Global payroll, simply put, is the management of the entire company’s payroll function – for all international offices from one central location.
Enabled by cloud technology, global payroll is transforming how multinationals manage their business operations. Gone are the days of having to recruit multiple in-country service providers and manage multiple contracts, deadlines and reporting. Now it is possible to work with one single service provider who looks after all your company’s payroll needs.
It is important that those who are managing your centralised outsourced system also have a global overview. This requires having a mix of on-the-ground expertise, as well as a centralised system
World Finance spoke to Christine Keily, Chief Tax and Payroll Officer at Immedis, a global payroll and employment tax provider, about how paying an international workforce while simultaneously navigating varying employment laws can be an overwhelming challenge. “For employment law considerations companies have to be really careful. What works in one country may not be compliant in another one so you really have to be mindful of what you are doing.’’
A multijurisdictional challenge This challenge of ‘keeping on top of legislation in multiple tax jurisdictions’ was the top result in a recent Immedis survey conducted among global payroll and finance professionals when asked, ‘what is your biggest global payroll challenge?’. In the results, a staggering 41 percent of participants stated this was their biggest concern, followed by 37 percent answering ‘multiple deadlines, processes, contracts and reporting’.
These challenges were followed by ‘fragmented reporting across multiple countries’ with 16 percent of respondents highlighting this problem and 6 percent pointing to ‘late payments, bank charges and FX fluctuations’ as another key concern.
Keily indicates to World Finance that she is not at all surprised by these results, stating: “For any international organisation, it is simply not possible to have enough knowledge on legislation in every location which you operate in. This is why it is important to be able to rely on the expertise and oversight that comes with a fully managed, outsourced, global payroll partner like Immedis.” Keily’s team of qualified tax experts around the world provide value at every level to ensure their clients’ businesses remain compliant with the legislation in each jurisdiction they operate in.
Centralising payroll operations in one location is also more efficient than dealing with multiple providers across multiple regions. With the advent of the EU’s General Data Protection Regulation (GDPR), centralising information in one place makes even more sense. The GDPR rules apply not only to the EU, but to companies that interact with or manage the data of someone based in the EU, or information that is transmitted into the EU. “From an international payroll perspective, companies will have to have a global view and centralised approach to the GDPR and impose the same approach which meets the GDPR criteria, no matter where they are,” Keily explained. “You don’t know at what point in time you may be subjected to GDPR rules.”
Payroll information is particularly sensitive, so ensuring that businesses are GDPR compliant in terms of finances is important. “The increasing data risks are something we keep at the forefront of our technology, and our software is built and adapted with this in mind,” said Keily. “Globalisation and the increase in a global workforce in various locations can open up risks in the transmission of data across the internet and what we hold in our computers.”
While compliance commands the majority of attention surrounding payroll issues, cost is also a significant factor. Centralising payroll has logistical benefits in terms of time, which by extension is a cost saving. Utilising the services of an expert payroll provider also reduces the chance that a mistake will be made. Fines for breaching regulations vary greatly from region to region, and in some cases, penalties will far outweigh what it would have cost to do the process correctly the first time. Of course, there is also the reputational damage, which may be impossible to quantify. “When you get into that area where you have sacrificed compliance to save on cost, you will often find those people will end up paying more to sort it out than they would have done to get it right from the start,” said Keily.
Software in the cloud With this increase in international operations, Immedis has developed an approach designed to address new business needs. Keily explained how the company has adopted a centralised approach that uses cutting-edge technology to provide global insight into a business’ payroll: “Our innovative software gives our clients a plethora of benefits and insights including: bespoke global reporting; automation of repetitive manual tasks that historically would be prone to human error; reducing payroll cycle times; reducing the margin for errors; and the ability to visualise payroll data in a way that offers huge insights and predictive analysis to present to the board.”
While finding experts for an individual region may be easy, coordinating their efforts towards the same goal are not. With so many decisions now having to be made at a global level, Keily affirmed that centralising is the key to navigating challenges at the corporate employer level. She said: “If you are just dealing with outsourced providers in each separate location, you are dealing with the expectation that, as the employer, you have a lot of local knowledge. Whereas if you are working on a global, centralised approach, you are dealing with someone who knows your limitation as a global employer, as you cannot possibly have enough knowledge for every location you are dealing in. It’s simply not possible, and we know that, so you need to be able to rely on the expertise and oversight that comes with the centralisation.”
Tax experts on the ground Keily added that it is important that those who are managing your centralised outsourced system also have a global overview. This requires having a mix of on-the-ground expertise, as well as a centralised system that is capable of looking at a payroll service. Even greater benefits can be felt by consolidating finance, human resources and other systems into one. “For instance, if one area of the business has sent an employee abroad and HR doesn’t even have knowledge of this, it’s going to cause huge problems,” Keily said. “Or if someone from finance comes across this and finds there are huge costs involved in the management of the compliance of this, which wasn’t budgeted for previously, then there are going to be more issues.”
Another key benefit to centralising and collating all these services is the peace of mind and security it offers to both businesses and individual employees. Keily said when employers are looking at employees in multiple locations, a centralised system gives the employee a sense of consistency. “If you’ve got the one platform and you access it and it’s the same wherever you go, there is a feeling of security and reliability. Further, there may not be the same concerns involved if there was a whole new system to try and navigate and everything was different.”
Ultimately, security is one of the major reasons why businesses expand internationally. Although the focus is normally on elements like supply chains and market reliance, this pales into insignificance if a business’ back end is not up to shape. With a centralised payroll solution, however, businesses can focus their energy on the pressing challenges of a new market, without becoming overwhelmed with compliance requirements
From one of the most promising economies in sub-Saharan Africa to a nation struggling amid a crippling debt crisis, Mozambique’s fall from grace has been swift and replete with shady dealings. In 2014, the capital, Maputo, was chosen by the International Monetary Fund (IMF) to host its Africa Rising conference in recognition of Mozambique’s economic growth – an enviable 7.4 percent per year across two decades (see Fig 1). At the time, the IMF’s managing director, Christine Lagarde, spoke of the country’s “impressive performance” and her “high hopes” for the future. But in the four years since, much of that optimism has dissipated.
Falling commodity prices, clashes between rival parties and environmental challenges began threatening the economic stability that the country had enjoyed for two decades
In 2016, the discovery of undisclosed government loans worth up to $2bn precipitated an abrupt end to Mozambique’s economic success story. IMF aid was withdrawn and debt payments have subsequently been missed. In March of this year, finance minister Adriano Maleiane explained that creditors might have to wait another decade before they are repaid.
As the scandal deepens, questions are rightly being raised about the role played by international agencies, developed countries and global banks – specifically, how much responsibility they should take for the economic upheaval that will ultimately see the Mozambican people suffer. While government officials must surely be held accountable for their actions, so too must many others for a crisis in which few people’s hands are clean.
Halcyon days No story of Mozambique’s current debt crisis would be complete without examining the country’s more prosperous past. Following the end of the civil war in 1992, the national government implemented a series of macroeconomic reforms that looked to make the most of the country’s natural resources and facilitate a transition towards a market economy. Post-war megaprojects like the Mozal aluminium smelter helped curb Mozambique’s overreliance on the agricultural sector, which saw its share of GDP fall from 38 percent in 1992 to 20 percent by 2001.
