Abenomics 2.0 – economic reforms in continuity

On Sunday the 22nd of October new parliamentary elections have been held in Japan. Prime Minister Shinzo Abe called for a snap election that he and his party (Liberal Democratic Party –LDP) largely won.
As happened in 2014, early elections gave LDP and its alley the opportunity to secure the 2/3 majority in the House of Representatives (that in truth they already had). Political conditions were in fact extremely favourable for Abe: a weak opposition; the Nord Korea threat; the delicate Japanese economy. Despite his growing unpopularity, the victory makes the PM stronger, and gieves him the magical number needed to amend the pacifist constitution.
abe japan bisAbe has been elected as PM for the first time in 2006. His short government was oriented in budget stability and expenditure cuts. In 2007 a series of political issues forced him to step down: the defeat at the House of Councillors elections; the suicide of one of his minister for agriculture due to his involvement in a case of corruption; and the resignations of the following agriculture minister for other judicial problems.
He has been again elected PM in 2012 when he leaded his party to a consistent victory. His second government is the occasion to implement the so called Abenomics: a systematic series of economic reforms based on 3 “arrows”: expansive monetary policy (quantitative easing); expansive fiscal policy; structural long-term reforms to encourage private investments.
In this context, the consumption tax rising has been and still is an issue of debate. The government first implemented an increase from 5% to 8%, aiming to a further rising to 10% in 2015; then, in 2014, announced the 10% consumption tax will be implemented in 2017. Months later, Abe decided to dissolve the House of Representatives. New political scandals involving ex members of his cabinet, a deadlocked parliament, and an unprepared opposition convinced him in finding a new legitimacy for his reforms.
The 2014 victory allowed Abe to continue in his program: his third cabinet announced a new phase of Abenomics, and 3 new arrows: promotion of economic growth; child-rearing assistance to push up the low birth rate; and social security measures to increase nursing facilities for the elderly.
This year, Abe has failed again in rising the consumption tax, and delayed the implementation of the measure. After his confirmation as head of government, he should have no problem in doing so in 2019 (the new deadline).
With a strong hold of the parliament, Abe will be able to comfortably continue his reforms, with the complicity of the Bank of Japan. Actually, the BoJ governor Haruhiko Kuroda, who strongly supported Abenomics, will be confirmed to his position by his main sponsor: Abe himself.

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Save incidents, the new cabinet will govern the country until next elections, scheduled in autumn 2021. In this term, it will face important events such the 2020 Tokyo Olympic Games, and the preparation of the 2025 Expo, which Osaka is a candidate for. Two important opportunity for Abe’s cabinet, as well as foreign and local investors.

Annunci

Beyond Pilot-Reforms in China: controlled development for Cross Border E-Commerce. The awareness of being economy – model during XIX CCP Congress.

In 2013 Chinese government created the first Free Trade Zone, an area under special regulations aimed to test new type of legislation in the field of international trade and investments. In 4 years the FTZs became 11, with the last 7 approved only in March 2017: Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan e Shaanxi. Each FTZ has its focus: e.g. Chongqing will be related to One Belt, One Road project; Fujian FTZ focuses on trade with Taiwan; Henan on international transport and logistics.

Shanghai FTZ is the example of the success of these districts: almost 48.000 corporates are present in its area. 81 decided to establish their regional headquarters here. According to Shanghai City Commission, since the creation of the Zone high-tech, finance, and research and development sectors have sensibly increased.

A new Negative List on investments in FTZs has been decided in June 2016. The list specifies the industries where investments by foreign companies are prohibited or restricted. In order to invest in some of these sectors enterprises were needed to acquire special approval or enter in a joint venture with a Chinese partner. In the new list 27 special administrative measures have been removed: of these 10 relate to manufacturing, 4 to finance. Overall, the new negative list reduces restrictions in over 20 sectors, including railway transport equipment, pharmaceuticals, road transport, insurance, accounting and audit, and other commercial services. Foreign investors will no longer be forced to enter into a JV when engaging in rail transport equipment or civilian satellite manufacturing.

FTZs offer a significant opportunity to e-commerce: on goods traded online the Chinese government applied a parcel tax: a substitute of conventional custom duties that in many cases resulted to be cheaper. Until April 2016, depending of the product, there were 4 levels of taxation (10%, 20%, 30%, 50%). Moreover, products with a taxable value of less than 50 RMB were tax-free.

Now, retail goods purchased online will be treated as imported goods, subject to import tariff, import VAT and consumption tax. An interim import tariff rate of 0% will be applied to cross-border e-commerce retail goods within the personal limit of RMB 2,000 for a single transaction and a cumulative yearly personal transaction limit of RMB 20,000. Transactions above the personal limit will be levied as general trade items (refunds of tax paid and adjustments to the annual personal limit are possible for returned goods).

But for deals above the cap, consumers will get no tax discounts and will also need to pay customs tariffs.

The import tax rates have been divided into 3 categories and adjusted: Category I – 15% tax rate – includes books, video games, computers, digital cameras, gold and silver, food and beverages and toys. Category II – 30% tax rate – includes sporting goods, textiles, some electrical appliances and goods not included in Categories I and III. Category III – 60% tax rate – includes alcohol and tobacco, valuable accessories, golf balls and clubs, luxury watches and cosmetics. This means that custom duties now affect e-commerce too.

The changes will mean a tax increase for some cross-border e-commerce retail imports, with low price cosmetics (under RMB100 in value) being the most affected (likely increase of around 47%). Conversely, high price cosmetics are likely to actually decrease in import costs (likely decrease of around 3%). The same trend exists in clothing, electronics, watches and bikes – items below RMB250 are likely to increase by around 11.9% and items above RMB250 likely to decrease by around 8.1%. There will also be minor changes to commodities such as baby formula and skincare products.

