Afghanistan, although US exports have fallen back significantly since 2011 while China’s have grown, especially in sectors that support infrastructures like electronics and machinery and components. China’s approach to foreign policy, embodied in its Belt and Road initiative is that if people are economically content, then there is a lower risk of conflict. However, it’s impossible to ignore the fact that China has been investing in its naval base in Pakistan and has a greater presence in the region as a result.

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MultiLateral Monitor Q3 2021

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