Efforts to boost human development in the country, particularly in rural areas, started to pay off, with the proportion of citizens living in poverty falling from 69 percent in 1996 to 54 percent in 2003. The government’s fiscal policies, many of which were supported by the IMF, lowered trade barriers and simplified the tax system. Life for many in Mozambique may not have been comfortable – the country’s per capita income was still 40 percent below the average for sub-Saharan Africa in 2012 – but there were reasons for optimism, at least.
In fact, Neil Balchin, Research Fellow at the Overseas Development Institute, believes that Mozambique’s potential has been clear to see for some time, even if the country has struggled to overcome its macroeconomic challenges. “Mozambique has potentially good prospects for diversifying production, advancing industrialisation, promoting economic transformation and creating jobs for the large number of young people entering the labour market, estimated at around 420,000 annually,” Balchin explained. “It has considerable mineral reserves, vast arable land and an extensive coastline.”
But as Mozambique was cashing in on these plaudits and receiving numerous investment proposals in the early 2010s, problems started to appear below the surface. Falling commodity prices, clashes between rival parties and environmental challenges began threatening the economic and political stability that the country had enjoyed for the previous two decades. Worse was still to come.
A dirty secret Back in 2013, the Mozambique Government borrowed $2bn in order to set up three state-backed tuna fishing companies, with the loans arranged by Credit Suisse and a Russian investment bank. Although there is nothing particularly unusual about a developing nation asking for outside help to fund its economic projects, in this case the request was kept hidden, with the loans agreed in secret away from the scrutinising eyes of the country’s parliament.
Many of the boats that were purchased using the $2bn loan now sit idle and unused in Maputo harbour
The secrecy initially disguised the fact that the numbers involved in the deal simply didn’t add up. Firstly, $2bn is a colossal amount for a country of Mozambique’s financial heft, representing more than 12 percent of the country’s GDP (see Fig 2). And second, the loans were taken out on the wildly optimistic assumption that the new tuna fleet would be able to catch $200m worth of fish every year. Even if such ambitious goals were achieved, they would still fail to match the annual repayments (including interest) of $260m. The irregularities surrounding the loan perhaps help explain why it was not originally made public – its full extent only became known in early 2016. The subsequent breakdown in trust between Mozambique and its creditors caused international donors, the IMF and the World Bank to suspend all financial aid.
While the initial disclosure damaged Mozambique’s financial credibility, subsequent revelations have served to exacerbate the crisis. An independent audit report by risk consultancy firm Kroll found that Mozambique’s state-owned tuna businesses paid $713m more for maritime equipment than it was worth. What’s more, a significant proportion of the funds were not spent on new fishing boats at all. Among other naval supplies, three Ocean Eagle 43 military vessels were purchased, each capable of launching unmanned aerial vehicles and dispensing machine gun fire. These could help Mozambique police its waters, but they won’t directly contribute to its lofty fishing goals.
The audit also found that $500m of the loan simply remains unaccounted for, all of which adds up to a murky deal that is proving difficult to illuminate. The three Mozambican companies that received the $2bn loan – Ematum, ProIndicus and Mozambique Asset Management (MAM) – have yet to begin meaningful operations, with many of their boats sitting unused in the Maputo harbour.
Antonio do Rosario, the chairman of all three organisations, has so far resisted the efforts of investigators by withholding data on “national security” grounds. Clearly, the close connections between politics and business in the country make accountability a challenge. Armando Guebuza, president in 2013, justified his decision to offer government guarantees on the loans in patriotic terms. The current president, Felipe Nyusi, who was minister of defence at the time the loans were issued, was a trustee at Ematum, while Rosario himself holds a prominent position within the state intelligence and security service.
Dr Joseph Hanlon, a senior lecturer in development policy and practice at the Open University, believes that the actions of private companies, coupled with the issuing of secret contracts, make it difficult to attribute debt liability to the Mozambique Government. “One of the important things to remember is that of the $2bn, not one penny entered Mozambique,” he said. “In a very unusual part of the deal, Credit Suisse insisted that all of the money was paid upfront to a Lebanese equipment supplier.”
Although accountability for the debt scandal is proving difficult, this has not lessened its impact. Foreign grants fell to less than $200m following the discovery of the hidden loans in 2016, down from $700m in 2014. During the same period, foreign direct investment plummeted by 40 percent. Last year, economic growth slowed to just 3.7 percent, and today the country’s financial credibility languishes at the lowest levels among the majority of credit rating agencies. So in order to regain the respect of its creditors and restart the aid programmes upon which it relies so heavily, Mozambique has been given little choice but to impose austerity on its already impoverished citizens.
The blame game On the surface, it is easy to dismiss Mozambique’s ongoing debt crisis as another example of a sub-Saharan African nation undone by corrupt politicians misusing foreign aid. A closer look, however, reveals that to lay all of the blame for this particular debacle at the feet of government elites would be to let other unscrupulous parties off the hook.
To lay all of the blame for this particular debacle at the feet of government elites would be to let other unscrupulous parties off the hook
In particular, one has to look at the role played by both of Mozambique’s creditors in encouraging the country to take out a loan when it was highly unlikely it would ever be able to pay it back. When attempting to justify its actions, Credit Suisse pointed to its own feasibility studies, which indicated that Mozambique would be able to sell its tuna for three times as much as the Seychelles. Given that this is exactly the same fish – the maritime boundaries of Seychelles and Mozambique are separated by just a few hundred miles at their nearest point – such claims were optimistic at best and wilfully misleading at worst.
Hanlon believes that, for all the faults of the Mozambican politicians, fingers should also be pointing at the investment banks. “The proposal for the loan came from Credit Suisse,” he explained. “Mozambique would never have done it if Credit Suisse hadn’t suggested it. The loan was based on business proposals that were total nonsense. Evidently, basic due diligence was not done.”
In many parts of the world, if an individual walks into a bank and requests a business loan despite lacking a sound business proposal, the lending institution would be deemed guilty of reckless lending and find itself at least partially liable for the debt once the customer inevitably defaults. In international law, this is not the case. Hanlon believes that this lack of regulatory standards has allowed global banks to take advantage of developing countries.
“If you look at the history of international lending, there is something called ‘loan pushing’ that has occurred whenever banks have an excess of capital,” Hanlon told World Finance. “Today, quantitative easing has given banks more money than they can get rid of, but this is not a new phenomenon. If you go back to the 1920s, you see exactly the same thing, with US congressional committees criticising what they termed ‘loan salesman’.”
If Mozambique’s creditors have taken on the role of modern-day loan salesmen, then they have certainly exacted a high price. Both banks earned almost $200m in fees for arranging the loans, and Credit Suisse even pocketed an additional $4.1m in 2016 for helping to restructure the part of the debt relating to Ematum. Although Credit Suisse has recently responded to the scandal, explaining that it is “cooperating fully with ongoing investigations into the Mozambique financings”, this makes the economic punishment being handed out to Mozambique seem extremely unfair, as does the fact that the tuna fishing loans were never legitimate in the first place: the loans were never approved by the country’s parliament, and the government guarantees subsequently applied to them were in violation of the 2013 and 2014 Finance Acts.
Of course, fairness works both ways and, despite the dubious legality of Mozambique’s debt, bondholders will still claim that their investments should be repaid. In-fighting has already begun over this issue, with some Ematum bondholders arguing that they should be paid in full while holders of the ProIndicus and MAM debts should receive nothing. Between all the arguing and the finger pointing, a consensus desperately needs to be reached soon. The people of Mozambique – the only truly innocent party in this ongoing saga – cannot wait any longer for their economy to get back on track.
