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WORLD ECONOMY

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Brazil – Long Road Ahead

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Sentiments regarding economic recovery in Brazil rose high when Index of Economic Activity of the Central Bank (IBC-Br) recorded growth in January and February this year, only to be dampened by the March data, which showed 0.44% decline in the index. Hope of economic revival was hinged on good show by service sector, coupled with anticipation of improvement in agriculture and industrial sectors in the first quarter of 2017.

Fluctuations in IBC-Br, which is considered as a preview of Brazil’s GDP performance, indicate the fragile condition of the country’s economy, shaken by two back-to-back recessionary years. Downturn of 2015 and 2016 was uncommon in the country’s recent economic history, which had not seen the GDP declining for two straight quarters on more than four occasions since 1996. Brazil was among the few countries that were able to withstand the global financial turmoil of 2008-2009.

Reasons behind the deterioration of the Brazilian economy seem to be clear. Reliance on commodity exports for growth and high consumer debt were among the key factors that burst Brazil’s economic bubble. Unless these issues are addressed, Brazil’s long-term economic recovery will remain doubtful. Hence, it is imperative to look where the country stands with respect to each of the factors that contributed so considerably to the deterioration over the past two years.

EOS Perspective

In near term, commodities are likely to retain high share in Brazil’s external trade, as increasing the export share of finished or semi-finished goods would require significant efforts that Brazil currently is unlikely to be capable of making. Commodity prices are expected to remain volatile in near term, with soybean, sugar, and wheat likely to continue registering decline in prices (as witnessed year on year, April 2016 – April 2017). Therefore, unless the domestic demand picks up, commodity export is unlikely to assist significantly in boosting the Brazilian economy in the near future.

Keeping interest rates low is one of the ways to boost spending, and the country’s falling inflation, which in April 2017 plummeted to 4.08% (below the market forecast of 4.1%), has enabled the central bank to slash interest rates from 12.25% to 11.25%. This is expected to reduce the cost of credit for households, thereby boosting spending (amid fears of debt burden ballooning up again).

Brazil needs to create more assets to increase productivity and to create more income sources. Capital formation (a measure of investment) as a share of GDP was at about 15.5% in 2016 (fourth quarter) as compared with the high of 23% in 2013 (first quarter). The country needs to invest more, and one way to unlock funds for this would be through reforming the pension scheme (bill related to pension reforms was passed in lower house of Congress in May 2017 amid protests), which is the primary reason behind Brazil’s fiscal deficit. Brazil currently spends more than 10% of its GDP on pensions. Reforms seek to fix minimum retirement age at 65 for men and 62 for women. At present, many Brazilians qualify to retire in early to mid-fifties, and this not only impacts the productivity but also puts pressure on the government coffers.

There is a general consensus that Brazil will come out of recession in 2017, registering a modest sub-1% growth. However, to sustain this recovery, it will require a political will, fiscal discipline, and a vision for long-term growth.

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Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline

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In early May 2017, representatives from Japan and Mercosur, a sub-regional alliance consisting of Argentina, Brazil, Paraguay, and Uruguay, met to discuss trade and investment between the nations with the aim to promote free trade and fluid movement of goods. Over the past years, business between Mercosur and Japan has been badly affected mainly by outdated trade policies that have not been revised in a long time. To improve economic relations between Japan and member countries of Mercosur, trade policies need to be renewed and new sectors of investment should be explored.

In 2016, Japan exports to Mercosur nations reached US$3.5 billion and imports from Mercosur totaled US$7.6 billion. Both exports and imports drastically reduced since 2012, taking a hit of 52% and 42.8%, respectively.

Japan and Argentina

After a decade of slow business dealings, trade relations between Japan and Argentina are showing signs of improvement. The number of Japanese companies operating in Argentina reduced from 120 in the 1990s to 54 by the end of 2007. However, the interest of Japanese businesses in the Argentinian market has started to return since the last quarter of 2015, with 78 companies currently in operation in Argentina, and Japan aims to have a minimum of 200 Japanese companies operating in the coming years. According to Japan External Trade Organization (JETRO), in 2016, Japanese exports to Argentina stood at US$630 million, primary exports being machinery and electronics. Imports to Japan were worth US$762 million in the same year.

