FEATURING: USA China Trade War - Darma Year 12
The Sunday Roast Under Threat? - Eleanor Year 12 The Impact of the Russian – Ukraine War on the Russian Economy: Holly Year 12 The Impact of the Russian – Ukraine War on the global economy: Oreoluwa Year 12 Book Review: Freakonomics – Sarah – Year 11 What is Happening to Energy Prices? – Matilda Year 12 Dangerously High Labour shortages – Rishil – Year 12 Is Fraud a Real Crime? – Adam – Year 12
Theme 4 A Level Case Study: USA China Trade War Following the 2016 election, Donald Trump was not happy with the trade imbalance with China. He started a trade war in 2018, by imposing tariffs of around $400 billion of goods between the two economic superpowers. -
Trump wanted to reduce the trade deficits the USA has with China, while also accusing China of intellectual property theft. What tariffs were imposed? US imposed tariffs on over £268bn Chinese goods, which China imposing tariffs on over £110bn of American goods The tariffs remained back and forth, with the US delivering 3 lots of tariffs in 2018, and a 4th, on meat, musical instruments in 2019. The caused Beijing to retaliate with tariffs from 5% - 25%. Trump announced an additional tariff increase of 5% on imports from China, following Chinese plans to hit £61bn of US products with duties. China previously revealed plans to increase duties between 5% and 10% on over 5,000 US goods, some being agricultural goods, crude oil, aircraft. In reciprocation, Trump stated the increase from 25% to 30% On $250 billion of Chinese imports.
Tariffs against the USA: Increased duties between 5% and 10% on more than 5,000 US products including agricultural goods, aircraft and crude oil China stated they will re-impose a suspended 25% duty on US car imports.
Tariffs against China Trump began imposing unilateral tariffs on goods such as washing machines, solar panels, steel and aluminum that the US imports, in particular China. The most recent round targeted Chinese imports, meat, musical instruments, with a 15% duty.
However, in January the two countries signed an agreement in an attempt to ease the trade war, due to both countries domestic economies suffering. The agreements included China pledging to boost US imports by $200bn and strengthen intellectual property rules. USA have agreed to halve some of the tariffs against Chinese products. What are the impacts of the Deal? President Xi Jinping left the meeting agreeing to terms they offered early on in the process, this quickly benefitting. The US federal reserve has estimated that due to US demand for its goods, the Chinese economy had taken a 0.25% hit. The trade off is still ongoing, the current leaders struggling to resolve the obvious issues . What is the impact economically? Economists estimated that US companies and consumers will burden the cost of over $40 billion. Globally, due to the two countries being economic superpowers, economies all around the world have suffered: (Mexico, Canada, Japan, Germany). This is because many firms import and export goods from the US and China; in particular, American companies are losers in this trade off. This is seen in Sherrill Mosee’s personal crisis, due to the fact that she is stuck between the crossfire of the trade war. She is the founder of the bagmaker ‘Minkee Blue’ Who are based in The US but manufactures its products in China then imports them back to Philadelphia. To import her products back into the US, she had to pay the tariff at the border. This was a problem, as she stated she’d, ‘had to scramble around to get the additional funds’, because of the increasingly inflating duties. This resulted In Mosee having to increase the prices of her products in order to pay the increased cost of production of her firm.
The Sunday Roast Under Threat? Many families across the country who sit down together to enjoy the traditional Sunday Roast have noticed this classic surge in price as inflation continues to haunt the economy. Households looking to keep costs down may have to be a little more creative when it comes to conjuring up the nation’s Sunday best as annual food inflation currently stands at 4.2%. Data from the firm Kantar reveals that prices of fresh beef has risen by 8.6% with a joint of beef now costing £2.50 more than in 2021 and fresh lamb prices have surged, by an eye-watering 10% to around £11 per kilo. Other essential components of the Sunday Roast including cauliflower plus other vegetables have risen by more than a fifth in price and due to supply shortages, the price of potatoes has shot up by 3.5% over the last 12 months. Food prices have not increased as significantly as now since 2012.
