December 2019

Country Ranking Trends

  • Magni completed a review of the Philippines. The country finally has made meaningful progress in implementing reforms to improve its Market Integrity. The longstanding deficiencies were highlighted when the Philippines was used to launder money stolen in 2016 from Bangladeshi banks.
  • For all of 2019, ten countries in the investible world were upgraded, while only China received a downgrade. The average governance of investible countries improved by about 0.58 percent. The amount is more than in the last couple of years; however, it is still below the longer-term trendline.

What is the China Phase I Trade Deal?

  • China and the United States have announced agreement to a “phase one” trade deal. In it, the U.S. cancelled $160 billion in tariffs that were to go into effect on December 15, but there still will be tariffs of up to 25% on a range of Chinese imports. China, in return, has agreed to purchase $50 billion in U.S. agricultural products and to increase purchases of manufactured goods. U.S. officials have indicated that the deal will begin to address some of the structural issues, such as stronger intellectual property rights, that were said to necessitate initiating this trade war in the first place. There has been ambiguity about the deal as text was not released, while U.S. and Chinese statements demonstrated noticeable differences regarding the scope of the agreement. Even with phase one, tariffs will remain far higher than they were before the U.S.-China trade war started.
  • Implications: In addition to the uncertainties regarding the agreement, the subsequent process is unclear. The structural and legal changes that the U.S. seeks from China are constructive reforms, though Chinese leadership will have a very hard time agreeing to changes forced on them. If implemented, the Magni Country Score for China would increase.

USMCA – the Deal Formerly Known as NAFTA

  • The House of Representatives overwhelmingly approved a replacement for the 25-year-old North American Free Trade Agreement (NAFTA). The new U.S. Mexico Canada Agreement, or USMCA, is meant to modernize trade rules among the three countries. The deal, which was agreed to by the leaders a year ago, was finally passed in the House after numerous adjustments were made to gain the support of Democrats, including changes to the deal’s provisions on enforcement, labor and environmental standards, as well as eliminating protections for biologic drugs. Among the most significant new rules in USMCA is more stringent automobile content requirements. New provisions for e-commerce also have been added, an area of trade that barely existed when NAFTA was enacted in 1994. The deal also includes a new 16-year sunset period. The Senate will not consider USMCA before January at the earliest with the timing of its impending impeachment trial a complicating factor. Not all Republicans are on board with the new pact. Senator Pat Toomey of Pennsylvania has come out against it saying it is the only trade pact he’s ever seen that is meant to diminish trade.
  • Implications: The U.S. intends to use USMCA as a pattern for future bilateral trade deals around the world. The timeline for USMCA could be a good guide for future deals. It is unclear how practical it is to attempt literally dozens of bilateral deals instead of the former multilateral model.

Is France Going Back to the Future?

  • Travel and public services across France have been disrupted by the widest strikes in decades as public sector workers protest proposed pension changes. President Emmanuel Macron has pledged to reform France’s generous pension system, arguing change is necessary so that the system can support an aging population. France’s official retirement age is 62, but it has 42 different retirement programs, with some allowing workers to retire in their early fifties. Macron’s proposal would create a single universal pension system that would incentivize people to work until age 64. The plan would be phased in and would not apply to older workers, but many public sector workers worry they could lose some of the advantages they enjoy under the current system. So far, the government has said it won’t back down on pushing forward with its reform plans. Currently however, public support appears to be behind the protests. The strikers are hoping to repeat their success of 1995 when another French government was forced to abandon its pension reforms in the face of strikes taking place just before Christmas.
  • Implications: As with most developed countries with aging populations, prior programs for senior citizens are placing growing and unsustainable pressure on national finances. At the same time, taking away benefits from the citizenry is difficult. The pension proposals will not impact directly the Magni Corporate Governance Score for France. The political fallout from whatever happens may impact France’s score. At the same time, the experience in France may shed light on what will happen to countries around the world.

UK Election Means That the Country has Reached the End of the Beginning (per Churchill)

  • Prime Minister Boris Johnson and his Conservative party gained an overwhelming majority in the House of Commons, winning 48 more seats than they won in 2017. Labor, by contrast, had its worst result since 1935, losing 59 seats. Boris Johnson’s strong mandate should be enough to break the stalemate in Parliament and ensure that the UK leaves the EU by the January 31st deadline. The focus will then turn to the transition period and discussions on the UK’s post-Brexit relationship with the EU. With the transition period set to end in December 2020, there is a very short time period to conduct those negotiations. The date can be extended for up to two years, if both the UK and EU members agree. However, Johnson has vowed that there will be no extension, and he has amended the withdrawal bill making its way through Parliament to rule out the possibility of any postponement. Without a deal, trade would default to World Trade Organization terms, with the likelihood of tariffs on imports and exports.
  • Implications: The British were tired of the years of fighting, thus giving Mr. Johnson a victory. Britain almost assuredly will leave the EU. The level of disruption will be heavily influenced by the discussions over the course of 2020. In addition to these issues, the Conservative majority will likely be challenged by a renewed effort from Scotland to declare independence, while also potentially experiencing an effort to integrate Northern Ireland into Ireland. Following the disruption, the United Kingdom’s inherent governance strengths should position the country to do fine, though the country may consist only of England and Wales.