In order to boost Argentina’s economy, president Mauricio Macri has focused on reviving infrastructure projects in the country. Taking an advantage of this opportunity, Japanese trading companies are keeping a close watch on upcoming rail contracts. Marubeni Corporation, Mitsubishi Corporation, and Mitsui & Co., three of the largest trading companies in Japan, are interested in sales of passenger rail cars in Argentina and planning on submitting bids as part of the new proposed projects. Japanese companies plan to invest between US$6 billion and US$9 billion in Argentina during 2017-2020. The investments are likely to be made across various sectors including mining, energy, and agriculture, among others. With more sectors now open to investment, Japan hopes to boost trade in the broader Latin American market.

Japan and Brazil

Brazil is a large investment market for Japan. With close to 700 Japanese companies currently operating in Brazil, the commercial and industrial opportunities the country offers are unquestionable. In 2016, Japan imported goods worth US$6.7 billion from Brazil, a drop by 10.6% over the previous year when the imports stood at US$7.5 billion. Japan and Brazil are now partnering to strengthen trade and investment between the two countries to spur increase in trade.

Brazil offers Japan a considerable investment opportunity in infrastructure projects. After the Cooperation Agreement for the Promotion of Infrastructure Investments was signed in October 2016, investment in areas such as transportation, logistics, information technology, and energy is expected to increase. At the same time, Japan is a large market for Brazilian agricultural products such as soy, corn, and cotton, but Brazil is also interested to enter the fruit and beef market in Japan. While discussions and negotiations regarding the entry of Brazilian products in the Japanese market are still under way, issues related to hygiene and sanitary standards still need to be addressed.

Japan and Paraguay

Paraguay is one of the least explored countries in terms of trade by Japanese firms. Between 2011 and 2014, only some 10 Japanese companies established operations in Paraguay. Japanese exports to Paraguay stood at US$77.5 million in 2016 while imports from Paraguay were reported at US$41.6 million during the same year. Japanese companies plan to invest in Paraguay to improve business and generate revenue in sectors such as infrastructure, agriculture, and energy, which are seen as areas of opportunities in the future.

Japan and Uruguay

In January 2015, the countries signed a Japan-Uruguay Investment Agreement – the first investment agreement between Japan and any member of Mercosur. Uruguay has become an attractive destination for Japanese investors mainly due to the country’s economic and political stability, low level of corruption, and easy inflow of FDI in the country. Additionally, Japanese companies are provided with the same opportunities and conditions as domestic firms. Uruguay offers the benefit of being able to serve as a distribution hub and boasts of good logistical services to other Mercosur countries – Japanese companies are likely take this as an opportunity to develop an overseas base to strengthen business ties within the region. Uruguay largely depends on natural resources such as wind, water, solar, and biomass to produce energy, making the renewable energy sector in the country another attractive area for investment by Japanese companies in the coming years.

EOS Perspective

The arrival of Trump’s administration leading to USA’s withdrawal from Trans-Pacific Partnership and focus on encouraging domestic industrialization by limiting imports from countries across Latin America, have resulted in several LATAM countries’ attempts to improve and tighten friendly trade relations within their own region as well as with new partners globally, including Asia – we wrote about it in our article Trump In Action: Triumph Or Tremor For Latin America? in February 2017. Japan appears to be willing to use this situation to its advantage by renewing trade and investment policies with Mercosur nations as well.

In the past five years, exports and imports value have declined continuously between Japan and Mercosur nations, and to reverse this declining trend and to revive trade, Japan started to build new trading relationships with Mercosur countries. If successful, this initiative is likely to serve two purposes – firstly, Mercosur countries can reduce dependence on the USA and move towards new markets to look for new opportunities, and secondly, through increased investment in Mercosur, Japan can become a prominent player in the region to reap benefits from engaging in business with several emerging countries.

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TPP 2.0 – Minus the USA

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The Trans-Pacific Partnership (TPP) is a regional trade agreement involving twelve countries on the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the USA, and Vietnam. TPP was to be the largest regional trade agreement as the countries involved accounted for 40% of the world’s GDP and 26% of global trade by value. TPP differed from usual trade partnerships as the agreement, along with focus on free trade, also promoted intellectual property protection, enhanced labor standards, and environmental protection, as well as took into account the needs of a digitized global economy – setting new standards for 21st-century global trading environment.

