THE EQUILIBRIUM 2021 - Revolutionising Modern Economics

THE EQUILIBRIUM

REVOLUTIONISING MODERN ECONOMICS

THE REALM OF BLOCK BY BLOCK: A STEP TOWARDS

THE AGE OF CRYPTO

CURRENCY

INTERNATIONAL TRADE

TABLE OF CONTENTS

01 03 05 Messages from the Research and Editorial Team 07 A Message from Our Advisor

A Message from Our President

A Message from the Vice President Research and Editorial ,

141 Events Review 151 Meet Our Team 152 Who Are We 153 Bibliograohy ?

BLOCK TO BLO TOWARDS T CRYPTOCU

11 27

All About Crypto -

Chen Wei Yu

Market Structure Cryptocurrency -

Teo Kang Qi

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The Future of Ma In the Hands of C

57

Monetary Stabil Cryptocurrency

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-

Ng Wei Meng

Khyati Gupta

LOCK : A STEP THE AGE OF URRENCY

ocurrency

e of the Industry

acroeconomic Policies Cryptocurrency

lization of

THE REALM OF INTERNATIONAL TRADE

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The Impact of Covid 19 on International Trade

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Global Political Competitiveness Commodity Trading

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-

Thaung Myint Oo

&

Leonard Ong Xia Wei

107

Macroeconomic Aspects of International Trade

125

The Symbiotic Relationship Between Trade and the Environment

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-

Sumair Jalan

Ng Yanting

A MESSAGE FROM OUR ADVISOR

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Dear readers, It is my pleasure to introduce to you the Newsletter by SIM Economic Society, a society managed by a group of students with strong interest in Economics.

Economics is a social science and it has a close association with our day to day life. With a good understanding of economics reasoning, we can better analyse the effects of events and policies on the economic environment that we live in and can be bettered prepared to enhance our living and operations. This year Newsletter analyses two topics that can affect the global economy, cryptocurrency and international trade.

In the first topic on Cryptocurrency, the students introduces the fundamental concepts of cryptocurrency, the market structure where cryptocurrency operates, monetary effects of cryptocurrency and the future of macroeconomic policies in the presence of cryptocurrency. In 1963, Economics Nobel Prize Winner Milton Friedman mentioned that inflation is always and everywhere a monetary phenomenon. It is interesting to analyse whether the validity of this statement is in the presence of cryptocurrency.

In the second topic of international trade, the students discuss the macroeconomic aspects of international trade, the impact of Covid-19 on international trade, the symbiotic relationship between trade and environment and global political competitiveness and commodity trading. In 1993, Economics Nobel Prize Winner Paul Krugman wrote an article on “What Do Undergrads Need To Know About Trade” to highlight the importance of this knowledge. This is even more important now with the greater integration between economies through trade.

Through these analysis, we can derive a better understanding of the real and financial impacts of Cryptocurrency and international trade. This will help us to appreciate the events better and allow us to respond better in the future following these events. Hope that you enjoy reading the articles. Your support is the best encouragement to these students.

Thank you for your support.

Tan Khay Boon Advisor SIM Economic Society

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A MESSAGE FROM OUR PRESIDENT

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Dear Readers, It is with great pleasure that I present to you our annual newsletter, ‘The Equilibrium’. As we come to the end of our second year dealing with the coronavirus pandemic, we are thankful to frontline workers and scientists who have made it possible for the world to slowly return to normalcy.

In this edition of our newsletter, we at SIMES have explored two very relevant subjects in today’s time that we feel will be detrimental in deciding the fate of economies around the world going forward. As we map the road to recovery going forward, it is crucial that we learn the key lessons that this pandemic has taught us. How it has adversely affected us all together without discriminating, it is essential that we respond in a similar manner.

With this thought I introduce to you our first topic, ‘The Realm of International Trade’. Here, we explore the status of international trade going into the pandemic, what’s changed in the last couple of years such as the sudden surge in metal prices, shipping charter rates and government policies, and the outlook of trade going forward. Our team has attempted to research on and answer the age-old question of how beneficial can trade really be, and do we need it now more than ever?

Our second topic, ‘Block by block: A step towards the Age of Cryptocurrency’ observes the rise of cryptocurrencies as a n asset class backed by the blockchain technology. With the recent influx of a ton of new retail investors worldwide during the rebound of equity markets, especially from the younger side of the demographic, has seen a sharp increase in the number of crypto investors.

Our team explores the future potential of such currencies, government regulations regarding legal tender and the introduction of central bank digital currencies.

We are really excited about this newsletter, as well as our annual flagship event, the Summit, where we will be having experts from various prominent firms of the financial industry as well as educational institutes come down and share their insights on these two topics.

I extend my heartfelt thanks to our Student Development staff at SIM, especially Ms. Patricia Lee and Mr. Kenneth Chan for being so supportive and helping us navigate through these events virtually. Our academic advisor, Dr. Tan Khay Boon has always been kind enough to share his views on our research and has provided essential academic guidance to our work.

