CLO 1: Determine how current issues and trends in the global economy and trading environment affect the Canadian economy.

1. Introduction

Geopolitical tensions are exactly what they sound like — political issues between or involving two or more countries that cause tension or unrest. These tensions can stem from several factors, but some examples are power, trade, military activity, climate change or a significant event like Brexit’

Geopolitical definition: The struggle over the control of geographical entities with an international and global dimension, and the use of such geographical entities for political advantage.

What are some examples of geopolitics? Geopolitical examples may include trade agreements, war treaties, border or territorial acknowledgements, climate agreements, and more. Two recent examples are NAFTA and the Kyoto protocol.

Concerns about global economic and financial fragmentation have intensified in recent years amid rising geopolitical tensions, strained ties between the United States and China, and Russia’s invasion of Ukraine.

Financial fragmentation has important implications for global financial stability by affecting cross-border investment, international payment systems, and asset prices. This in turn fuels instability by increasing banks’ funding costs, lowering their profitability, and reducing their lending to the private sector.

Financial stability risks

Geopolitical tensions threaten financial stability through a financial channel. Imposition of financial restrictions, increased uncertainty, and cross-border credit and investment outflows triggered by an escalation of tensions could increase banks’ debt rollover risks and funding costs. It could also drive-up interest rates on government bonds, reducing the values of banks’ assets and adding to their funding costs.

At the same time, geopolitical tensions are transmitted to banks through the real economy. The effect of disruptions to supply chains and commodity markets on domestic growth and inflation could exacerbate banks’ market and credit losses, further reducing their profitability and capitalization. The stress is likely to diminish the risk-taking capacity of banks, prompting them to cut lending, further weighing on economic growth.

The financial and real-economy channels are likely to feed off one another, with the overall effect being disproportionately larger for banks in emerging markets and developing economies, and for those with lower capitalization ratios.

 Source

Catalan M., Natalucci F., Qureshi M., & Tsuruga T. (2023, April 5). Geopolitics and Fragmentation Emerge as Serious Financial Stability Threats (imf.org)

2. US-China trade tensions

The China–United States trade war is an ongoing economic conflict between China and the United States.

In January 2018, U.S. President Donald Trump began setting tariffs and other trade barriers on China with the goal of forcing it to make changes to what the U.S. says are longstanding unfair trade practices and intellectual property theft. The Trump administration stated that these practices may contribute to the U.S.–China trade deficit, and that the Chinese government requires transfer of American technology to China. In response to US trade measures, the Chinese government accused the Trump administration of engaging in nationalist protectionism and took retaliatory action. After the trade war escalated through 2019, in January 2020 the two sides reached a tense phase one agreement; it expired in December 2021 with China failing by a wide margin to reach its targets for U.S. imports to China. By the end of the Trump presidency, the trade war was widely characterized as a failure. His successor, Joe Biden, has kept tariffs in place.

Video: An unwinnable conflict? The US-China trade war (South China Morning Post)

Source

The ‘bystander effect’ of the US-China trade war. Fajgelbaum, P., Goldberg, P., Kennedy, P.,& Taglioni. (2023). VoxEU

3. Brexit

What is Brexit?

Brexit is the abbreviation of “Britain Exit,” which refers to the decision of the United Kingdom to leave the European Union. Brexit involves the process of negotiating new trade deals, citizen registration rules, borders, etc. The process started on June 23, 2016, after the referendum passed by 51.9% to 48.1%.

Summary

• Brexit stands for “Britain Exit”, which refers to the UK’s decision to leave the European Union.
• The process involves the renegotiation of things such as residence permits and trade regulations.
• The announcement of Brexit caused the depreciation of the pound, a decrease in car manufacturing within the UK, and the relocation of $1 trillion worth of assets from the UK to other European countries by the financial services industry. However, many analysts believe Brexit will ultimately be net positive economically for the UK

How Did Brexit Start?

Brexit officially started on June 23, 2016, after the passing of the Brexit referendum. However, there had been growing pressure for such a referendum for several years. The referendum passed for several reasons, such as immigration, sovereignty, and monetary issues. Immigration is a longstanding issue in Britain. Like much of Western Europe, the UK has experienced a massive influx of Muslim immigrants from the Middle East within the past 10-20 years. According to The Economist, areas of the UK that saw a large increase in the foreign-born population also saw a higher percentage of people voting to leave the EU.