Negotiations on the deal were concluded in October 2015 and representatives from each country signed the agreement in February 2016. TPP was to come in effect after approval of the agreement by each country’s legislature. Before the deal could materialize, the newly elected president of the USA, Donald Trump, issued an executive order in January 2017 withdrawing the country from the process – leaving remaining member-countries in a lurch.

As per the terms, TPP could come in effect only if ratified by six countries accounting for 85% of the group’s total GDP. Since the USA accounted for about 60% of the groups’ total GDP, its withdrawal killed the deal in a literal sense. However, the remaining eleven countries are still clung to the idea of TPP and are reluctant to throw away years of negotiation. This leads to a question – can TPP survive without the USA? We take a look at the countries’ take on a newly proposed TPP agreement involving the group of eleven countries, without the USA.

Japan to lead the pact

When the USA opted out from TPP, the first reaction of the prime minister of Japan reaffirmed that the trade deal was meaningless without participation of the USA – the largest market in the group. Soon Japan realized that even through eleven-member TPP it can still yield net economic gains in medium-sized markets such as Australia and Vietnam. Moreover, this deal was essential to reduce the dominance of China in the region. Since TPP has been an integral part of the Japanese government’s growth strategy, the country took a U-turn from its previous stance and took the lead in pushing forward the relaunch of TPP involving eleven member countries.

Australia, New Zealand, Singapore, and Canada still in favor of the deal

Australia and New Zealand, being advocates of trade liberalization, were among the first few countries to express their intention to continue with TPP without the USA. Through the eleven-country TPP, Australia and New Zealand aim to gain access to new markets such as Canada, Mexico, and Peru, with which these countries do not have any trade agreements. Moreover, New Zealand expects to gain about two thirds of the US$2.7 billion in estimated annual benefits (after 15 years) if the eleven-member TPP is implemented with terms similar to original deal. This indicates that TPP would result in net economic benefit for the members even without participation of the USA.

Singapore, being an export-oriented economy, strongly favors multilateral trading system especially with like-minded trading partners and thereby the country is likely to support eleven-member TPP.

In a bid to strengthen its economic ties with the pact, especially with Japan, Canada has also shown interest in renegotiating the TPP with remaining eleven countries and urges other nations to join the trade deal.

These countries believe that it would be better to have a weakened TPP without the US participation than to have no TPP at all.

Latin countries sense distinct opportunity

Mexico has enjoyed free access to markets of its largest trading partners – the USA and Canada – since 1994 through North American Free Trade Agreement (NAFTA). As Trump administration turns unfriendly and hostile towards Mexico, threatening to renegotiate or even withdraw from NAFTA, Mexico is looking to diversify its trading options to counter the effect. Under such circumstances, Mexico is more than willing to pursue an eleven-member TPP that will open new markets for the country.

Smaller countries such as Chile and Peru are also keen on going ahead with the proposed eleven-member TPP so as to gain access to Asian markets.

Some Asian countries may lack enough incentive to continue with TPP in absence of the USA

Without participation of the USA, it seems difficult to lure countries such as Malaysia and Vietnam that agreed to change rules on state-owned enterprises and deregulate key sectors such as finance, telecommunications, and retail in anticipation of gaining access to the US market. Both the countries signaled waning enthusiasm for TPP in absence of their largest target market – the USA. For instance, through the twelve-member TPP, Vietnam was expecting its textile exports to increase by 40%, primarily due to free access to the US market at 0% tariff. Thus, without the USA, the expected economic benefits of TPP would drastically reduce for Vietnam as well as Malaysia.

In such a scenario, these countries might give preference to alternative trade agreements such as Regional Comprehensive Economic Partnership (RCEP) that includes seven of the TPP members (i.e. Malaysia, Vietnam, Brunei, Singapore, Japan, Australia, and New Zealand). Launched in 2015 and backed by China, RCEP is the proposed trade agreement aimed to economically integrate 16 countries in Asia and Oceania region, however, this trade deal lacks the elements of intellectual property protection or labor and environment laws that TPP is set apart with. Brunei, the smallest economy in the pact, is actively involved in further discussions, however, its final take on eleven-member TPP is still unclear.

