Here is a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

Redrawing the Map of Global Trade

Boston Consulting Group
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More than anything else, the coronavirus crisis has been associated with change, and global trade is no exception. The Boston Consulting group sees global trade declining by 20% by year’s end, and not recovering to its 2019 level of $18 trillion until 2023. Over that time, the trade map will have been redrawn in significant ways – a 15% decline in US-China trade, reduced trade with the EU across the board, and significant gains for Southeast Asia. Companies will be forced to restructure their supply chains in the midst of a shifting landscape of multilateral frictions. Deep recessions and structural economic damage will drive down trade flows and commodity prices as global demand falters. These factors are all pushing manufacturers toward “supply chain resilience,” a term for more regional sourcing and higher sitting inventories to provide insurance against future shocks.

Fears Mount of a Fresh Latin American Debt Crisis

Michael Stott and Andres Schipani, Financial Times
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In addition to being an epicenter of the coronavirus pandemic, Latin America is also facing a potential debt crisis worse than the bust of the 1980’s. Even before the pandemic, faltering growth, weak health systems, low tax revenues, high borrowing levels, and an over-reliance on commodity exports were weakening the financial health of the region, and the pandemic has only worsened the situation. Latin America’s lockdowns have had a far more profound impact on its outlook than most regions: under-developed health and sanitation systems increase the need for prolonged lockdowns while widespread labor informality and hamstrung central banks exacerbate the economic impact of a shuttered economy. Argentina and Ecuador are already in default, and Brazil has seen its debt skyrocket (with the debt-to-GDP ratio nearing 100%) despite being the strongest economy in the region. The IMF forecasts that Mexico’s GDP will plummet 10.5% this year, a blow which Morgan Stanley believes will lose the nation its investment-grade credit rating. Average debt levels across the region are expected to rise from 57% of GDP before the pandemic to the 71-76% range by 2022.

Government-Guaranteed Bank Lending in Europe: Beyond the Headline Numbers

Julia Anderson, Francesco Papadia, and Nicolas Véron; Peterson Institute for International Economics
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If change is the calling card of the pandemic, then “unprecedented” is its slogan. Europe has had this kind of response as it has introduced new loan guarantee and credit support programs for businesses across the region. Although these measures have drawn concern about disproportional benefit to the bloc’s richer nations, initial results indicate that the programs have not significantly distorted the European market. A study by the Peterson Institute has not found a correlation between the debt burdens of individual nations and credit support to that nation’s businesses, indicating that the actions taken by the European Commission are not currently skewed toward low-debt members. In addition, the study found that the announced envelope size of the relief package has had little impact on the actual funds committed, and this latter number has been fairly consistent across the bloc. The patterns underlying these findings are nebulous and difficult to analyze, but the results seem clear nonetheless – the individual fiscal capacity of European nations has not been a driving force in the economic recovery.

Officials Push U.S.-China Relations Toward Point of No Return

Edward Wong and Steven Lee Myers, The New York Times
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U.S. relations with China have soured significantly in the past few months, as hawkish voices in both nations have continued to dismantle decades of engagement on multiple fronts. On the U.S. side, Secretary of State Mike Pompeo asserts that the relationship should be one of “distrust and verify,” as “blind engagement with China” has undermined American interests. The State Department has added teeth to this approach, most recentlyclosing the Houston consulate and bringing criminal charges against four members of the People’s Liberation Army, while the administration had earlier sanctioned Chinese officials, revoked the special status of Hong Kong, and declared China’s maritime claims in the South China Sea illegal. Obama-administration China director on the National Security Council Ryan Hass called this a “reorient[ation]… toward an all-encompassing systemic rivalry.” On the Chinese side, Renmin University associate professor Cheng Xiaohe called the tensions “a natural escalation and a result of the inherent contradictions between China and the United States.” Given the size of both nations’ economies and their deep integrations, there seems to be a limit on the extent of any decoupling. The looming November election may also bring a change in tone on the U.S. side, although a tough stance on China has seen robust bipartisan support through the Trump presidency. In the midst of global uncertainty, both nations are looking to carefully weigh their individual domestic concerns against the balance of global economic, military, and political power, and in the end neither wishes to come out on the bottom.