This newsletter is also the result of the sheer hard work and effort put in by the Research & Editorial and the Marketing department here at SIMES. From writing the articles and working on case studies to ensuring that every last detail of the newsletter’s design is perfect, the teams have worked together tirelessly to make this possible.

Our team at SIMES, including all executive as well as sub-committee members have put in their best efforts to make the publication of this newsletter possible. As is the case with any other organization out there, we made the transition to a virtual work environment and have continued to strive to uphold the vision of SIMES in the best manner possible. I thank all my team members for helping the club do so.

With that, I hope you cherish reading this edition of our newsletter and are able to take away quality economic insights that’ll help our recovery in these tough times. Take care, and stay safe.

Priyan Purohit President SIM Economic Society

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A MESSAGE FROM THE VICE PRESIDENT OF R&E

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Dear Readers, Globalisation is the key for getting together and connecting from different corners of the world. In this modern world, following 3 things can be shared more easily than ever: ideas, money, and goods. This year's edition of SIMES’s Newsletter brings to you a full range of new ideas on a host of topics, including trade of goods and services and advancements in the recent payment revolution.

Global trade now exceeds US$22 Tn as per 2020 numbers. It has ensured growth and development of most of the countries around the world. This growth is a result of decades of hard work and exchange of ideas by visionary leadership over the last 50-years with commitment to lowering barriers that separated the peoples of the world. World trade is and should be a constantly evolving phenomenon. Working on this newsletter has been a great learning experience opening up a new understanding of the complex world of International trade.

A successful trade is completed with successful settlement and payment for goods and services. This has been key since the dawn of humanity. From bartering to cryptocurrencies, methods of payment have changed dramatically, and we are in the midst of another wave of change. Digitalisation has led to Blockchain and Cryptocurrencies which are becoming a new catalyst for the newest payment revolution.

This “mushrooming of private cryptocurrencies'' has now also sparked a requirement for new regulations for digital ecosystems by several central banks. Through the Newsletter we express our deepest emotion - the sublime feeling of what was captured by physical art is now being created in a formless digital world.

Henry Ford once said “Coming together is a beginning; keeping together is progress; working together is success.” The production and completion of this year's Newsletter would not have been possible without my entire team of R&E and their exceptional hard work, talent and dedication. I would also like to express my sincere gratitude to all SIMES members, special mention to the entire team of Marcomm for making this happen.

To readers, I hope you stay safe and healthy as we continue to manage the new surge COVID-19 infections and their variants. I wish all our readers a successful and transformational 2021-22. I guarantee one definite takeaway from this year's Newsletter to you - anything can happen in the next 10 years in both trade and payment realms . That's a scary yet exciting thought and certainly a liberating one.

Khyati Gupta Research & Editorial, Vice President SIM Economic Society

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MESSAGES FROM THE RESE DIRECTOR OF RESEARCH

SUMAIR JALAN

This year’s edition of the newsletter presents The Realm of Internation Trade which looks at the dynamic, multi-faceted world of International Trad The R&E team has curated a spectrum of subtopics to provide readers w a panoramic view of the topic and give them insight into the plethora factors at play. The Covid-19 pandemic represents an unprecedent disruption to the global economy, and hence it is paramount for nations pivot and adopt unconventional ways to promote economic recovery. In t digital era, countries must leverage trade policies and trade relations induce innovation, a key engine of economic growth.

SENIOR SUBCOMMITEE OF RESEARCH Greetings everyone! I am Leonard, a fellow senior research subcommittee representing the Research & Editorial Department. I am pursuing an Economics major degree while undergoing an Internship Programme at UniCredit Bank AG in Data Protection. My aim, through this dedicated annual initiative, is to increase awareness on how the current major economic and political situations will play a significant impact in our everyday lives. As such, I hope that the specially curated content will bring you a unique perspective of global affairs, appreciate the needs and wants that have been satisfied and have a relook of the future in your hands.

LEONARD ONG XIA WEI

SENIOR SUBCOMMITEE OF RESEARCH

My name is Wei Meng, third year UOL Banking and Finance Stude currently interning in a Merger and Acquisition Company. The momen saw the topic, it stood out to me as a very intriguing one and I really h fun researching and doing up this research. The prominence Cryptocurrency is ever rising and should definitely be up to date on whether one likes Crypto or not. This research should serve some insigh that the team found and most importantly help you understand t influence that Cryptocurrency can potentially have.

NG WEI MENG

SENIOR SUBCOMMITEE OF RESEARCH Hello, this is Bryan from Myanmar. This newsletter covers the impact of Covid-19 pandemic on international trade and how governments and private sectors work together to strengthen the trading system. As we all know that Covid-19 has disrupted global supply chains and severely affected our lives and livelihood. The role of global in times of Covid-19 is not only in scaling up of vaccine production, but also in supporting world economic recovery towards a sustainable future.

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BRYAN THAUNG MYINT OO

EARCH & EDITORIAL TEAM

nal de. with of ted s to this to

ent, nt I had of n it hts the

CHIEF EDITOR As the world becomes increasingly interconnected, the relevance of international trade has skyrocketed.