EOS Perspective

While the twelve-member TPP is effectively dead, the new TPP, if at all formed and implemented in future, would be very different from the original one. Being the largest economy in the group, the USA had great negotiation power in development of the original TPP. With the USA’s exit, the power dynamics have changed and the remaining member countries might want to reconsider certain terms that they agreed upon only under the pressure of the USA. For instance, Malaysia could demand change in TPP’s rules that restrict the country to offer preferential treatment to ethnic Malays in government contracts. Such difference in power dynamics might indicate that the eleven-member TPP negotiation process is unlikely to be as simple as just striking ‘the USA’ off the 5,000+ page agreement. It might take years of discussions and renegotiations before the member countries could reach a consensus.

Furthermore, increasing participation from other countries is one way to fill the void left by the USA. TPP members have extended invitation to several countries, including China and UK. China immediately rejected the proposal stating that the TPP is very complex and the country is rather focused on RCEP. In the meantime, UK is yet to confirm its intent. UK is looking to deepen ties with other countries to boost trade after Brexit, thus, joining the TPP might be a good decision, as this might possibly allow the country to have direct access to the markets of the current eleven member countries. However, UK would need to objectively weigh in the estimated benefits of joining TPP as against the stringent requirements of the deal.

At this stage, the future of TPP is uncertain. In the end, all countries act in the best interest of their own economies as well as own political aspirations. Though the ambitious TPP proposal laid out a strong vision for international rules-based trade and investment system for global digital economy, it is far from implementation unless it ensures satisfactory benefits for all the countries involved.

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Trump In Action: Triumph Or Tremor For Latin America?

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Donald Trump commenced his presidency by announcing ‘America First’ policy, thus casting a dark shadow on trade and exports from other countries to the USA. Trump’s protectionist and neo-isolation policies are accepted with gritted teeth across the world, particularly by the USA’s southern neighbors. The renegotiation of trade treaties, more stringent migration policies, as well as strong focus on encouraging domestic industrialization by pruning imports might contribute to a slowdown in economic growth of a few Latin American countries. The policies set by the new president may result in economic malaise across Latin America, where people are uncertain and apprehensive towards the alarming strategies laid down by the USA.

While the degree of economic and trade impact will vary across LATAM countries, the strongest distress is likely to be witnessed across Cuba, Mexico, and Venezuela. On the other hand, Brazil might partially benefit, while the impact is unlikely to be significant on other larger economies such as Argentina or Chile.

The wall between Mexico and the USA

Mexico is facing the worst of Trump’s wrath. The country is highly dependent on the USA for trade – most importantly for duty free exports. These are likely to witness a tremendous setback with Trump imposing 20% import tax on goods from Mexico to finance a wall that he intends to build to safeguard USA’s border from illegal immigrants.

Renegotiation of the North American Free Trade Agreement (NAFTA) and withdrawal from the Trans-Pacific Partnership will further tarnish Mexico’s trade with the USA. Trump intends to renegotiate terms of NAFTA, focusing mainly on moving away from the zero trade barrier policy. By imposing tariffs on imports from Mexico, the cost of goods will increase as they enter the USA, which is likely to boost domestic production of those goods, but it will surely have a negative impact on Mexican production. Another key driver for Trump’s plans to put a break on Mexican imports is the concern over trade deficit that the USA faces with Mexico – approximately, US$ 50 billion in 2015. Hence, Trump wants to encourage domestic production to reduce imports from Mexico.

Further, Trump’s administration has also endangered billions dollars of remittances, one of the largest sources of foreign capital in Mexico, received from Mexican citizens working in the USA. Trump has threatened to tax the remittance transfers if Mexico does not support the trade and immigration limitations imposed by the USA.

Another major issue is the possibility of implementation of strict migration policies which can result in deportation of millions of undocumented migrants, most of them being Mexicans. Several other countries such as Haiti, Dominican Republic, El Salvador, Guatemala, Honduras, and Cuba also stand to suffer due to the change in migration policies. Mass deportation will increase unemployment in these migrants’ home countries and reduce remittances in foreign currency.

