International Trade in Global Financial Crisis

The subprime crisis of the big power has led to the global financial crisis. It seems that such an expression overstates the strength of the big power. But we cannot ignore the economic globalization which makes economic communities connect with and affect each other positively or negatively.

In the financial tsunami hitting every corner of the world, what are the status quo and future trend of international trade?

First of all, it is necessary for us to look at the trade chain:

– raw materials
– finished product processing firms (manufacturers)
– (suppliers – trade companies)
– logistics companies
– importers
– wholesalers
– retailers
– end consumers, financial service providers such as banks, and Internet platforms for international trade led by Alibaba.

On the chain, all the elements are interactional and can transmit to each other. Price transmission is a key element. Rate of exchange influences trading price. We can begin with importer, one of initiators of trade. With the global financial tsunami seeming to gradually calm down, a procurement manager working with a large company that was founded one hundred years ago talked about their current situation: we are now facing extremely high pressure in retail and need to reduce retail prices of our products in market.

The manager urges suppliers to cut down price with three simple reasons:

1. Against the background of current financial crisis, prices of raw materials have decreased;

2. Significant reduction in prices of energy products such as petroleum means lower freight and storage cost; and

3.With the decreasing and stable amplitude of the financial crisis wave, rate of exchange will tend to level off and rise.

Then why do suppliers need to reduce their prices? Because the consumption end of commodities is facing much lower purchasing power of the country due to the financial crisis. The information from the consumption end is that the consumer confidence index goes down and end consumer groups (including corporate and individual procurement) reduce their costs, expenses and consumption. With such a weak market, merchants can only use price reduction as their sharp tool to stimulate consumption. Merchants promote psychologically by enabling consumers to buy the same goods as before with less money. Wholesalers and retailers in the middle of the chain deliver goods on the chain from one level to another. During this course, they gain profits and ensure normal circulation of goods. Their sensitivity to price and inventory leads to importer’s action mentioned above. As for wholesalers facing high retail pressure, lower purchasing power and weak sales, price is the only and effective solution to improve sales.

As for consumables, those who are able to provide the market with inexpensive commodity with proper quality will have a large market share, no matter they are wholesalers or importers. This is low-price transmission resulting in larger trade volume. With increasingly stable financial community, trade will tend to be active and large in size when consumers have suitable savings and their purchasing power and consumption confidence index rise. Maybe experts and scholars then will conclude that the crisis has ended and economy begins a recovery journey. When it comes to the bulk commodity market, economists say that its bull market has ended since crude oil price peaked. Those people trading at the peak of the bull market have made a great loss due to substantially lower price. The time for them to recover from such a loss may be longer than that for the crisis to come to end. Therefore, goods at low price will be favorites of people in a certain period of time.

Next, we will discuss the price transmission from the perspective of suppliers. With the global financial tsunami directly leading to significantly shrunken trade volume, it is truly a thorny problem to retain customers while continuing to make profit and reducing risks and losses in such an environment. To maintain its normal operation, supplier may adjust prices of its products or accept orders and deposit foreign exchange if rates of exchange fluctuate narrowly, waiting for further stabilization and rebounding of exchange rate. They look like those who are bundled to stocks purchased at high prices and wait for being unbundled and reducing loss. Prices of products from suppliers will be influenced by that of raw materials. It can not be ignored that the crisis directly makes many small-and-middle-sized enterprises (SMEs) go bankrupt, or stand on the verge of bankruptcy, or reduce their employees. As an Internet trade platform, Alibaba, which has a close relationship with those SMEs, said that the next few years will be a winter in its operation. A lot of SMEs get orders, generally small ones, through Alibaba. Due to the crisis, there are no longer any small orders from Alibaba for those SMEs. With the economic depression caused by the crisis ensuing the global inflation and big ups and downs of price, the lack of orders has directly led to huge loss of SMEs, especially for those who focus on export trade. As a result, there is a bankruptcy upsurge of SMEs that operate on a high-cost-and-low-price basis. The bankruptcy and shrinkage of SMEs have directly affected the proceeds of Alibaba that mainly provides services for SMEs. Considering this point, the financial crisis also leads to early coming of the winter of Internet Business-to-Business E-commerce. Internet E-commerce seeks for breakthroughs in a new operational mode while waiting for its spring.

What about logistics companies between importers and suppliers? Suppliers or importers have a direct business relationship with those logistics companies. Significantly shrunken volume of freight causes the over-capacity of those shipping companies and forwarders. There is even zero trade freight for transporting goods to the countries near the ocean. In fact, freight is paid by importers. However, for now, transport cost is significantly lower than ever before. Similar to sea-borne and air-borne shipment, international express business has witnessed a big drop in delivery of samples and documents resulted from decrease in trade. It can be seen that most parts of the influenced trade chain will incur loss. What about banks? It is impractical to say that the destruction in trade will lead to weaken business of banks. At most, banks will have less volume of business in loans and export bill purchase. It is financial derivatives that are affecting banks, seemingly not in the same field as trade.

