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global trade

In the face of rising protectionism and growing political backlash among many western nations, the G-20 faces a steep challenge in reestablishing forward momentum for any of the various pending global free trade agreements.

A meeting of trade ministers from the G-20 nations was held in Shanghai last weekend, with an agenda dominated by growing concerns over industrial over-capacity, the sluggish pace of international trade, and reduced foreign direct investment.

Of course, as is typically the case, very little emerged from the meeting in the way of concrete proposals or agreements other than the usual anodyne joint statement of principles. In the face of rising protectionism and growing political backlash among many western nations, the G-20 faces a steep challenge in reestablishing forward momentum for any of the various pending global free trade agreements.

Industrial overcapacity represents perhaps the most significant economic problem facing the G-20 nations, given the very loose monetary policies (to say nothing of direct government subsidies in the case of China) that have been part of the central bankers’ playbook in the attempt to recover from the 2008 financial crisis. As economists have observed, the huge flow of monetary stimulus around the world has created an illusion of demand and provided companies with cheap financing to build new capacity, which only further exacerbates the underlying problem.

For China, as the world’s largest exporter, which is struggling to rebalance its economy more towards domestic consumption, overcapacity is the economic problem that dare not speak its name. Gao Hucheng, China’s commerce minister and representative at the G-20 summit, instead focused his attention on the lack of demand, lamenting that “global economic recovery remains sluggish, trade growth is lingering at a low level and investment flow has yet to recover to pre-crisis levels.”

Left unaddressed was the matter of China’s ongoing high production of steel, aluminium, chemicals, cotton and synthetic yarns, all of which continue to flood foreign markets, causing disruption and unemployment among many of its trading partners.

Given the tensions inherent among the G-20 member nations, it’s perhaps not surprising that the trade ministers turned their attention away from overcapacity to address the far less controversial topic of direct foreign investment, which everyone seems to agree is sorely in need of a boost. According to China’s Gao, the G-20 ministers’ current assessment is that cross-border investment this year is expected to fall worldwide by as much as 15%. That presents a major economic headache, particularly in the developing world, where foreign capital represents a critical resource to stimulate growth. The G-20 ministers were able to conclude their latest summit by reaching agreement on a nine-point set of principles aimed at spurring foreign direct investment.

As if to confirm the G-20 ministers’ fears, the Economic Commission for Latin America and the Caribbean (which is a regional agency of the United Nations) issued its most recent report, which shows that a decline in foreign direct investment in Latin America was already well underway in 2015, when it dropped by 9.1% compared to the prior year. The report cites the weaknesses in many commodity prices as a major contributing factor, leading to a sharp decrease in investment in Latin America’s mining and hydrocarbon sectors.

It’s interesting to note, though, that while overall the pace of direct foreign investment in Latin America decelerated sharply, some countries in the region actually enjoyed continued growth. Mexico in particular stands out with an increase of direct foreign investment of 18% last year, to reach a total of $30.3 billion — the highest level recorded in the last seven years. This was mainly due to increased foreign investment in the telecommunications and manufacturing sectors, particularly automotive. Mexico’s performance is in sharp contrast to Brazil where direct foreign investment contracted by more than 17%.

This is consistent with our own view of the cross-border investment landscape here at Aurigin (formerly BankerBay). While commodity price weakness and currency volatility pose significant challenges to cross-border investors, there is no shortage of opportunity out there – compelling investment opportunities around the world that are waiting to be discovered. But the landscape is shifting. While a weak yuan may make it much less attractive for a Chinese company considering the purchase of California real estate, a strong dollar will nonetheless make it much more attractive for an American company to make an acquisition in Vietnam or Mexico.