Amid the USA-Mexico tension, the Mexican peso has already witnessed a slump, almost nearing its all-time low – declined by 5% since the beginning of 2017 and by 20% since Trump came into power.

Trump’s crackdown on Cuba

The relationship between Cuba and the USA is predicted to get frosty under Trump’s administration. Cuba has struggled for several years under the USA-imposed isolation until president Obama negotiated to re-establish diplomatic relationship between these two countries. However, in his campaign, Trump threatened to reverse the restated diplomatic relationship – including easing of travel and remittances between Cuba and the USA – if Cuba does not agree to a “better deal” which Trump left undefined. Moreover, the US president has announced that he was against the Cuban Adjustment Act, which permits any Cuban, who reaches the USA to stay there legally and apply for residency.

Venezuela, not far from Trump’s radar

Trump has already turned hostile towards Venezuela considering the recent sanction imposed by his administration in February 2017 on the Vice President Tareck El Aissami, accusing him of playing a significant role in international drug trafficking. Relationship between these two countries has already turned sour amidst the deep economic and political crisis that exists in Venezuela.

Further, Venezuela’s oil exports to the USA might suffer due to Trump’s decision to revive the Dakota Access Pipeline – an oil pipeline project that can reduce country’s need to import crude oil. Presently, Venezuela exports 792,000 barrels a day of its crude oil or 38% of total crude exports to the USA, and any additional access to oil for the USA could have a deep impact on Venezuela’s oil exports.

Trump could be good news for Brazil

It appears that the only silver lining for Latin America, while Trump hovers with his protectionist policies, is Brazil’s opportunity to strengthen its ties with Pacific and European nations. Brazil’s Minister of Foreign Trade predicts new trade opportunities for Brazil, as the country aims to expand trading relations with other countries, while the USA withdraws and renegotiates key trade agreements. Moreover, Brazil (as a member of Mercosur – consisting of Argentina, Brazil, Paraguay, and Uruguay) is already pursuing free trade agreement with the European Union, with next round of negotiations lined up for March 2017.

However, a few setbacks that Brazil could suffer include deportation of many of the 1.3 million Brazilians immigrants living in the USA, whose stay in the USA remains undocumented. The deportation is likely to adversely impact the remittances received by Brazil. Further, Trump’s focus on implementing higher import tariffs is likely to impact the Brazilian exports to the USA – approximately 13% of Brazilian exports are directed to the USA.

 

EOS Perspective

USA’s withdrawal from Trans-Pacific Partnership and aim to renegotiate NAFTA is driving Latin American countries to break dependence on the USA, establishing friendly trade relations with other countries and strengthening intra-regional ties. Latin American countries are focusing to redirect trade and investment towards countries such as China and Russia, as well as Europe and Africa.

China is already a key trading partner for Latin America – with trade between the two regions growing from US$ 13 billion in 2000 to US$ 262 billion in 2013 – and USA’s withdrawal from Trans-Pacific Partnership is likely to further deepen the ties between them. China aims to increase investment and trade in LATAM to US$ 250 billion and US$ 500 billion, respectively, by 2025.

China is moving swiftly to strengthen relationship with Latin American countries. Soon after Trump’s win, the Chinese President visited LATAM aiming to deepen economic cooperation, and to promote social and economic development in the region. During the visit, Ecuador and China agreed to a new economic Free Trade Agreement, focused to grow production and investment across energy, infrastructure, and agriculture sectors. An extension of China-Peru free trade agreement was also signed to promote bilateral trade and investment between the two countries. A closer association between China and Latin America is likely to reduce USA’s dominance and supremacy in the region.

Further, with USA’s plans to increase import tariffs, Latin American countries are slowly focusing on expanding intra-regional trading relationships, which till now have not been developed to their full potential due to dependence on the USA for trade and exports. Present circumstances are optimal to slowly start building an intra-regional trade force in Latin America, and the region’s countries should work towards strengthening existing trade and integration blocs, such as the Union of South American Nations (UNASUR) and the Community of Latin American and Caribbean States (CELAC).