Causes of the food inflation: Annual inflation was up at 5.4% in December, the highest on record for almost 30 years. According to the Director of Insights and Analytics at the British Retail Consortium Kyle Monk, ‘Brexit, HGV shortages and staff wage increases’ are all too blame for ‘domestically produced food prices rising.’ Predominantly, the main reason for food inflation is down to the rising costs of agriculture commodities including machinery used to manufacture food and the cost of processing, packaging and distribution. These rising costs also known as cost- push inflation are making it difficult for firms to cut their costs resulting in them having no choice but to pass on this burden to their customers leading to higher prices for goods in the supermarkets.
Inferior goods such as supermarket own branded products will rise in popularity. However, reports have found increased prices will affect all areas of supermarket shelves resulting in the price difference between branded and non-branded goods to be narrower than usual as the top 8 largest UK supermarkets are charging up to 9% more for their ranges. This has resulted in what Richard Walked (head of the supermarket Iceland) calls ‘alarming’ as the demand for food banks nationally has increased significantly with foodbanks handing out 32 meals a minute over the last six months as households struggle to feed themselves. From further research there are currently more Foodbanks in the UK (2,200) than McDonalds branches (1,300). Furthermore, with the inflation of many meat products as seen before, the plant-based meat alternative market is forecasted to continue to grow in popularity over the next few years as many groups of society such as university students are unable to afford the surging meat costs. The following has led to The Food Foundation warning that many people may have to make tough decisions choosing between ‘eating or heating’, a situation which would cause tragic effects to public health. The government has announced a scheme offering low-income households a council tax rebate and offering residents loans to help pay rising energy bills. However, many have critiqued this saying these measures don’t extend far enough. Inflation isn’t set to peak here as The Bank of England has forecasted it to reach 7% by April 2022 the highest on record since 1991.
Impact of the Russian – Ukraine War on the Russian Economy On 24th February, Russia launched an invasion of Ukraine, sending troops to attack multiple fronts and missile strikes near the Ukrainian capital of Kyiv. This attack has drawn deep condemnation from world leaders and a tempest of financial sanctions on the Russian economy. Japan and even Switzerland have joined the sanction efforts to deter the invasion of Ukraine. Whilst the US and Europe have avoided direct military conflict with Russia, the Russian economy has been struck severely. European and US allies have restricted Russia’s ability to make transactions in foreign currencies, such as the Dollar, Euro, and Yen. This leaves Russia unable to move their approximate $630 billions of stockpiled foreign reserves, which was built to fend off the effects of possible sanctions and protect the Russian economy. Banks like VTB, Promsvyazbank and 5 others have had their assets frozen. These sanctions could be incredibly troubling for Russia in times of currency unpredictability, especially since the Ruble has become increasingly volatile outside Russia. On Monday, the Ruble value plummeted by 25%, the worst value fall since 1998 when the Russian economy collapsed, and the government defaulted on its debt. Now, as of approximately 11 pm on 2nd March, the Ruble was worth 0.0073 Pound sterling, and 0.0097 US Dollars. The Moscow Exchange has been temporarily closed, and shares in overseas Russian companies have flailed and crashed.
Additionally, the same 7 Russian banks have been prohibited from the use SWIFT, (Society for Worldwide Interbank Financial Telecommunication) which links over 11,000 financial institutions in more than 200 countries and territories. This could be significantly damaging to these banks as Swift sends over 42 million messages per day, that facilitate domestic and international business deals, making it the leading gobetween for financial transactions. As a result, these Russian banks will be unable to send messages to any bank connected to SWIFT worldwide and will have to deal with one another directly, cutting off a source of revenue for the government. Russian companies and banks may also experience higher costs by losing access to trouble-free transactions through Swift. Investors have begun to dump their Russian assets as well, increasing the pressure on the Russian economy. On 27th February, the Norwegian government said its $1.3 trillion oil fund, and the world’s biggest sovereign wealth fund, would sell its total $3 billion of Russian investments. Similarly, BP is cutting ties with its 19.75% in the Russian oil company Rosneft, along with Shell and UEFA divesting themselves of ties with Gazprom, a sponsorship deal worth around $40 million.