Financial crisis is a situation where the capital chain of financial system breaks. Superficially, there is not enough currency in an economic system. Actually, the reason is that the circulation of currency is not good. Superficially, companies or merchants do not have funds or lack funds and cannot get loans from banks. Money can not flow freely. These have led to the fact that companies go bankrupt, or reduce their size of production, or even slow down their trade expansion. The shrinkage in production and manufacturing industry can be seen directly from less orders and substantially reduced procurement volume of importers. On the side of retailers, they sell their inventory as soon as possible, sell at discounted prices to recover cash, and control inventory or even keep zero inventory. As the financial turbulence hit normal trade circulation, it results in the big fluctuation of exchange rate and depreciation of currency. As a result, the procurement cost will be higher. Trade is hit severely by both increase of purchasing cost and decrease of purchasing power. At this time, merchants need inexpensive goods more than ever before to compensate the loss caused by the financial shock. If the sales volume of low-price goods soars in one country or region, trade friction between trading countries will come forth, without exception during the time of financial crisis. If there are too many imported goods in a country, this will directly lead to the rise of trade protectionism and more trade barriers that violate the principle of free and fair trade. In the previous crises, countries set trade barriers to hold back low-price goods from exporters, with the purpose to protect its local industries from being hit, to lower unemployment rate, and to avoid spread of crisis to a larger scope. Such measures based on individualism will conversely further the depression of global economy. The measures, aimed at protecting domestic or local companies, are not good for recovery from a crisis. It will take longer for the economy to recover when it falls to the bottom. In this financial crisis, headlines of newspaper report that governments have invested a huge amount of money to rescue the market and central banks have greatly lowered interest rate consecutively to stimulate economy, drive consumption, avoid long-time economic depression, abate financial fluctuation and reduce the huge damage brought about by the crisis. At this very moment, it is both a risk and an opportunity for international trade. Risk means that companies and banks may go bankrupt at any time while opportunity means that consumers of the world need more low-price goods. The bull commodity market of the world has ended. It seems to tell us that people need to have more inexpensive goods with good quality when facing lack of money.

Under such an economic environment, how do companies on the trade chain face the situation? After each crisis, there are cheap shares and assets everywhere. It is perfect time for companies to reconstruct, merge and acquire. Those companies with abundant cash flow will expand and develop themselves at this time through the measures mentioned above. Exporters shall seize opportunities to cooperate with international brand companies. Strength of low cost will play a more important role in future trade.

Asian Financial Crisis – How to Learn From the Past

The 1997-1998 Asian Financial Crisis: How Did Asia Fall?

The great 1997 Asian Financial Crisis (AFC) affected most countries in Southeast Asia as well as other Asian countries. During the times of trouble, people in the AFC affected countries feared that the crisis would spark a global economic meltdown.

The starting point of the monetary crisis was the collapse of the Thai baht. In 1997, the Thai government’s decision of floating the Thai baht resulted in a financial collapse of the currency. While Thailand failed to maintain the value of its currency, the country’s economic condition was degrading significantly. The crisis resulted in layoffs in several sectors such as construction, real estate, and finance. Around 600,000 foreign workers and a huge number of local workers lost their jobs following the national crisis. January 1998 was Thailand’s lowest point; the baht reached its lowest rate of 56 to 1 US dollar. Meanwhile, before the crisis, the rate was 25 units to the dollar.

In Indonesia, severe financial crisis hit the country in August 1997. The government did not see this coming because in June 1997, the monetary condition of the country was at its best. The sudden crisis was triggered by numerous protests against the incumbent government. Political instability soon led to an awful financial and national security crisis. Intense devaluation started to develop in November 1997 and reached its peak in early 1998. The country lost 13.5% of its GDP in 1998 and the rate of the Indonesian rupiah plunged to 14,000 to 1 US dollar while before the crisis, 1 dollar only cost roughly 2,600 rupiah.

In South Korea, the crisis was also known as the IMF crisis. While the macroeconomic fundamentals of the national country were stable, many South Korean banks were burdened with non-performing loans in order to fund aggressive expansion of large companies. Huge establishments such as Kia Motors, Hyundai Motors, Samsung Motors, and Daewoo Motors asked for excessive loans and failed to return their debts. In 1998, Kia Motors was taken over by Hyundai Motors, Samsung Motors was liquidated, and Daewoo Motors was sold to the US-based company General Motors. At the same time, the value of the South Korean won continued to decrease. From the normal rate of 800 won to 1 US dollar, the rate decreased to 1,700 won to the dollar.