Trump’s policies are likely to have a diverse impact on different Latin American countries. The region has already slowly started forging new trading relationships to reduce dependence on the USA, which proves that LATAM might be able to divert the negative repercussions of USA’s new policies and turn them into new opportunities (at least to some extent).

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The Gloomy Post-Olympic Scenario for Brazil

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Now that the Rio Olympics have ended, Brazil will soon get to see whether the expected benefits of its enormous investment start materializing. The sports extravaganza was heavy on Brazil’s pocket, as the country spent massive amount of money on construction of sports venues, housing, transportation, and other infrastructure. Hosting Olympics has indisputably driven tourism, created job opportunities, and generated profit from industries such as transportation, hospitality, entertainment, food, retail, etc. However, this upsurge seems to have been momentary, and mostly limited till the time games lasted. The mid and long term benefits of Olympics are still questionable and raising doubts whether Brazil will pay a high price for the Olympic glory.

Hosting a massive event like Olympics is always exorbitant, requiring huge investments to spruce infrastructure, improve accommodation facilities, etc. Brazil invested heavily to host the games resulting in cost overrun of 51%. Some of the major cost heads included administration, technology, and infrastructure.

1-Cost

During the games, Brazil was flocked with visitors, restaurants and hotels were buzzing with people, who spent mammoth amount of money, adding on to Brazil’s revenue. Foreign visitors spent about US$ 617 million, while ticket sales alone generated US$ 323 million. Bars and restaurants witnessed upsurge in sales and hotels enjoyed much higher occupancy rates than any other time.


2-Impact

The post-Olympic scenario looks gloomy with minimal impact on economic growth of the country (meager addition of 0.05pp to GDP) while Brazil remains engulfed with rising inflation, public debt, and high insolvency rate. Further, results of a survey conducted by Fecomércio MG (Federation of Trade in Goods, Services, and Tourism) in 2016, suggests that only 4% people believe that Brazil will reap benefits post-games and 53.3% people consider that Olympics will have no impact on businesses.


3-Post Olympic Impact

EOS Perspective

In 2009, when Rio was chosen to host the 2016 Olympics, Brazil was at the crest of its economic boom. However, currently, Brazil is struggling to fight its third straight year of recession, growing unemployment, and double-digit inflation. The economy is expected to shrink by 3.5% in 2016 owing to weak commodity prices, political instability, and low import demand from China (one of Brazil’s key trade partners). Amidst all the economic mayhem, hosting Olympics further deepened the financial crack such that Rio had to declare a state of financial emergency, when the Brazilian government authorized a loan of US$ 850 million to pay for Olympic infrastructure and security.

Economic benefits of hosting extravagant events like Olympics are often quite exaggerated. For instance, London earned revenue of barely US$3.5 billion after its lavish spending of US$ 15 billion.

For Brazil, Olympics will definitely drive a modest short-term growth in terms of economy, tourism, and job creation, however, the net impact is likely to be negative. Investment in building massive infrastructure for Olympics and additional public spending are expected to escalate public debt. Organizing a mega sporting event like Olympics amidst rising public debt is likely to result in high inflation rate visible until 2020 and an increase in regional business bankruptcies. The benefits generated by hosting Olympics might be insufficient to compensate for the economic turmoil that had already plagued Brazil even before the games commenced. Unfortunately, the timing of hosting opulent events like World Cup and Olympics back to back might jeopardize the much needed positive impact expected from these sports events.

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Sharing Economy Needs Regulator Support

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Sharing economy works on a business model where individuals have the ability to borrow or rent goods or services owned by someone else. The concept has been widely accepted in a short span of time and companies such as Uber and Airbnb have become well known among consumers. The sharing economy sector has witnessed tremendous growth with aggregate valuation of the companies operating in this market reaching US$ 140 billion in 2015. The industry has already started causing a shift in the employment sector and is said to have far-reaching implications which are likely to disrupt the traditional rental business model, particularly for companies in hotel and transportation sectors. The growth potential of sharing economy has become of considerable interest to policy makers around the globe as well, and the industry has recently come under scrutiny of various governments and regulators, and is likely to face regulatory barriers affecting its potential to scale up.