Russia has scrambled to respond to the financial wreckage by trying to strengthen its currency and finances. The Central Bank of Russia more than doubled the interest rate from 9.5% to 20%, attempting to end the volatility of the Ruble as its value nosedived against the US Dollar. On 1st March, to stop investors from selling their assets, the Russian government announced a temporary ban on foreign investors exiting Russian assets. This follows measures by the Kremlin on 28th February banning any payments to foreigners, and exporters being ordered to sell 80% of their foreign currency gains. Putin has also signed a ban on residents of Russia leaving the country with more than $10,000 as long lines are forming at ATMs and food stores of Russians who fear a ‘run’ on banks. The situation will probably worsen; analysts at Goldman Sachs have predicted a 7% decline in Russian GDP and if this continues to 2023, sanctions are likely to cause serious damage for the Russian government. They are also hurting the Russian people, who were already in a difficult position before now coming out of the slump of the economy after the Covid-19 pandemic.
The Impact of the Russia – Ukraine War on the World Economy The principal issue we should all be concerned about with the Russia-Ukraine war is the humanitarian crisis which has arisen. This article will instead focus on the economic impact of the invasion. The war in the east has not only had an impact on Russia’s economy, but its effects are also manifesting themselves in companies and countries all around the globe.
A prevalent, short-term effect is the heightened inflationary pressure despite the rising cost of living reaching the highest levels for the past 30 years. Russia is the world’s biggest natural gas exporter and the second-largest exporter of oil (after Saudi Arabia). As countries try to break ties in trading with Russia, energy prices are forecast to soar, especially in countries like Latvia and the Czech Republic where they are currently entirely dependent on Russia for natural gas. European natural gas prices rose by almost 70% since the 24th of February, and the global oil price peaked at $105 for the first time since 2014. The cost of living rise also has a regressive effect on those with lower incomes, who are likely to spend a large proportion of their income on necessities, some of which will rise at an exponential rate like bread and flour.
Multinationals are also getting hit by the war, Apple is one of the latest major firms to halt all product sales in Russia. Apple iPhones are the third best-selling smartphone in Russia and supplied around 13% of all the handsets sold last year, but that represents less than 2% of Apple’s global iPhone sales so is not detrimental to their income. This does not immediately seem disastrous for Russia, however Nokia said it would also stop deliveries to Russia too. This alongside reduced exports from Russia and Ukraine on essential metals like palladium, aluminium, and nickel, would initially suggest that fewer automobiles and electronics are produced globally. For Indian metal companies, this may be economically beneficial as they become an attractive alternative leading to an 11.18% increase in their stock price from 27 th of February to the 3rd of March. A significant change for a multinational is for BP, who chose to divest its 19.75% stake in Rosneft. This is likely to be a more dramatic financial hit than for apple, as Rosneft has accounted for $2.7bn of its profits, which is about 20% of its total.
It is not only the spending patterns of companies which are affected, government spending is also in the process of reform. Olaf Scholz has announced his plan to increase defence spending to over 2% of GDP, an unexpected choice as Germany has been resisting pressure from the US and other nations to make this raise for a long while due to its history in the 20th century. This recalibration of spending means that the €100 billion now being spent on the military, is not being spent elsewhere. Education is forecast to suffer, which is likely to have adverse effects on its economy in the future. Another possibility is that taxpayers lose out and must cover the extra money flowing out of the government. This is particularly damaging as Germany are experiencing unusually high prices, with their inflation rate from 2010 to 2020 fluctuating around the 1% mark and 2021 having the highest rate of inflation since 1993 at 3.1%. Now The German Economic Institute predicts that the inflation rate could rise as high as 6.1% if the war in Ukraine escalates, so if taxpayers are paying more with their income that is buying them less, they will also face challenges.
Book Review: Freakonomics Summary In Freakonomics, authors Steven D. Levitt and Stephen J. Dubner ask the questions that no one thinks to ask and look beyond what people may assume to be the answer. The first chapter explores cheating; who cheats and why do they do it? This introduces an important concept of the book: the power of incentives. They explore how information is used by different groups of people, and how the internet has changed the ability to access information. Gangs, criminals, and drugs are looked at, including trends that occurred and why they happened. Levitt and Dubner go far beyond ‘conventional wisdom’ to find out the real cause of the drop in crime in America during the 90s, for example. Last but not least, the true effect of parenting on a child is revealed- how much does a good school, or well-chosen name really matter?