There are also arguments that Britons feel less integrated with the EU than other citizens within Europe. UK citizens have less of a European identity and a strong UK identity.

Monetary issues also swayed votes for the referendum and were the source of criticisms about misleading information. During the lead-up to the referendum, the Leave campaign stated that leaving the EU would lead to a £350 million increase in weekly spending for the UK. Not only was the amount incorrect, but it also did not take into account the amount saved from discounts and rebates from being in the EU.

Benefits of Brexit

If the United Kingdom does a hard Brexit, they will achieve more freedom to create their own trade deals and regulations. A hard Brexit is a scenario in which the UK gives up access to the single market and customs union. Regaining sovereignty is seen as a win even by those who opted to stay in the EU.

For example, under EU law, a citizen of another EU nation can decide to move to and live in the UK with no restrictions. This has led to a large increase in immigration into Britain and created difficulties fulfilling housing and service needs. Through a hard Brexit, the UK will exercise full control over its borders.

Drawbacks of Brexit

By being a part of the EU, the United Kingdom benefits from trade deals between the EU and other world powers. As an entity, the EU exerts stronger bargaining power as it is the largest economy as a group. Therefore, by leaving, the UK would lose negotiating power and free trade with other European countries. As the UK tries to recreate trade deals with other countries, they may get less favorable results.

The uncertainty of Brexit also causes volatility and affects businesses operating within the UK. In the case of a hard Brexit, goods and services will be subject to tariffs, increasing the cost of raw material into Britain and finished products out.

Brexit’s Impact on Britain

On the day of the referendum result, the pound dropped to a 31-year low. This reflected the uncertainty investors felt for the UK’s future after Brexit. As investors adapted to the news, the pound strengthened over the next year. However, once the Brexit transition plans were released and rejected multiple times, the pound weakened again. While a lower value currency increases exports, the volatility of the pound shows a lack of investor confidence. It also makes it unattractive to buy UK fixed-income assets, and foreign direct investment (FDI) will likely slow.

Uncertainty in terms of tariffs caused the UK car industry to slump 46% in 2017 and 80% over three years. While Brexit was not the sole reason for the decrease, it played a major role. British car plants get components from Europe and export a majority of finished cars to Europe as well. If there are vehicle import tariffs, auto manufacturing plants in the UK may become unprofitable.

Brexit may also impact the supply chain. With possible delays at the borders and additional requirements for importing components, companies will need to hold more inventory to avoid delays. Honda already closed its plant in Britain, while Nissan decided to make a new model of car in Japan instead of in Britain. However, both companies stated the decision was not made because of Brexit.

Another industry heavily impacted is the financial services industry. Since there are many regulatory laws in place for banks set by the EU, Brexit would leave the banks in the UK in an uncertain situation. For example, during a hard exit, UK banks may not be able to access the European market. At the beginning of 2019, it was reported that banks and financial companies had already shifted $1 trillion worth of assets from the UK to the EU.

Source

Brexit, CFI Team (2022). Corporate Finance Institute.

Causes of the vote in favour of Brexit

Why did the UK want Brexit?

Factors included sovereignty, immigration, the economy and anti-establishment politics, amongst various other influences. The result of the referendum was that 51.9% of the votes were in favour of leaving the European Union.

Issues with the European Union: There had been enormous variations in attitudes towards the European Union in Britian over the last decade. The big picture is that people supported membership if they felt that it was delivering what they wanted – a prosperous economy, protection against crime and terrorism, control over immigration and efficient public services. If they did not feel that membership helped to deliver these things, or worse still prevented the British government from delivering them they opposed membership. Many of the latter felt ‘left behind’ by changes in society and the economy.

The recession of 2008: Britain’s failure to effectively recover from the worst recession for over 70 years coloured the whole backdrop of the referendum, leaving many people feeling discontented and unrepresented.

The collapse of power in the Middle East: The Arab Spring, created new waves of immigration into Europe. Many voters concluded that not only had successive UK governments mishandled this issue but so had the European Commission.

Austerity: In managing their economy, the EU opted for austerity – however austerity did not work and delayed economic recovery both in Europe and Britain and stimulated Euroscepticism.