The resource curse In 2010, as Mozambique was experiencing sustained and rapid economic growth, the country received another boost with the discovery of five trillion cubic metres of natural gas in the Rovuma basin, located just off the country’s coast. If the revelation initially gave hope that Mozambique could continue its upward trajectory, this was swiftly quashed by the hidden debt scandal. Still, it was believed that revenues generated through liquefied natural gas (LNG) production could at least help pay off the country’s debts to the IMF and other creditors.
Donors like the IMF and the World Bank must also carry some of the blame for Mozambique’s inability to develop its other industries
These hopes were dashed completely in March this year, when Maleiane revealed that the country was unlikely to receive its LNG windfall until the late 2020s, owing to delays stemming from political and, somewhat ironically, economic instability. Like many other nations blessed with bountiful supplies of lucrative natural resources, Mozambique has struggled to support other industries while pursuing its offshore riches.
“A different focus towards economic transformation, beyond a singular emphasis on harnessing natural gas revenues, is required to bring about the necessary structural changes to the Mozambican economy,” said Balchin. “This could involve a combination of agro-processing and developing capabilities in manufacturing and services. But pursuing economic diversification through these channels will be difficult given the significant institutional challenges present in Mozambique.”
Mozambique’s efforts to diversify have not received much external help either. Hanlon laments the fact that the country has been forced into a trap by international financial institutions that have only been willing to support the mineral and energy industries. Unfortunately, the energy industry creates few jobs and centres on long-term projects that do little to alleviate present-day struggles.
“The obvious route for diversification would be to go into agriculture,” Hanlon explained. “Thailand represents a good model to follow, as it has become one of the world’s largest rice exporters as a result of huge government intervention to support family rice farmers. However, Mozambique isn’t being allowed to go down the same path. It can only do what foreign investors are prepared to pay for, and that’s minerals and energy.”
Donors like the IMF and the World Bank must also carry some of the blame for Mozambique’s inability to develop its other industries. In the name of neoliberal economics, these major aid suppliers pushed the government to significantly reduce state expenditure in exchange for funding. In the 1980s and 1990s, huge pressure was put on Mozambique to rapidly privatise, with the World Bank even supplying loans to privatised businesses when there was little prospect of them being repaid. Changing Mozambique’s economic structure was seemingly more important than sound economic principles.
Donors like the IMF and the World Bank must also carry some of the blame for Mozambique’s inability to develop its other industries
Writing for Third World Quarterly, Hanlon noted that the World Bank’s actions taught the Mozambicans “the lesson that capitalism is not about profit and production, but about patronage – businesses were privatised and given ‘loans’ that need not be repaid based on who you know and donor whim. And for the new businesses, government and donors were major customers and contracts with both were based on patronage, and often kickbacks”. This lesson not only prevented the government from supporting a diversified economy, it also provided a blueprint for the corruption at the heart of the tuna fishing loans.
Finding a way out With substantial revenues from LNG not expected for another 10 years or so, Mozambique will need to find another way out of its current predicament. Given that the tuna fishing loans did not receive government approval, there have been calls for the debt to be written off. This now looks highly unlikely, following parliament’s decision to retrospectively validate the loans in April 2017.
The figures involved in the $2bn debt scandal are exorbitant; the price being paid by the Mozambican people is higher still
The best offer on the table at the time of World Finance going to print proposes delaying repayments until as late as 2034 and asks for forgiveness for half of the $249m Mozambique owes in missed interest payments. Three restructuring proposals have been suggested, none of which have been received particularly warmly by investors. However, creditors may have to get over their disappointment and accept the offer to avoid further government defaults – nobody is likely to be pleased with a 50 percent write-down on their repayments, but it is better than receiving nothing at all.
Once the restructuring is finalised, Mozambique may finally be able to rebuild its damaged economy. First, the government should encourage a reform of its banking sector: Mozambique has more banks per person than Africa’s two largest economies (Nigeria and South Africa), and it should encourage smaller players to merge in order to fortify the sector against systemic collapse. Additional policies should then be implemented to help the country escape its reliance on natural resources.
“Exposure to international trade can stimulate productivity growth in particular sectors and facilitate the discovery and development of new productive capabilities,” Balchin said. “More also needs to be done to promote manufacturing linked to the country’s comparative advantages, such as location, availability of agricultural products and the presence of megaprojects around which linkages can be improved.”
If Mozambique is to reshape its economy, it will first need to be given the freedom to do so. If the IMF is truly committed to sustainable economic growth and reducing poverty, then it cannot impose a crippling programme of austerity on the country. Further investigation into the details of the debt scandal will also improve Mozambique’s financial credibility. In particular, the individuals and businesses responsible must be held to account.
The figures involved in the $2bn debt scandal are exorbitant; the price being paid by the Mozambican people is higher still. There is $500m that still remains unaccounted for, $713m that has been diverted through over-invoicing, and some $200m that has gone towards bank commissions. The three state-backed tuna companies that had no plausible business plans at the time the loans were issued remain largely inactive to this day.
During the Africa Rising conference in 2014, Christine Lagarde stated: “The IMF has been and will continue to be by [Mozambique’s] side.” The hidden loan scandal that surfaced two years later and the swift withdrawal of financial support showed how little those words truly meant. Undoubtedly, the government officials and private businesses responsible for the illegal debt should be punished, but until vital aid programmes are resumed, it is the ordinary citizens who will continue to suffer.
As the world becomes increasingly advanced and interconnected, new sectors must keep up with the latest demands. From biotechnology to artificial intelligence, we count down five of the fastest growing industries.
1 – Renewable energy
The price of renewable energy such as solar and wind power has declined in recent years and become more affordable, meaning that green power is now being seen as a more feasible option for many countries and companies. Global tech company Samsung has committed to using only renewable power by 2020 in the US, Europe and China. Additionally, the EU has raised its target of having 32 percent of its total energy use being green power by 2030 – after pressure from the UK, France, Spain and Italy. The renewable energy market is particularly successful because unlike other power industries, its sources won’t run out. The growth of this industry is so fast that the renewable energy market is already worth $1.35bn.
2 – Cybersecurity
As people and businesses turn online for their data and finances, so do cyber thieves. In 2017, in the UK alone, there were 4.7 million cyber crime cases, making cyber security more important than ever before. By using databases, networks, hardware, firewalls and encryption, cyber security teams can ensure that systems run smoothly, block intruders and stop any information or money from being stolen. Cyber security is now in such high demand, that experts predict that the global market will be worth $165.2bn by 2023.
3 – Biotechnology
Biotechnology is extremely useful in the modern day as it can be used to generate higher crop yields, which is crucial in a world where the population is rapidly increasing. Moreover, biotechnology can cure genetic diseases by manipulating genes, improving the quality of countless people’s lives. Modern biotechnology was first used by Karoly Ereky, a Hungarian architectural engineer in 1919, when he began to convert raw materials into more useful products. The need for biotechnology is in such high demand that the market is estimated to be worth $727.1bn by 2025 with a growth rate of 7.4 percent.