Review I have never read anything like Freakonomics before, the way information is presented and manipulated is incredible, as it paths the way for conclusions that you would never realise without the use of information. Unlike the initial theories, Levitt and Dubner have collected buckets of statistics, from 1996 Chicago school results to the finances of an American gang, to craft numerical, proven answers. And the conclusions drawn really make you rethink. What is more dangerous- a gun or a swimming pool? You will be surprised at the answer… Freakonomics is a great, but not your typical read, which is what makes it all the more interesting.
What is Happening to Energy Prices? One year ago, Ofgem, a public entity which is appointed by the government, set the “energy price cap”, which is the maximum annual cost of energy for a typical household on a standard energy tariff, at £1,138 in April 2021. This subsequently rose to £1,277 in October 2021, and most recently Ofgem announced a further increase to an eye-watering £1,971 which will take effect this April. This represents an astounding 73% or £833 rise in just a year. Aside from this, there is the backdrop of the relentlessly increasing cost of living, as inflation is expected to approach 6% after the ONS calculated a Consumer Price Index inflation of 5.1% in December 2021, the highest since 1991. This is much higher than what is considered an acceptable low and stable rate of 2% by the Monetary Policy Committee, which aims to create a stable pricing environment to reduce consumer uncertainty.
As a nation we are becoming progressively more reliant on environmentally sustainable renewable energy sources, as stakeholders have become increasingly aware of the destructive effects of climate change, the negative externalities it poses from extreme weather events (which impact agriculture and crop growth), and the detrimental CO2 emissions from “dirty” energy sourced from gas or coal-fuelled power stations. The output from renewable sources is variable because these depend on weather patterns. For instance, during Storm Eunice, massive output from wind farms resulted in a temporary fall in just one day of 11% to £140 per MWh. So, power prices have become very volatile.
But why are energy prices sky-rocketing in this way? When economies emerged from lockdown in 2021, an unprecedented increase in aggregate demand for goods suddenly arose globally, and many manufacturing industries had to resume production simultaneously to satisfy this latent demand. However, it can take 5 to 7 years to build a power station, meaning energy supply is invariably inelastic and prices are therefore forced up in order to ration energy amongst consumers. Moreover, coal and gas fired power stations which contribute to carbon emissions are being shut down faster than the replacement renewable power stations are being built in the interest of future generations, causing further supply bottlenecks over the medium term. Furthermore, very recently, a tragic war with Ukraine was started by Russia which is a key producer and exporter of gas to Europe. Given the increased uncertainty in this supply, this has pushed up even more both the cost of both gas and oil, which also has a major impact on the overall price of energy.
Overall, the success of the government’s recent initiatives to help with increasing energy bills is yet to be seen: this is a high risk and high cost venture when the nation is already experiencing a crushing national debt. Is it probable that all 27 million households will repay the £200 loan, which equates to £5.4 billion? Additionally, in conjunction with the rise of national insurance by 1.25%, the implementation of this package is worlds away from resolving the current cost of living crisis and only” kicks the can down the road” when energy prices are still likely to be high given the structural longer-term reasons for this. Moreover, these initiatives were published before the additional increases in energy costs from the Ukraine war.
A possible medium term solution is in the building of new power stations, some focused on renewable energy and others using nuclear fission, both of which do not emit harmful CO2, although the latter does result in radioactive waste which needs to be stored underground for decades. This would expand productive capacity, and through a process of ‘creative destruction’, non-renewable energy power plants will become increasingly obsolete.
There is, however, a longer-term glimmer of hope. Scientists in Oxford have last month sustained nuclear fusion for more than five seconds for the first time in history, at temperatures 10x hotter than the Sun. Although this particular experiment required more input energy to start the reaction than the output energy that was produced, this is still a ground-breaking development. If nuclear fusion can be accomplished at scale, limitless power would be provided, and a solution would be found to all our problems!
