International trade has rarely faced headwinds on this magnitude at the same time. Till the beginning of the year, most of the issues were mostly technical, cyclical, or already baked into calculations. Then CoronaVirus happened, followed by an oil dispute by two of the world's largest producers. The following are the significant investment and funding issues that will affect international trade.
Brexit officially happened in January 2020, now the UK and the EU have to negotiate an agreement by year-end. Typical trade negotiations take longer to iron out, so few expect the deadline to be met. It is most likely that Britain will not have a trade deal with its largest trading partner. That creates a massive problem for the global financial industry, of which London is at the center.
The flow of money into investments, credit, financial instruments could very well be disrupted because it is not clear what the international finance landscape will look like as of 2021.
The Coronavirus came at a time when the world was at its most connected, and that's what made it spread so fast. Nations have been forced to shut down their borders, and cities have been forced on lockdowns.
This has affected businesses in several ways, including:
Negotiations to cut production to keep a healthy price level deteriorated into a political and economic crisis. Oil prices dropped by over 30% in one day. This will affect businesses and economies around the world as:
- Oil dependent nations have to cut growth forecasts and their budgets. Even though countries may have low production costs, their national budgets rely on high oil prices. If the oil price war continues, oil nation credit ratings will fall, national debts will rise, and their investment grades will be downgraded.
- Oil companies, particularly in high production cost areas, will become bankrupt. Shale oil companies in America were already experiencing high rates of bankruptcies.
- Net oil-importing countries could benefit from the fire-sale price of oil, but the benefit could be short-lived as the world is expected to face a downturn.
Weakened Central Banks
During the 2008 financial crisis, central banks around the world initiated quantitative easing, a policy of printing money and lowering interest rates. More than and a decade later that money and low rates have created a flush of cash which has:
- Relentlessly chased investments, leading to the rise in overvalued unicorns.
- The high money supply and low rates have diminished the tools available to central banks should there be another financial crisis.
That crisis has arrived. The Coronavirus has created turmoil in international trade and affected all economies around the world. Central banks have taken action, but the potency of their policies will only be seen as the year proceeds.
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