4 – Virtual reality
Virtual reality was first introduced into the market in the early 1990s, and from there the industry quickly went from strength to strength. Virtual reality is not just used for entertainment purposes: it is used by the military, in sport as a training aid and even in mental health to help patients deal with past trauma and severe phobias. The size of the virtual reality industry has practically doubled each year, from being worth $6.1bn in 2016 to $14.1bn in 2017. The market’s rapid growth making it an extremely successful and fast growing industry not only to be in, but also to invest in.
5 – Artificial intelligence
Artificial intelligence is another industry that has rapidly grown, with its main pioneers located in China, Singapore and Hong Kong. From creating artificial intelligence that is able to smell disease, to being able to predict when you are going to die with a 95 percent accuracy, to Amazon Alexa, this sector is always creating new and improved technology. This competitive market will be worth almost $9bn by 2025.
We’ve finally reached that point – the one at which we can no longer bury our heads in the proverbial sand. The magnitude of the plastic problem facing our oceans has reached such a level that even the most indifferent can no longer ignore it. Consequently, over the past year or so, we have been seeing the issue in the news more and more. The public is now aware, and this awareness continues to grow.
The magnitude of the plastic problem facing our oceans has reached such a level that even the most indifferent can no longer ignore it
It’s driven in part by the mounting scientific evidence that is surfacing, in addition to the growing number of related incidents proliferating around the globe. “We’ve had stories like huge dumps of litter on the beaches of Bali, which is familiar to many of us in the West. We’ve seen large [swathes] of waste appearing, seemingly spontaneously, off the Caribbean coast and Latin America. There’s even been fatalities or disasters associated with plastic waste; in Sri Lanka, for example,” said Dr Malcolm Hudson, Associate Professor in Environmental Sciences at Southampton University.
Undoubtedly, David Attenborough’s incredibly popular Blue Planet II has also played a role in this growing societal consciousness. “It makes for very spectacular and very emotive television – seeing a negative story among all the beautiful things in the natural world,” Hudson added. Indeed, during the docu-series, and in the final episode in particular, viewers see first-hand just how much plastic is floating around our seas, the impact it has on marine life, and the damage it can inflict on the food chain. The reaction of most is one of sheer sadness: a disaster is all the more disconcerting when we know it could have been avoided.
At what price According to the Ellen MacArthur Foundation, it is estimated that around eight million tonnes of plastic flow into the oceans each year – but as great as this figure is, others believe it has actually been underestimated. Even more disturbing are the projections if we continue down our existing pathway: a report published by the foundation on behalf of the United Nations claims that by 2050 plastic waste will outweigh fish in the world’s oceans.
8m tons
Amount of plastic flowing into the oceans every year
51 trillion
Microplastic particles present in the oceans
1.8 trillion
Plastic pieces in the Great Pacific Garbage Patch
617,000sq miles
Size of the Great Pacific Garbage Patch
Acting as a sad symbol of this intensifying mess is the Great Pacific Garbage Patch, an ocean current in which huge swathes of plastic debris gather. Located between California and Hawaii, it is believed to contain 1.8 trillion plastic pieces and span 617,000 square miles – which, to put this into perspective, makes it roughly three times the size of France.
Unsurprisingly, all this plastic is having a direct impact on marine life. As recent reports indicate, creatures both large and small are ingesting plastic materials, believing them to be food, and starving in the process. They also act as poisons in the gut, while their very presence can cause severe digestive problems that lead to death. Sea birds are affected too: according to research undertaken by Jennifer Lavers of the University of Tasmania, every bird on Australia’s Lord Howe Island now has plastic in its stomach.
In addition to the deeply detrimental impact that plastic pollution is having on marine life, there are other underlying costs too, particularly with regards to both marine and coastal activities, and in turn the economic benefits that local communities and nations derive from them. Judith Schäli, a researcher at the World Trade Institute, told World Finance that environmental damage to marine ecosystems is estimated to equate to some $13bn per year. Elaborating further, she said: “Related economic costs include those linked to clean-up operations [and] litter removal.” According to Schäli, the cost to marine industries in the Asia-Pacific region is estimated to be around €1bn ($1.17bn) per year. But even that is not the whole picture: as she explained, the presence of alien invasive species that live on floating plastic debris can also result in serious economic losses, though the exact figure is difficult to quantify.
The fishing industry is an obvious economic victim in the declining health of our oceans. As well as obstructing motors, plastic debris can also cause the loss of or damage to fishing equipment; the result is the need to repair or replace gear, or even entire vessels. Even the time taken to clean litter from propellers and nets adds to the cost for fishers. Then there is the additional loss of revenue that culminates from fewer fish being caught, and the fact that what is caught nowadays is often of poorer quality; simply, less healthy oceans inevitably leads to less healthy fish. Collectively, these factors can weigh heavily on the industry as a whole, as well as on the individuals whose livelihoods depend on the seas.
The fishing industry is an obvious economic victim in the declining health of our oceans
Another vital industry that is now suffering first hand from marine litter is the tourism industry. Many popular destinations rely heavily on the lure of pristine beaches, sparklingly clean waters and beach-fronted hotels. But as many tourists have witnessed in recent years, the reality has become a far cry from depictions online and in glossy magazines. Numerous beaches in the Caribbean and Thailand are now lined with a tangled mess of plastics, putting many off revisiting these sorry sights. The associated impact to wildlife only adds to the rebuke of travellers. Speaking about the economic cost to the tourism industry as a result of a loss in aesthetic value, Schäli noted: “It was reported that in South Korea, a single marine litter event caused a revenue loss of about €29m [$34m] in 2011 compared to 2010, as a result of over 500,000 fewer visitors to the country.”
While oceans flow around each continent and are entities we all share, marine plastic pollution can vary from country to country. Schäliexplained: “The degree to which countries are affected by marine litter [varies depending] on their level of exposure, but also on their economy and level of income. Countries that largely depend on coastal tourism or the fishing industry are more vulnerable to the economic consequences of marine plastic pollution. Overall, the costs of marine plastic pollution are not necessarily borne by the polluters. Marine plastic pollution hence involves equity concerns… In addition, coastal municipalities, governments and local communities often have to bear high costs for clean-up operations, awareness-raising activities and education.”
Mega micro As shocking as these consequences are, sadly, this is just half the story – and the better half at that. The most concerning culprit is actually the prevalence of microplastics – tiny particles that have either broken up from fragments of plastics and continue to become smaller over time, or have been purposefully engineered for consumer products. The cosmetic industry, for example, has been using ‘microbeads’ for some time now, promoting their ability to thoroughly scrub skin, which has made them wildly popular in the process. These microbeads are so small that they easily flow through filtration systems and end up in waterways that lead into the sea. Both types of microplastics are having possibly irreparable damage to our oceans, particularly due to their volume: the UN Environment Programme approximates that as many as 51 trillion microplastic particles are present in the oceans.
“I think the microplastics are potentially a bigger problem than the macroplastics,” said Hudson. “With the large stuff, it’s visible and it’s difficult to clean it up, but we can envisage ways of removing it from the sea. But with the microplastics that can be just a few microns long – they could be smaller than the diameter of a piece of hair – these are not even visible, so you can’t even see that the problem is there, and that makes them much more difficult to track in the marine environment… And the longer we have plastic waste going into the sea, both large and small, the more microplastics we’re going to get in the end.”