Dangerously High Labour Shortages? The UK economy has been through a lot these last few years with Brexit looming and the sudden shock of the COVID-19 pandemic. The pandemic has had a huge negative impact on the labour market with restrictions affecting businesses’ ability to trade and unemployment being record high for workers aged 65+. Furthermore, inflation is growing faster than wages and combined with the high unemployment rate at present, people are lacking confidence in the economy.
However, sectors like hospitality and social care have been hit the worst. According to the Office for National statistics, there is a 10% vacancy in the hospitality sector which is around 210,000 jobs with hospitality having the highest quit rate of 6.4%. As a result, around Christmas time, pubs really struggled to accommodate the rise in demand during the festive period. This is due to furloughed staff finding work elsewhere. Additionally, there is a huge vacancy in social care jobs of 6.8% which is around 105,000 jobs. According to the Independent, some care residents are dying alone as staffing levels are dangerously low! This is due to the low pay on average £9.50 an hour and workers being burnt out and overworked. Furthermore, jobs in social care are described as being “demanding and emotionally taxing at times” which has a burden on the workers’ health. Combined with the low pay and worryingly high inflation rate of 5.5%, this is the reason care staff may be migrating to other sectors-so they can earn more with less of the stress.
The government had introduced a furlough scheme called the Coronavirus Job Retention Scheme (CJRS) which furloughed 11.7 million jobs in its lifetime until it ended on 30th September 2021. To solve the labour shortages in the social care and hospitality sectors, the government should increase wages which would encourage workers from abroad to work in these sectors in the UK. However, the government have introduced new rules that jobseekers on unemployment benefits will have to search for jobs outside their preferred occupation from the fourth week of their benefit claim instead of after three months. If they turn down a job offer, they will be penalised by having their benefits cut according to the Financial Times. This could cause large numbers of people entering jobs they do not like causing a fall in quality of life and reduced productivity in the economy. Ultimately, half of firms in all industries expect labour shortages will be solved in just over a year.
Is Fraud a Real Crime? According to the Fraud Act 2006, fraud can be defined as using deception to gain financially or otherwise. Furthermore, in the eyes of the penal system fraud is a crime, as proven by the maximum legal sentence it carries of up to 10 years imprisonment. On the other hand, fraud is evident throughout human history, with the earliest recorded instance in 300 B.C. through Hegestratos, a Greek sea merchant. "With commerce comes fraud". Fraud could potentially be seen as a short run maximisation of one's self interest. Fraud as a necessary evil could be in that it is infeasible to eradicate fraud, but steps can be undertaken to deter it. In light of COVID, subsidies for financially struggling businesses were provided but due to low requirements, exploitations occurred in the form of fraud. But surely it would be untimely for the government to focus their efforts on prosecuting frauders? There is a trade-off (opportunity cost) for everything. In this sense, despite the Fraud Act 2006 and the legal disincentives, fraud could be seen as a low priority crime.
Shattered Expectations Most notably, recently Rishi Sunak has been scrutinised over his decision to write off an alleged £4.3 billion in illegally obtained COVID loans - with one legal expert recently describing the situation as "fraud on a scale never seen before". The assertion made by the economic secretary of the treasury made it clear that this lack of recompense was due to other government priorities such as "speed of distribution of funds". In the presence of taxing economic shocks, fraud could be considered a necessary evil. This led to the damning resignation of the counter-fraud minister Lord Agnew. He described the government action in relation to fraud as "desperately inadequate". Emblematically, errors were made by the British business bank and HMRC. For instance, over 1,000 companies received bounce back loans that were not even trading when COVID struck as part of the BBL scheme. This flourished under a treasury characterised by a “combination of arrogance, ignorance and indolence" despite a total fraud loss across government at an estimated £29 billion per year.
Judgement - Rishi on Ropes Fraud is a crime. There is no doubt about this. It should also remain a crime as it has the potential to cause financial distress and long term mental anguish. However, prosecuting every incidence of fraud would be an incredibly expensive exercise in futility. But it is necessary to assert that fraud should not be written off in the region of £4.3 billion as was done by Rishi and should be prosecuted at a rate in excess of the current 3.1%.