The ‘Leave’ camp’s dual campaign: The Leave campaign was able to mobilize two types of voters, those that saw themselves as respectable and conservative and those that felt left behind.

Source

Insight: Why Britain really voted to leave the European Union, Whitely, P. (n.d.), University of Essex.

Brexit Meaning and Impact: The Truth About the U.K. Leaving the EU. Hayes, A. (2023), Investopedia.com

4. Climate change

Basic Terminology

What is generally called climate change or global warming in the popular media is referred to by scientists as anthropogenic climate forcing. Anthropogenic means man-made and specifies that they are talking about global warming that is caused by human activity and not by natural variations in temperature. The global temperature of the earth has varied continuously since the birth of the planet, and even today, some portion of that variation can still be attributed to unpredictable increases and decreases in the amount of solar radiation the Earth is receiving from the sun. Climate forcing refers to the effect of human activities in pushing the natural variation of the earth’s temperature in one direction or another. From this perspective, global warming is an imprecise term because some of the observed warming of the earth’s temperature may also be due to natural causes or natural variation. Most press commentators prefer to use the term climate change because many of the negative impacts of global warming will be the product of changes in weather patterns. There is thus more to climate change than increased temperatures, and it is even possible that some areas of the planet could experience cooling of temperatures (for example, it has been postulated that continued global warming could disrupt the Gulf Stream, which brings warm Caribbean waters to Europe—thereby leading to much colder European winters).

The Threat of Climate Change

Climate change is perhaps the most important problem facing the world’s citizens today. In the consensus view of scientific experts, climate change—in particular as manifested through global warming—is likely to produce disastrous social and environmental catastrophes in this century. For example, certain low-lying Pacific islands are in danger of being inundated by rising sea levels. Another fear is that deserts in Africa and the Middle East will not only grow rapidly in size, but eventually will become inhospitable to human and animal life as temperatures rise. Yet another major concern is that the hurricanes and typhoons that regularly pound the world’s coastlines will reach ever-greater levels of destructive power.

Despite these risks, neither the United Nations nor the world’s governments have yet implemented a clear and convincing strategy to fight climate change. Virtually all climate experts agree that the key to stopping or even slowing global warming lies in the urgent reversal of the long-term trend toward increasing atmospheric concentrations of carbon dioxide (CO2).

Solutions and Responses: Mitigation, Adaptation and Geo-Engineering

Mitigation: The long-term solution to global warming is for mankind to further develop renewable or “clean” forms of energy, such as hydropower, solar power, and wind power, which do not generate GHG (Greenhouse Gas) emissions. However, with the exception of hydropower, renewable methods produce energy at prices that are currently so much more expensive than energy derived from coal, oil, and gas that it seems very unlikely that many countries will switch over rapidly to clean energies.

Adaptation: Adaptation involves preparing people and countries to better resist the negative impacts of climate change. One of the most widely-discussed risks associated with increased global warming is the increased intensity of hurricanes. The harmful impact of such hurricanes can be augmented by a gradual increase in sea level, also associated with global warming. For example, it was a combination of a severe hurricane with an unusually high tide that resulted in the devastation and flooding of New York City by Hurricane Sandy in 2012. Adaptation by New York City might involve preventing future encroachment upon the city of hurricane sea surges by building barriers similar to the massive ocean barriers that have been built in the Netherlands.

Geo-Engineering: Often relegated to the realm of science fiction or fantasy by experts, geo-engineering responses continue to be discussed as a possible fallback option if, as seems increasingly likely, humans are unable to reverse the long-term growth of carbon emissions in the twenty-first century. Geo-engineering involves using a number of novel or advanced technologies to reduce carbon emissions or lower the planet’s temperature.19 One example is the massive planting of trees, because trees drain CO2 out of the atmosphere, thereby creating a large “carbon sink” and reducing the level of atmospheric CO2. Another solution, more far-fetched, would be to spray inert sun-blocking gases high into the stratosphere, creating a sort of “global sun-block.” Some concerned scientists are even more frightened by the thought of ill-advised geo-engineering of this nature than they are of global warming itself.

Source:

Jimenez G., Pulos E. (2023). Climate change. Climate Change – Good Corporation, Bad Corporation: Corporate Social Responsibility in the Global Economy (geneseo.edu) – Chapter 3.