All types of sea creatures are ingesting microplastics each day, and as they move up the food chain, these plastics will inevitably end up in the human gut. “The plastics have materials in them, such as plasticising agents, that may be harmful for living things and human health… But they also absorb pollutants that are already in the marine environment. So organic materials, pesticides and pharmaceuticals that end up in our marine systems will tend to get concentrated in these tiny particles,” Hudson told World Finance. “We could swallow these particles when, say, eating seafood. And if they’re very small, they might have the potential to pass toxic chemicals or maybe carcinogens into our bodies that may disrupt our hormone systems – we don’t know what the effects of them will be.”
Marine plastic debris affects multiple industries, our global economy, and it could well be affecting our health too
With such stories proliferating in the news and beginning to weigh on the consumer conscience, the UK banned the use of microbeads in the cosmetic industry in January 2018. While this move is a massive boon for the environment, the problem doesn’t stop there, for it’s not just the cosmetic industry that is at fault here – and neither is it just the UK. In terms of the former, plastic beads have various industrial uses as well, such as sand blasting and wastewater treatment. As such, until these areas are also addressed – and in all countries, for that matter – we are continuing to pump these tiny creations into the sea.
There is also another plastic pollutant that has unknown consequences, but has received far less attention in the media: microfibres. These plastic fibres are generated by washing synthetic garments; each time, thousands of synthetic fibres are discarded into washing machines, which are then passed into water treatment systems. “Our water treatment systems aren’t designed to remove them, so they can pass straight into our rivers, estuaries and coastal waters, and then they’re lost in the marine environment in the long-term – with potentially the consequences we’ve talked about,” said Hudson. Unfortunately, the problem doesn’t stop at synthetic clothing: as Hudson explained, plastic fibres also originate from articles such as fishing nets and plastic ropes, which, once discarded into the ocean, will continue to break down until they become microfibres, another invisible enemy with which we must contend.
Boomy McBoomface Clean-up initiatives, while well-intentioned and helpful to an extent, are limited in their effectiveness. Such operations range from simple beach clean-ups carried out by willing volunteers to much-researched, more innovative methods. The latter most famously refers to a scheme thought up by Dutch entrepreneur Boyan Slat, designed to tackle the Great Pacific Garbage Patch. On May 11, 2017, Slat’s organisation, the Ocean Cleanup, unveiled a new design for the system and its deployment, in what will be the world’s first attempt to clean up the biggest mass of ocean plastic on the planet since it was discovered in 1997.
Slat’s device, which is officially called ‘Boomy McBoomface’, lets the ocean do all the hard work. Namely, currents funnel plastic debris into solid V-shaped screens, which are held in place by inflated plastic booms that are anchored to the sea floor. The next stage of the process will involve loading the plastics onto vessels to be taken back to land and recycled. It is hoped that Boomy McBoomface will collect half the mass of the Great Pacific Garbage Patch – which equates to a whopping 40,000 metric tons – within five years.
“It’s very impressive, but it needs to be done over a long time period, over a very large scale, and there are also problems with carrying it out. So where we have these large-scale rafts of plastic in the centre of our major oceans, there is marine life associated with that, so there will be impacts of removing them at the same time,” Hudson explained. “We also have the question of what we do with so much plastic waste when we bring it on shore, so we’ve got to find a way of dealing with that in with minimal environmental impact. Also, large booms – that are, again, plastic material – are likely to degrade. So while I think these are positive ideas, they may have negative aspects to them that we haven’t foreseen yet.”
Shared accountability While certain countries are impacted more than others (see Fig 1) and some nations are better equipped to tackle the challenge, marine plastic debris is a problem we all share. It affects multiple industries and, in turn, our global economy, and it could well be affecting our health too. Aside from such direct costs, there are, of course, also those to marine life – causing animals to suffer and die as a result of our reckless use and disposal of plastics.
The existing problem is frightening, but the first port of call is to stop it from becoming worse. “We need to look at our usage of plastics and find ways to use them more wisely,” said Hudson. This is an important point, for plastic itself is not necessarily the enemy – it’s our relationship with it that is causing so many problems for the natural environment. Hudson shared some suggestions for ways forward with this controversial, yet essential, material to human life: “We can design ways that plastic can be reused, remodelled or remade so that it doesn’t become a waste product, some of which will be lost and some of which will end up in our natural systems.”
The existing problem is frightening, but the first port of call is to stop it from becoming worse
Schäli agreed: “Corporations that are involved in the market of plastic products, especially consumer products, play an important role in the shaping of our production and consumption patterns. They influence consumer behaviour [through] commercials and subliminal advertisement in packaging. By their material choices and product designs, they determine the durability of their products, as well as their recyclability, biodegradability, ecotoxicity and susceptibility to end up in the environment. They further influence consumers’ product choices by providing or withholding information about the materials they use, including the additives with potentially toxic or otherwise hazardous effects.
“In order to reduce their impact, companies should be aware of, and take responsibility for, the whole life cycle of their products, including disposal… They can redefine their business models and overcome the phenomenon of planned and perceived obsolescence, which pushes consumers to constantly renew their belongings by artificially limiting the service life of the products or suggesting that they are outdated.”
Businesses can also reduce packaging quantities and avoid hazardous chemicals, particularly toxic and bioaccumulative substances. Using recyclable or biodegradable materials is a positive step in the right direction. Schäli explained: “[Corporations] can engage in research and development in order to find technical solutions to specific problems in their field of activity, such as textile fibres from washing machines or microplastics from tyre wear. They can make sure that maritime transport of their goods is safe and that the ships meet international standards and comply with the regulations, including the prohibition [of disposing of] plastic wastes at sea. Finally, they can engage in awareness-raising campaigns, educational activities or coastal clean-ups.”
Governments too have a vital role to play, as they can establish the necessary legal requirements, as well as incentives and disincentives, to curb marine plastic pollution. “From an economic point of view, massive marine plastic pollution may bring us to rethink our economic models, based on raising consumption levels and a high throughput of resources, and our throwaway lifestyles,” Schäli noted. A big rethink of our disposable attitude is crucial, but as considerable as this change is, it can start today, with each individual. For now is the time for action: we can no longer stand by and watch the demise of our oceans – without them, we too will perish.
Creating change – significant change – takes time, resolve and money. But the cost if we stand by and simply continue our current habits will be startlingly worse than it is at present. Fortunately, individuals, businesses and governments are on the cusp of the epiphany needed: new regulations are being introduced, reduced packaging is becoming more common, and there is far greater consumer awareness than ever before. But it is not enough. We have to act fast – not for future generations, but for the present, as this is the time frame that we’re dealing with. On the one hand, there is the damage to the environment and subsequent marine fatalities, which should be enough to convince many of this issue’s pertinence. For those less concerned with such issues, there is the inarguable cost to numerous industries, thousands of businesses, national economies, as well as the global economy. Fortunately, the story is not all doom and gloom: awareness is the first step. Now onto the next.
We can be a funny lot sometimes. On the one hand, we are always so eager to step into the future. We embrace new technology – whatever it may be – like it’s exactly what’s been missing from our lives. We’re glued to our smartphones as though they’re limbs attached to our person, and we went crazy for digital currencies as soon as they entered the mainstream media – suddenly, everyone from the local butcher to the high-profile banker started investing. But ask us to eradicate from our lives something that has become outdated – redundant, even – and we cry out in indignation. This, in a nutshell, is the situation we have with the penny.