The new policy aims to level competition between online platforms and traditional brick and mortar import stores, and it is in no way to be seen as a protectionist measure used by the Chinese government. On the contrary, it demonstrates the maturity of the Chinese model and chinese market more oriented on creating good way for quality products with good structured system, more and more open to the world, that the government updates to make it more efficient and well controlled as part of international business environment with awareness of leading role.

China-Abroad

The move also comes as China is stepping up efforts to boost domestic consumption, especially for quality, high-end items. The government said last month it will open 19 new duty-free shops across the country to meet consumer’s growing appetite for high-quality overseas products.

The recent speech of Xi Jinping at the opening of XIX Congress of the Communist Party of China is quite clear on this point: “No country can retreat to their own island, we live in a shared world and face a shared destiny,” he said alluding to the choices of Trump administration.

The Chinese government frequently make use of pilot or experimental legislation. Once a new policy has been tested and evaluated then it is simply corrected. The parcel tax is no exception: it will no more benefits certain goods, but trade in FTZ will continue to be facilitated. The Cross-border E-commerce Retail Import Commodity List is a demonstration: it can be defined as a White List containing a vast number of goods that will be free from submission of license to the customs, the inspection and quarantine supervision. This will shorten delivery time.

The introduction of a clearer and more certain tax rate structure will be helpful in removing one of the major obstacles impairing long term development of the industry, and large enterprises previously holding back due to the immature and unsustainable tax system can now make medium and long term decisions in relation to development of an e-commerce business in China.

This is an optimal time for enterprises with the goal of engaging in cross-border e-commerce trade to begin market research and specific planning.

Companies desiring to invest in China should look very closely at the new opportunities offered by Chinese Model, because the Asian country is no longer merely the place where to invest in low-cost labour: according to a 2016 Euromonitor International research Chinese labour costs in manufacturing are now almost equal to those of Portuguese ad Greek workers (who are considered among the least salaried in Europe). The Pudong Innovation Research Institute of Shanghai has confirmed the analysis, certifying in 2016 an increase of 9% in labour cost. The increase is stronger in centre-western provinces where salaries are still lower in respect of the rest of the country, while cities like Beijing and Shanghai register a 10% rise.

FTA as tool for EU to strengthen cooperation with Asia

Free trade agreements (FTA) are international treaties that two or more State negotiate in order to strengthen their commercial relations, making export easier and cheaper.

These agreements are important because even if a very huge number of Countries is today member of WTO (World Trade Organization) and so subject to its regulations, there are still means and ways to protect market form foreign imports. We talk about tariffs as well as non-tariff barriers, e.g. standard regulations and quantitative restrictions (quotas).

With a FTA States can eliminate or reduce barriers to trade between them: this gives companies an easier access to a new market and the opportunity to reduce export costs.

FTA and the European Union

Articles 207 and 218 of the Treaty on the Functioning of the European Union (TFEU) give European institutions competence on dealing with international commerce and so FTA. Member States cannot conclude such agreements by their own.

The procedure to approve a FTA may require much time, for negotiations are not easy to carry and the institutional passages in order to conclude a similar treaty are not few. Nevertheless, as we’ll see later, companies that hope to benefit with these agreements need not to wait too much, as the Council may ask for a provisional entry into force.

Let us have a closer look at this procedure. The initiative to start a negotiation is in the hands of the Council, the institution representing the national governments. They authorize the Commission to meet the third party following precise guidelines.

The negotiations are held behind closed doors; however, the Commission must report the European Parliament and the Council on their status and respect directions of the letter.

Once agreement has been reached on a text, it is translated in all the official languages of the European Union. The Council then approves it. Here technical and linguistic changes are possible.

The Council may now decide to let the agreement entry into force provisionally. Before we go on, first we need to clarify the nature of FTAs: according to the provision in them, we speak of EU-only or mixed FTAs. The formers contain regulations in matters where the EU has exclusive competence, while the letters concern also concurrent legislation. EU-only provisions alone can entry into force provisionally (that’s what happened with CETA).

In order to make the entry into force final and complete, the European Parliament (and in case of the ratification of a mixed FTA, also all the national parliaments) must give its consent.

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Opportunities for Europe and its partners

After the 2016 US presidential elections and the protectionist positions of the new administration, global trading is rapidly changing. In January 2017 Donald Trump announced the US withdrawal of TPP, the ambitious agreement aiming to create a very strong commercial cooperation between the United States, Canada, Japan, ASEAN and other Pacific Countries (Mexico, New Zealand, Australia, Chile, Peru, Colombia).

The Transpacific Partnership may never entry into force: without its most important member, the agreement as it has been concluded does not fit the others partners. Japan has additionally declared it is not interested in a modified version of the treaty. “it would be meaningless” said PM Shinzo Abe.

TPP failure may nonetheless become an opportunity for Europe. On one hand, Asian Countries like Vietnam and Japan are particularly interested in finding a new important economic partner; on the other hand, the EU may use FTAs as a tool to strengthen cooperation with Asia also in non-economical fields, in competition with China, that works to maintain its dominance in the area.

Hanoi is currently negotiating a FTA with the European Countries. Reaching an agreement is difficult because of human rights situation in Vietnam, but the country needs a new economic partner: European market is an excellent alternative to China, with whom commercial relation are quite unfair for Vietnam. That’s a perfect example where the EU could use FTAs as a political instrument.

Something similar can be said for Japan. In this case Europeans aim to have access to a market where its high-quality products are very appreciated. The EU-Japan FTA is in an advanced state of negotiation, and by the end of the year a text may be agreed.