The concept of sharing economy, also known as peer-to-peer economy, facilitates a direct contact between consumers and service providers and is centered around the use of privately owned, unused inventory. Technology is key to the growth of this type of economy, which has already witnessed the emergence of several sharing platforms enabling consumers to share products and services such as cars and houses.

Sharing EconomySharing EconomySharing EconomySharing EconomyEOS Perspective

Companies such as Uber and Airbnb have become the talk of the town, due to their tremendous growth achieved thanks to a simple business model: providing consumers the ability to monetize idle inventory and rent an asset, instead of purchasing it. Sharing economy also meets consumers’ desire for social interaction, lower costs, and technology-based access to goods and services. However, the sudden and overwhelming rise in its popularity has shaken the governments’ ability to appropriately and sufficiently regulate this economy. Weak legal frameworks hampering consumer’s safety and tax collection have led to debates around the benefits of sharing economy.

Implementation of the traditional regulatory frameworks in the sharing economy sector is likely to upend the peer-to-peer business model. Inclusion and implementation of monetary employee benefits, tax obligations, and safety regulations in the sharing economy can be expected to lead to an increase in the cost of services offered by these companies, thereby defeating the purpose of the existence of sharing economy. Thus, instead of imposing regulations originally developed and meant for traditional rental sector, there arises a vital need to develop a new policy framework best suited to the peer-to-peer business model.

Instead of completely imposing bans on these services and eliminating the opportunity to make use of idle inventory, governments should work alongside these companies and create regulations tailored to their regions to encourage safe business conduct. For instance, Airbnb signed an agreement with the City of Amsterdam to promote responsible home sharing in 2015. The agreement includes a set of rules for the hosts to be followed before activating their listing, and also stipulates the collection and remittance of tourist tax by Airbnb on behalf of the hosts. In addition, the agreement also includes a partnership with Airbnb to collect content from the company’s database to shutdown illegal hotels. These efforts are expected to ensure the hosts receive clear information on renting their homes and promote consumer safety.

Sharing economy has the potential to make a tremendous impact on the traditional rental sector and is likely to create opportunities across various different economic activities. However, from a legal perspective, it cannot be ignored that the model lacks a strong regulatory support, which over time will continue to put pressure on this newly emerged sector. The peer-to-peer model will be required to address these imperatives in the near future in order to scale to new heights.

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GST Likely to Become India’s Biggest Tax Reform

Business Acronym GST as Goods and Services Tax

After 16 years from the conception of the idea, in August 2016, the Indian parliament finally passed the much awaited Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) which is set to replace almost all indirect taxes in the country by April 2017, effectively simplifying India’s tax system. GST, a value added tax, is a single tax levied on the supply of goods and services from the manufacturers to the end consumers. As per this new tax regulation, the dealer of the product will be liable to pay tax only on the value added by him in the supply chain, thereby offsetting tax credits paid on inputs. Thus, the consumer will bear only the GST charged by the last party in the supply chain.

Under the previous tax regime, the state and the central governments levied different charges such as income tax, sales tax, excise duty, central tax, and security transaction tax separately. The GST is set to replace this procedure of implementing multiple indirect taxes with a single comprehensive tax regime under the GST umbrella. The new regime will have a dual structure with the central government and the state government having administrative powers to charge GST across the supply chain. It will include three kinds of taxes: the central GST, the state GST, and an integrated GST to handle inter-sate transaction.

This new tax reform is said to have far reaching impact on the Indian economy. It aims to eliminate the shortcomings of the current way of applying taxes across the supply chain involving numerous multi-layered policies and to remove the ‘cascading effect’ of multiple taxes on goods and services. The old regime of imposing separate taxes on goods and services and dividing transaction values for taxation purpose led to administrative complications and high compliance costs. The new system of uniform and integrated tax rates is likely to facilitate ease of doing business in the country, while the removal of inter-state taxes is likely to reduce time and logistics cost of the movement of goods. In addition, the integration of taxes and removal of Central Sales Tax (CST) is expected to lead to a decline in prices of domestic goods and services. Lower transaction costs combined with the removal of CST are likely to facilitate a rise in the competitiveness of the country’s goods and services in the international market and boost exports.