It costs more than a penny to make a penny. This has been the case for the US since 2006
In spring of this year, the debate heated up in the UK. After the government toyed with the idea of eradicating one and two-pence coins for good, the immediate reaction was one of outrage at the thought of eliminating a symbol of national pride. In the US, a spat of sorts has been going on for years now. Some countries, meanwhile, have made the move already: in May 2012, Canada bucked the trend and retired its lowest-denomination currency. Unsurprisingly, its economy has survived this unfathomable shock, while the country itself is also still standing.
More cost than worth Canada is not alone. Australia and New Zealand withdrew their one-cent coins even further back – 1992 and 2006 respectively – and are among a growing list of others. As radical as the elimination of the penny may seem to some, the move is a logical one. By no coincidence, it starts with money: nowadays, it costs more than a penny to make a penny. This has been the case for the US since 2006, in fact.
“The actual amount has fluctuated from year to year, but [the cost is] in the range of 1.6 to 1.7 cents per penny made,” said Jeff Gore, Associate Professor at MIT and co-founder of the group Citizens to Retire the US Penny. The manufacturing cost reached a peak of 2.41 cents in 2012, while in 2017 it cost 1.82 cents per penny, according to the US Mint’s latest annual report. It is also important to note that because so many pennies fall out of circulation, more are required than any other coin: 8.4 billion were delivered in the US last year, greater than the sum of all other coins combined.
There are also various emotions involved in the debate – people couple pennies with nostalgia
Theoretically, a penny can be used thousands and thousands of times over many years, thereby offsetting its disproportionate cost. The reality, however, is that this happens very rarely nowadays. First, nothing costs a single penny anymore: back in 1914, a penny could buy a loaf of bread, a pint of milk or a newspaper in the UK. It’s been decades, however, since you could even buy ‘penny sweets’.
Second, many people just don’t like loose change – particularly pennies, which they rarely use. Coins weigh down our purses and pockets, and take time to count out to a cashier. Many of us collect them in oft-forgotten-about jars, while some people willingly give them away and others simply discard them. A penny generally stays in circulation for much less time than that which would make the cost worthwhile. “To me, this is really striking, where you have a coin that nobody wants to get – we often give it away,” Gore told World Finance. “There’s the ‘take a penny, leave a penny jar’ in many of these shops – yet the US Government is losing money making this thing. It sort of highlights the absurdity of the situation.”
The time wasted is a huge factor for Gore. Indeed, a study conducted by the National Association of Convenience Stores (NACS) providing empirical evidence to the fact was the inspiration behind his campaign. “[NACS] found that something like 1.5 seconds were wasted in each cash transaction as a result of handling pennies… 1.5 seconds is not that long, but if you run the numbers, given the number of transactions over the course of the year and the number of people that might be involved in the transaction – it comes out to be an hour or two that each of us waste as a result of pennies circulating in the system,” Gore explained. “From my perspective, there are a lot of problems in the world that are very difficult to solve, whereas this to me is a complete no-brainer that essentially everyone would be better off if we were to retire the US penny.”
Aside from the costs in terms of both time and money, there is another incurred: that to the environment. Unsurprisingly, it takes a great deal of energy to mine zinc, extract it from ore, roast it, smelt it and refine it. Once processed, it is rolled out, impressions are stamped, and then the newly minted pennies are transported around the country. According to Design Life-Cycle, it takes 35 metric tons of force to strike a penny, while transporting pennies releases more than 1.5 million tons of carbon dioxide into the atmosphere each year.
There is also their toxicity to consider. The US Environmental Protection Agency states that only three to 11 percent of zinc ore contains metallic zinc. The rest is composed of noxious materials, such as lead and cadmium. Even zinc itself is harmful in high doses. These materials can all contaminate the soil and water around the mines from which they are extracted. “Different people are going to have different takes on this. From my perspective, the primary issue is that we should not be wasting resources, and that includes valuable metals, as well as our time,” Gore added.
Bring us luck Naturally, there are several arguments those in favour of keeping the penny often use. A couple of them are actually quite convincing, with the most common relating to charitable giving. It is commonly said that without pennies, people would simply give less; charities wouldn’t survive without penny drives or a common willingness to rid ourselves of such low-value change. Of course, if everyone – or at least a great deal of us – were to part with their pennies, the amounts raised for charities would be transformative. And when it comes to a good cause, it’s hard to argue for something that could result in less funding.
Aside from the costs in terms of both time and money, there is another incurred: that to the environment
But this may not necessarily be the case. If it is human nature to give away our least valuable currency, this then infers that without the penny, the five-cent coin (or the two-cent, depending on the country) would be donated instead. This in turn could result in charities receiving more.
On this topic, Gore said: “If you look at the value of pennies that end up being collected, it’s really not very large. Besides, we can have nickel drives, and so forth. And so I really think that charities can get money from the other coins that are in the system, and that’s actually where the vast majority of the value is.” Some argue that people will be less inclined to give nickels away, but this is perhaps an overstatement – besides, with time, everything becomes relative.
The other chief argument is that the consumer will lose out, as they will have to pay more for everyday goods. This fear is linked in particular to concerns for the poorer segments of society, which are more inclined to pay with cash, and so could be hit the hardest when prices are being rounded.
It’s natural to assume that corporations will simply increase their prices, particularly given the cost that the transition would have (which would include relabelling, changing menus, reprogramming cash registers, and so on). Back in 1990, when representing the pro-penny lobby group Americans for Common Cents, Raymond Lombra, Professor of Economics at Pennsylvania State University, told a congressional committee: “This rounding ‘tax’ will have a significant adverse effect on consumers. A conservative estimate places the tax in the $600m per year range.”
Opponents such as Gore, however, argue that corporations would not always round up. He uses sales tax as the foundation of his argument. “With sales tax, the final amount doesn’t come out to be right on the penny; instead we round to the nearest penny in order to decide how much [something] is. We don’t systematically round up or down; half the time it goes up, half the time it goes down, meaning that it favours neither the store nor the customer. And indeed, this is the way that we would do it without the penny.”
Everybody wins Naturally, it is difficult, if not impossible, to calculate just how much both businesses and individuals could stand to lose from the transition – but assuming that a non-systematic rounding takes place, then the difference should be minimal. There is, obviously, a reason why some would argue otherwise. “Given that Jarden Zinc [Products], for example, sells tens of millions of dollars [worth] of penny blanks to the US Mint each year, they have the incentive to fund groups that will make counter arguments, and that’s understandable – it’s just the way that the world works. But it’s important to understand that the pro-penny lobby – and it is indeed a lobby group, [although] it looks like a non-profit website supported by local citizens and so forth – is getting paid to do this, whereas I will note that I don’t get any money for my advocacy of this particular issue,” Gore told World Finance.
And yet, despite the battle fought by those who stand to lose out from the eradication of pennies, this outcome is surely inevitable, for the coins are becoming more and more redundant with each passing year. Add to this the exponential increase in electronic payments, together with the advent of cryptocurrencies, and the notion of continuing to make such low-value and little-used coins becomes all the more absurd.
There are also various emotions involved in the debate – for some reason, people couple pennies with nostalgia. Perhaps this is because they remind us of our childhoods and happy days gone by, where we would splash out on sweet things for mere cents. There are also nationalistic sentiments involved: in the US, the one-cent coin represents President Lincoln; in the UK, the penny is seen as some form of national identity. And yet both arguments are flawed: Lincoln is still represented on the $5 bill, while there are much stronger symbols of British pride – the flag and the Queen being but two.