The People’s Republic of China was one of the few Asian countries that remained unaffected by the severe financial crisis. China’s renminbi (RMB) remained stable with the exchange rate of 8.3 RMB to 1 US dollar. RMB’s non-convertibility policy actually protected the currency from speculators that it helped China become one of the few Asian countries with the strongest financial stability. However, although China did not suffer from currency rate fluctuation or deficit in GDP, the AFC did slow down the growth of China’s GDP. To overcome this issue, the Chinese government soon implemented new policies to overcome the country’s financial weaknesses such as relying mostly on trade with the United States and having too many non-performing loans.

Unlike China, Japan was pressurized by the AFC but did not collapse. This is due to the fact that about 40 percent of their exports were aimed at Asian countries. Due to the crisis, most of these countries had to cut back on their imports and thus this affected Japan’s economic condition. To overcome this problem, the products that were supposed to be exported to Asian countries were sold massively, which caused the rate of the Japanese yen to fall to 147 yen to the dollar. From 1997 to 1998, Japan’s GPD continually dropped from 5% to 1.6%. Even worse, in 1998, recession occurred due to heavy competitions between manufacturers, which lead to more bankruptcies.

On the other hand, other countries in Asia such as the Philippines, Hong Kong, Malaysia, and Singapore also underwent financial crises. In general, these countries suffered from GDP deficit. While the Philippines suffered from 3 percent GDP deficit, Malaysia lost 5 percent of its GDP during the AFC.

IMF’s Confession of the Wrong Handling of the 1997 Asian Financial Crisis

During his Asian tour in February 2011, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, confessed IMF’s mistake in handling the 1997 and 1998 Asian Financial Crisis in front of the president of the Republic of Indonesia, Susilo Bambang Yudhoyono. While handling the crisis, the organization did not take into account about the differences in political and historical condition of each Asian country. As a matter of fact, those differences are significant as different issues require different handling approaches. During his speech, Strauss-Kahn said that the IMF did some things right but he also humbly admitted that “we also did things wrong, and we have to accept this”. By accepting the mistake, Strauss-Kahn also meant that the International Monetary Fund has learned a lot from the AFC.

How to Prevent the Financial Crisis from Recurring?

To avoid the AFC from recurring, Asia should learn from the past. As Asia progressively develops, competition is never static in this region. Many things have to be improved and reformed due to years of delay. For these reasons, we cannot take for granted the current momentum of Asia’s economic growth as well as the surfacing markets. Indeed Asia still relies heavily on imported goods and technology from developed countries. Yet, if economic performers in Asia are not careful enough to stick with themselves in the trade cycle, this region may experience another financial crisis.

Looking back, the AFC was triggered by various factors such as too much leverage in the corporate sector, bad credit management, and weak macro-management in handling problems like capital markets, monetary policy, and fluctuating exchange rates. Another causal factor of the crisis was governmental issue, which was also referred to as crony capitalism.

Based on Dominique Strauss-Kahn’s statement regarding IMF’s mismanagement of the Asian Financial Crisis, we can see that the large portions of advanced countries ignored the real factors which triggered the AFC from happening. Without real handling of the root problem, flawed macro-economic theory, lax fiscal policies, weak financial supervision, and insufficient monetary policy over an eagerly developing continent will be fatal.

7 Keys to Turn a Financial Crisis Into Your Best Opportunity

This is a simple article about one family (ours!) who dared to dream big 4 years ago and finally climbed out of financial ruin. Many families, including ours, were in financial crisis long before the wall street meltdown and current economic concerns hit. A growing majority simply don’t have enough cash to make ends meet, much less investing in their future. Combine this with the recent job losses and you have a recipe for a major financial crisis.

Finding opportunity amidst the financial crisis involves thinking about your situation in a brand new way.

What is it that you’re after?

The way money relates to “freedom” lies in the ability to devote your life to causes that you deem as more soul serving than working to make ends meet. Whether you are after just a little more each month or getting to a position where you no longer have money worries, each family can generate what they are looking for with some focused attention on a few key factors.

Our family is working towards financial freedom and early “retirement.” As the children of parents who have had very little financial success, my husband and I have seen how years of money worries can smother hopes and dreams. We knew we wanted to avoid repeating the same circumstance in our lives, however, without understanding a few basic rules of financial wellness we made a mess of our own finances soon after getting married.

There is a silver lining in all crisis though. Financial meltdowns can serves a huge opportunity for you and your family with some work and a fresh perspective.

Why is a financial crisis your best opportunity?

The problem with being constantly cash strapped is that over time it can seriously affect how you perceive opportunity in the world.

I’m going out on a limb to say that since there is no shortage of opportunity, a limited perspective is one of the major reasons why it is so hard for families to recreate their bank balance. A limited perspective makes it very hard to overcome obstacles and hardship. The comforts of stability do not require much personal growth and learning so a crisis of any kind is amplified by how ill prepared a person is to handle it.