A robust IT infrastructure will be the backbone of the GST system, initiating ease of tax administration for the government and transparent and easy conduct of tax services, such as payments and registrations, for the citizens. Only a comprehensive IT infrastructure is likely to enable smooth transfer of tax credit across the supply chain, keeping a check on leakage. The new system is also expected to lead to a decline in the cost of tax collection, thereby generating high tax revenues for the government.

The GST system is also believed to be of significant importance to the consumers. Multiple indirect taxes levied by the central and state governments led to incomplete input tax credit availability which had to be adjusted against tax payable leading to the inclusion of various hidden taxes in the cost of goods and services. The GST system will levy a single tax from the manufacturer to the consumer, providing transparency and clarity of taxes paid. Further, efficient business conduct and reduction of leakages will lower the tax burden on the goods.

While the GST promises to streamline the indirect tax regime with a single tax, it has to overcome various challenges to be successful. Since the country is adopting a dual structure with the central and state governments, the main issue would be the coordination between different states. The central and state governments will be required to come to an agreement regarding the GST rates, administration efficiency, and the implementation of the GST, which might prove to be a cumbersome procedure. Further, IT infrastructure, which is said to be the foundation of the GST regime, will be a critical factor affecting the success of the new system. A strong technology support connecting all state governments, banks, industry, and other stakeholders on a real-time basis will be required for the efficient conduct of business. In addition, since the working of the GST tax regime is different from the indirect tax system, proper training will be required for the tax administrative staff at central and state levels regarding legislation and procedures within the GST. Another factor the government will need to consider is to adjust the new tax in a way that the tax revenue remains at least same without any revenue loss. For this purpose, a Revenue Neutral Rate (RNR) will need to be calculated and critically evaluated, as such a rate is likely to have a great impact on the Indian economy.

GST is a much awaited revolutionary tax reform in the Indian economy. If implemented properly, it is believed to add 2% to 2.5% to the nation’s GDP in the long run. It promises ease of doing business, economic growth, and higher tax revenue. Even with the diverse challenges the new tax regime is likely to be faced with, the GST has the potential to be a game changer for the Indian economy in the near future and is said to pave the way to a ‘one nation, one tax’ system.

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BREXIT: First Thoughts

Streit ums Haus

In a landmark decision, UK’s citizen expressed their preference to leave the European Union. While the process is not straight forward, and will take at least two years to complete, Britain could struggle to lift the markets sentiment in a short to medium term.

Sterling Pound, probably one of the strongest currencies in the world, immediately suffered the largest drop in the past 30 years. Stock markets across the world have also responded to the news, with most stock exchanges witnessing a significant drop in share prices. This only reciprocates the negative market sentiment currently dominating the market. Some even feel that announcement of BREXIT could be a dawn a new recession period, similar to the 2008 crisis.

Britain will have to undergo massive negotiations over the next two years – not only in terms of their relations with other EU member countries, but also at a more granular level. Most companies will have to renegotiate their EU-wide contracts, to enable provisions for a separate/independent Britain. A major challenge will be addressing trade with EU member states, as well as countries with which EU has signed free trade agreements, which according to estimates puts about £250 billion worth of trade at risk.

Several companies, especially the ones which use Britain as the base to serve other EU markets, have been left in the midst of turbulent waters, unsure of what pans for them in the future. All will again depend on how negotiations go among the 27 EU member states during a long drawn process, after Britain enforces the Article 50 of the Treaty on European Union, for officially exiting the EU.

China, already suffering from the stock market and debt crisis in early 2016 following a crash in crude oil prices, could see its trade with European countries taking a hit. UK is the second largest customer for China in Europe. Weakening of the Sterling Pound and Euro is expected to erode the competitive advantage that China sought by devaluing its currency several times since August 2015. Moreover, the negative market sentiment is also likely to drive the crude oil prices further downwards, which could add the pressure on the debt-ridden country.

The knock-on effect will also be felt in other emerging markets in Asia. Nomura’s analysts predict growth rates in other Asian emerging markets to drop by up to 1.0 percentage point.

EOS Perspective

While many expect the impact of BREXIT to be felt gradually, the short terms scenario certainly seems to point otherwise. All will depend on how the exit process progresses, along with the negotiations, which might leave Britain in a slightly less advantageous position. Even if all goes well, it will take several years to attain normalcy.

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