Perhaps instead it all comes down to a sheer reluctance to acknowledge inflation. Undoubtedly, retiring the penny is a symbol of inflation – one that most people prefer to ignore, because essentially it makes them sad to recognise that the cost of living grows relentlessly. Those of this mindset talk about ‘not giving in to inflation’, but inflation isn’t a bad thing per se – not moderate inflation, at least. It is simply an unavoidable economic mechanism brought on by time.
The truth is no one knows how much removing the penny from circulation could cost both consumers and businesses. But let’s not forget that we have done this before: back in 1857, the US retired its half-cent coin and people simply got used to it. As examples such as Canada, Australia and New Zealand indicate, this time around will be no different. No major problems will be caused, and no issues to the economy will arise. In this scenario, no one loses out – well, except the companies selling penny blanks, of course.
On March 2, 2018, US President Donald Trump posted the following on his Twitter account: “When a country… is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down [$100bn] with a certain country and they get cute, don’t trade anymore – we win big. It’s easy!” The tweet, alongside a plan to apply duties of 25 percent on imported steel and 10 percent on aluminium, has become another example of the gradual deterioration of trade relations between the US and China, the ‘certain country’ referenced in the tweet.
Precursors to war While Trump’s tweets are usually not much more than banal politicking, his posts about trade have so far amounted to tangible policies. At the beginning of 2018, the Trump administration began slowly putting pressure on China, imposing safeguard tariffs on some minor imports like washing machines and stainless steel flanges. The Chinese Ministry of Commerce expressed frustration at these tariffs on a number of occasions. Tensions reached a boiling point on March 22 when the US proposed a 25 percent tariff on $50bn of Chinese products, alongside the filing of a complaint with the World Trade Organisation alleging that China’s intellectual property practices were benefitting the country to the detriment of US competitiveness. Responding, China released its own list of tariffs, matching the US’ figure across products ranging from soybeans to aircraft. Threats have escalated further, with the US now considering imposing $150bn worth of tariffs on more Chinese goods.
Throughout history there are examples where a trade war has ultimately hurt the participants more than it benefitted them, with the US being no exception
On April 4, Trump tweeted: “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a Trade Deficit of [$500bn] a year, with Intellectual Property Theft of another [$300bn]. We cannot let this continue!” He continued: “When you’re already [$500bn] DOWN, you can’t lose!” In reality, trade wars are difficult to define, rarely positive and attempts to identify a winner are almost impossible. Throughout history there are examples where a trade war has ultimately hurt the participants more than it benefitted them, with the US being no exception.
Defining the conflict Unpacking the concept of a trade war is surprisingly difficult. Douglas Irwin is the John French Professor of Economics at Dartmouth College and author of several books about trade, including Clashing over Commerce: A History of US Trade Policy. Speaking to World Finance, Irwin said economists have two difficulties with identifying the winners of a trade war: “One is there is no unique definition or generally accepted definition of what a trade war is, or what it constitutes. And second of all [is] the idea that you’re ‘winning’ or ‘losing’ as a result of trade. Economists generally believe that trade is mutually beneficial and that if you stop trade, you hurt your trade partner, but you also hurt yourself because the price of your imports will go up for consumers.”
25%
Planned US tariff on imported steel
10%
Planned US tariff on imported aluminium
$500bn
Supposed trade deficit between US and China
$300bn
Alleged cost of Chinese intellectual property theft for the US
A basic definition is that a trade war occurs when countries try and damage each other’s economies through the imposition of tariffs, quotas or other restrictions on imports and exports. They are typically rooted in protectionism, with the justification for instigating a trade war often the protection of local industries from an unfair advantage had by an international competitor. Another reason may be to balance out a trade deficit, a situation where imports are far larger than exports and so represent wealth flowing out of a country. When a country subject to tariffs launches its own retaliatory tariffs, this confrontation could be considered the beginning of a trade war.
However, trade wars are not usually this clear cut. ‘Wars’ typically have winners and losers, but identifying the victor of a trade war is not always possible. Countries have multiple trading partners, making a targeted and damaging trade strike difficult to achieve. Engaging in a trade war will almost certainly hurt the country imposing the tariffs, as well as the target. In many cases, trade wars never move beyond the mere threat of tariffs and are effectively over before even starting. As a consequence of this, settling on an exact definition of a trade war is a challenge, and Trump’s suggestion that they’re “easy to win” is manifestly wrong.
The lessons of history Given the detrimental effects of a trade war on a country, the usual hope is that the threat of tariffs is not followed by their actual imposition. Irwin said there are relatively few examples of two countries engaging in major retaliatory trade actions against each other, but there are some smaller examples that are similar to the current situation between the US and China: during the mid-1980s and early 1990s, the US and Japan were locked in something of a trade war. At the time, the US had a significantly large trade deficit with Japan, and also alleged that Japan was engaging in unfair trade practices and industrial espionage. The threat from the US was clear; unless you meet our terms, there will be a host of trade restrictions put in place.
“Because Japan was an ally, and to some extent dependent on the US market and wanted to keep the US happy, Japan [was] willing to negotiate, though not always happily,” Irwin said. “But [it] did try to reach an accommodation with the US, so the US did not have to impose those tariffs as many times as they were threatened: sometimes agreements were reached.”
An interpretation of the trade war between the US and Japan could be that the US was ultimately the victor. The US got much of what it wanted from Japan, such as voluntary export quotas, penalties for unfair trade practices and the liberalisation of restricted Japanese imports. It also never grew to become a fully fledged trade war by the traditional definition. Japan may have only begrudgingly come to the negotiation table, but it did so before imposing tariffs of its own. Neither economy suffered significantly from the conflict, suggesting that, more often than not, the most desirable outcome for a trade war is to halt it before it even begins.
While there are similarities between then and the US’ current trade disputes with China, such as allegations of corporate espionage and unfair practices, Irwin said there are also major differences: “The big difference with China today is that China is not an ally of the United States and has already threatened to retaliate. Japan never threatened to retaliate or counter retaliate against the United States. So, the risk that this will be an un-won trade war – one where it’s damaging to world commerce without achieving the goal of more open markets – is much higher than the case with Japan in the 1980s.”
The fog of war Many of the times where the US has engaged in an indecisively concluded trade war, significant economic damage has followed in its wake. Dr Marc-William Palen is a lecturer at the University of Exeter and author of the book The Conspiracy of Free Trade: The Anglo-American Struggle over Empire and Economic Globalisation. Speaking to World Finance, Palen said that Trump and the Republican Party’s current position has a number of similarities to its stance in the mid-19th century: “Following the Civil War’s end in 1865, the Republican Party tied its ideological sails to economic nationalism. It became the party of big business and protectionism. The GOP stuck to protectionism throughout most of its history, and only began abandoning it after the Second World War, and only gradually at that.In other words, Donald Trump’s protectionism isn’t an anomaly; it’s a return to the Republican status quo.”