We lived for 4 years on the verge of bankruptcy and nothing sucked more than being a slave to our own circumstance! The good news is that a financial crisis turns your life upside down. Crisis has always motivated people to make great changes in their lives and your financial crisis can be the same gift of change, if you choose.

The following 7 keys will help you see a financial crisis from a new perspective and turn it into your best opportunity:

1.  Accept Personal Responsibility.

Regardless of the perceived cause of your crisis, accept responsibility for it. To quote a popular saying, “you cannot change what you don’t accept.”  While external situations may have caused additional hardships, take back control for the fact that the solution now lays in your hands.

If your financial slop has been brewing over a longer period of time, begin to ask yourself probing questions about how you view money, yourself, success and other successful people to greater understand why opportunity may continuously elude. (I’ll include a book list for the next article which will help you probe deeper into this.)

The main point is that people who are personally responsible no longer feel scammed, cheated or defeated because they take advantage of each situation as a learning opportunity. Become solution oriented and forget spending time thinking about things that do not change your circumstance.

2.  Don’t Rely On Others To Make It Easier.

As soon as you decide that you cannot rely on others for your financial well being, you will no longer accept less than you deserve. Are you holding out for a little while forsaking the opportunity to Be and Have more?

We soon realized what a huge motivator “rock bottom” can be! Continuous “help” from others is a problem because it  serves as a band-aid that only delays the need to hit “rock bottom” and become resourceful enough to figure out a solid plan of action. While assistance can be a lifesaver for the short term, don’t exchange it for the reward of being able to choose how you want to live.

3. Accept that There Is No “Secret” Formula.

Call it the “lottery mentality” in the age of  instant gratification. We, along with so many people were waiting for the “big reveal” on what it takes to be financially independent. There must be something they’re not telling us? One of our biggest moments of personal growth was realizing that we too can have the same success as others. There is no “secret” that we need be privileged enough to have access to!

All of the highly successful people we have come into contact with have only been willing to do a few key things that others are not willing to do.

Financial independence comes with a price though. There is a price to pay for everything. Do you have the discipline to delay your gratification in order to make sacrifices with your time and effort until you reach your goals?

4. Study To Grow Larger Than The Problems You Face.

Most of us eventually arrive at our destination not because we’ve intended it to be this way but because we’ve fallen asleep at the wheel. You can be sure that the one thing that greatly influences every financial decision in your home is your own personal mindset about money. Use this crisis as an opportunity to understand how your thinking differs from those who are in the financial position you want to be in.
 

Thinking about our personal views on success and money was a lot of fun although frustrating and shocking to admit that we had some pretty “poor” ways of seeing ourselves. Once you begin to shift your perspective you will be in a much better position to take steps towards fixing your financial situation.

5. Invest In Yourself First.

YOU are the best return on your money. If you want to break past the ceiling or plateau of J.O.B. income then it pays to invest in yourself.

Consider starting a business. You don’t need to bet the family farm to gain big rewards either. Start small. If you don’t have a business yet, consider that the only way to build something for the future is to generate multiple streams of income. Begin with one additional income stream outside your current job or income source.

Examine your financial goals, talents and passions and then take some steps to invest in yourself and your future.

6.   Learn To Take Calculated Risks.

The day we finally became sick and tired of our limited choices was the day we decided to take our first bold steps towards a new life. We were able to risk what others do not because we felt we didn’t have much to lose. Despite popular advice, we chose to risk it all because the life we had would always be waiting for us if we “failed.”

Do you take the risks required to advance towards your dreams? When you do take a risk and it doesn’t provide the results you seek, does the cynic take over and you give up?  Mature your “entrepreneur spirit” by taking small calculated risks that will season your tolerance level for taking bigger risks in the future .

Don’t let any “problems” along the way become a roadblock for you! The only way to move past problems is by paying special attention to Key #4 – “Study to become larger than the problems you face.”

7. Be Selective.

Too many people take financial advice from people who are not walking their talk. Is your “adviser” earning a wage from his advice or is he financially free because of his advice? Big difference.

If it is financial abundance you are seeking then it pays to learn a little about what the rich do to get wealthy. How do they think, how do they work, how do they see assets, liabilities, time, and opportunity. Their perspective is much different that what you will find on TV or from the popular “money guru’s” currently dispelling their advice.

Also remember that much of the so called wealth you see around you is swimming in debt so never feel envy or competition towards others.

In Summary Tune out the negative and focus on what YOU want for your family. Stop buying into the crisis, set a new course and be willing to go the distance. You can do this because we managed to do it, even when everything was against us.

Find out more about the valuable resources that that saved us from ourselves on my blog.