During this period, there are cases where attempts by the US to protect its own economy backfired. In the late 19th century, Republicans dominated the White House and the party was still proudly protectionist, prompting the US to repeal its reciprocity treaty with Canada in 1866. Palen said Canadian conservatives consolidated around their own national policy of protectionism in 1879, prompting exactly the opposite of what the Republican Party desired. “Some American companies like Singer Manufacturing, Westinghouse, [the American Tobacco Company] and International Harvester realised it was cheaper to move their production to Canada rather than pay the high import taxes. Sixty-five US manufacturing plants had relocated to Canada by the late 1880s. So, in this case, far from halting outsourcing, protectionism created it.”
When trade wars escalate to retaliatory sanctions, the only real winner that emerges is any country that is not participating
When trade wars escalate to retaliatory sanctions, the only real winner that emerges is any country that is not participating, as was the case between the US and Canada. “Trade tensions reached a breaking point in 1890, when Republicans passed the highly protectionist McKinley Tariff,” Palen said. “Agricultural exports to Canada fell by half from 1889 to 1892. And when the Republicans passed the even more protectionist Dingley [Act] in 1897, Canada decided that the best response was a combination of tariff retaliation and establishing closer trade ties with the British Empire rather than with the [US]. America’s loss was the British Empire’s gain.”
By far the most famous example of tariffs not working as desired for the US was the Smoot-Hawley Tariff of 1930. Sponsored by Senator Reed Smoot of Utah, who was chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, the chairman of the House Ways and Means Committee, the act raised the US’ already high import tax to an average of 40 percent across all industries. It was designed to protect US businesses from competition in Europe, wherean economic recovery was occurring after the war. The stock market crash of 1929 made protectionism even more appealing to Americans, and the act passed in the Senate by a narrow margin. “It raised duties on hundreds of imports, following which Canada responded with tariff increases of its own, as did Europe,” Palen said.
This tit-for-tat trade discrimination left the US isolated and unable to tap into global markets, effectively making a recovery from the Great Depression far more difficult than it necessarily needed to be. Due to the economic damage the tariffs wrought in other countries, the US also became deeply unpopular internationally. “To provide but one example, the Italians responded violently to the Smoot-Hawley Tariff,” Palen said. “American-made cars were attacked on Italian streets, and US-made car sales plummeted. Tariff duties were increased on US goods, plunging US exports to Italy from $211m in 1928 to $58m in 1932. Italy quickly signed a commercial treaty with Soviet Russia in August 1930, followed by a non-aggression pact two years later, demonstrating again the unpredictable geopolitical fallout from trade wars.” Again, the winners of the trade war were those on the periphery, who were able to fill the holes left in the market. The impact of the Smoot-Hawley Tariff was such that the US changed its laws, and the act became the last trade act to pass through Congress. Trade negotiation was then delegated to the president; the system is still in place today. The Smoot-Hawley Tariff also led to another definition of what a trade war is. “Political economist Joseph M Jones Jr, in a widely cited study from 1934, examined Europe’s retaliation,” Palen said. “His study warned of the trade wars that can arise when a single nation’s tariff policy threatens specialised industries in other countries, which can arouse hostility and retaliation.”
The 1960s saw the next major trade battle in the US’ history: the European Union was establishing agricultural policies for the recently formed common market, prompting the price of chicken to significantly drop. European countries began introducing price controls and placing tariffs on imported chicken. Factory farming had made chicken a major US export, so in response President Lyndon Johnson imposed tariffs on Europe. In particular, a 25 percent tariff was placed on light trucks.
Irwin said the winner of this trade war is indeterminable: “Europe refused to open up [its] market to US chicken, and we [the US] never got rid of our tariffs. The question is, who won that? They’re not taking our chicken, we’re not buying vans from them, in fact we still have this 25 percent tariff in place today… It’s hard to say anything was accomplished.” The tax in place is unlikely to be repealed since US automakers have successfully lobbied for it to remain, since it puts them in a favourable position.
A threat to peace Since the General Agreement on Tariffs and Trade was signed in 1947, and later the World Trade Organisation established, global trade has surged while tariffs have, on average, been in gradual decline. Trade is far more transparent than it was before, and supply chains now cross borders far more easily. A trade war between China and the US would certainly destabilise this.
In terms of supply chains, Irwin said he believes they may be disrupted temporarily, but will change to accommodate. “I think what will happen is there will be a movement of resourcing to other countries in South-East Asia, away from China. So, we might start getting our apparel from Vietnam, or see electronic component assembly operations set up in Vietnam… It would be trade diversionary, I think, rather than a permanent loss of imports from those countries.” Once again, the real winners of a trade war may be the countries that simply choose not to participate.Negotiations have been ongoing, and Trump has already emerged with some surprising announcements. A delegation to China in early May yielded little progress, but Trump has since expressed a willingness to work out a deal that would save ZTE, a Chinese technology company that has stated it will be forced to close under the current sanctions relating to national security. An employer of 75,000 people, the rescue of ZTE could be a significant bargaining chip in negotiations, albeit from a predicament brought on by the US in the first place.
Palen said a predictable outcome of the trade war would be higher prices for American consumers, which will be felt most by the poorest. “[With] Trump’s new tariffs, these winners will likely be US steel and aluminium producers, in the short term at least. But the losers – American and world consumers, [and] businesses that rely upon global supply and demand chains – will far outnumber the handful of winners, that’s for sure.”
Based on US history, major trade actions like those that have been proposed recently will have far-reaching and unpredictable consequences
What is more uncertain is how a trade war between the US and China could change the world’s economic and political stability. Based on US history, major trade actions like those that have been proposed recently will have far-reaching and unpredictable consequences. Palen said the parallels between now and late 19th century Republican policies are remarkable and also historically unprecedented. “Granted, Trump’s xenophobia, protectionism, jingoism and populism parallel the GOP of the late 19th century. They might well have been taken directly from this earlier era’s Republican playbook. What is historically unprecedented today is that, with Trump in the White House, the United States – the leader of the global economic system and main advocate of trade liberalisation since 1945 – is now the first to advocate turning away from the very system it helped create. We’ve never witnessed anything like this before. As a result, the uncertainty that this holds for the future of the global economic order is at least as worrying as the GOP’s revival of late 19th century protectionist politics.”
No one wins It will be challenging to identify a winner from the fallout of the rounds of sanctions that China and the US are throwing at one another, since there is not a clearly defined goal for either side. Both economies will suffer from the tariffs, and neither is likely to see a significant redevelopment of their local industries. The concerns of the US regarding alleged intellectual property theft by Chinese firms may be addressed, but whether that will result in a reduction of the trade deficit is unknown. Based on the US’ history, the damage from a fully fledged trade war could be significant
Efforts to boost human development in the country, particularly in rural areas, started to pay off, with the proportion of citizens living in poverty falling from 69 percent in 1996 to 54 percent in 2003. The government’s fiscal policies, many of which were supported by the IMF, lowered trade barriers and simplified the tax system. Life for many in Mozambique may not have been comfortable – the country’s per capita income was still 40 percent below the average for sub-Saharan Africa in 2012 – but there were reasons for optimism, at least.
Antonio do Rosario, the chairman of all three organisations, has so far resisted the efforts of investigators by withholding data on “national security” grounds. Clearly, the close connections between politics and business in the country make accountability a challenge. Armando Guebuza, president in 2013, justified his decision to offer government guarantees on the loans in patriotic terms. The current president, Felipe Nyusi, who was minister of defence at the time the loans were issued, was a trustee at Ematum, while Rosario himself holds a prominent position within the state intelligence and security service.