In the process of its burgeoning, the environment has been impacted. Through this newsletter, we will explore the bidirectional relationship between trade and the environment, subsequently delving into the societal and economic facets of this relationship. To all our readers, we hope that this newsletter will be an enjoyable read and that our writings will impart stimulating and insightful information to you.

NG YANTING

DEPUTY DIRECTOR OF RESEARCH Joseph Stiglitz, a Nobel Prize-winning economist said that he “believe very strongly that countries like the United States could and should move to a digital currency, so that there is the ability to trace corruption.

There are important issues of privacy, cyber-security, but it would certainly have big advantages.”

TEO KANG QI

Cryptocurrency has been a popular topic of debate.

With Bitcoin being nicknamed the digital gold, one would think that cryptocurrencies can replace money.

In this newsletter, we will be bringing you our findings about the future of cryptocurrency.

DEPUTY CHIEF EDITOR Jack Ma, the co-founder of Alibaba, once said “Blockchain Technology can change our world more than people can imagine.” Indeed, cryptocurrency is one of the most prominent examples. In this year’s annual newsletter, the R&E team will discuss different aspects of Crypto, ranging from the economic nature of Crypto to the monetary stabilization of Crypto. I am honored to join the R&E team where we explored different subtopics about Crypto. This newsletter will not exist without the dedicated effort from every member of the Economics Society. Also, a special thanks to our VP of R&E for helping refine our works!

CHEN WEI YU

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BLOCK BY BLOCK : A STEP TOWARDS THE AGE OF CRYPTOCURRENCY

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FOREWORD Through Block by block: A Step Towards the Age of Cryptocurrency we bring to you the sharpest vision of where the future of money lies and how crypto is shaping it.

Cryptocurrencies provide an important dimension of innovation to the evolution of the exchange medium we call money. Since its launch in 2009, there has been increasing interest in Bitcoin and other cryptocurrencies. Initially mostly discussed in popular media, more recently a growing body of research and discussion has emerged on the topic, spanning many fields such as macroeconomics, law and economics, and computer science. Block by block: A Step Towards the Age of Cryptocurrency is our attempt to explore how over the past five to ten years, the literature on the blockchain and cryptocurrencies has branched out in many directions and the opportunities to link it to economics, including governance, macroeconomic impacts, stable coins substitution, central bank digital currencies and, of course, an entire branch of computer science.

The creators’ original motivation behind Bitcoin was to develop a cash-like payment system that permitted electronic transactions but that also included many of the advantageous characteristics of physical cash. To understand the specific features of physical monetary units and the desire to develop digital cash, we explore crypto as an asset class and future of money in a DeFi world. We try to decode the foundation of crypto, blockchain, DeFi, trading and more – a primer for anyone new to crypto and its trading.

There are now over 2,000 cryptocurrencies, and their potential and volume is growing.

In our attempt to study their market structure we discuss different types of cryptocurrencies and competition between them, which is an increasingly relevant topic as the market capitalization of all cryptocurrencies grew at a stunning rate in the past few years. The market capitalization of all cryptocurrencies was approximately $14 billion, in 2018, near Bitcoin’s peak, it reached $825 billion. As of August 2021, total market capitalization was approximately $916 billion.

Moreover, we establish how cryptocurrencies, collectively and in volume, create real problems for the monetary system of a country. Central banks, which are institutions tasked with providing monetary stability, are more essential than ever. We see how problems may arise while the power of their traditional tools to control money supply and interest rates—such as reserve requirements and the discount rates—is declining.

We conclude that competitive private cryptocurrencies inherently create monetary instability; those central banks are therefore more essential than ever; but that the effectiveness of the traditional tools of the central banks is diminished. However, new tools for macroeconomic stabilization and creation of growth are also available, Stablecoins, and their development and absorption must be a priority. In the process, central banks will also issue their own digital currencies, CBDC, and a small number of those will become global super-currencies.

Khyati Gupta, Vice President of Research & Editorial at SIMES.

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ALL ABOUT CRYPTOCURRENCY

BY CHEN WEI YU 11

How well can a cryptocurrency serve as a means of payment?

Since Bitcoin's inception in 2009, many critics have decried cryptocurrencies as scams or outright bubbles. Others have argued that such currencies are only there to support payments for illegal activities or simply waste resources. Proponents, however, point out that these new currencies - based on cryptographic principles to ensure security - can support payments without the need to designate a third party to control the currency as a means of payment, possibly for their own profit.

There are several questions that need to be answered with regard to a number of key principles that govern cryptocurrency use, exchange, and transactions.

The history of money emergence Money is a surprisingly elusive concept. The history of money begins in the 17th century when a central bank was established and banks were given permission to issue banknotes. The principle behind this move was that governments could raise funds for their needs by issuing financial instruments that were temporarily backed by gold or silver reserves. Initially, this worked well, but later we began to notice major problems with it, such as inflation, loss of trust among people, and massive failure due to corruption because these institutions had no real control over them (i.e. they never had physical data on what was happening).

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INTRODUCTION

What is “DeFi”?

Cryptocurrency blockchains have spawned a new constellation of "decentralized financial enterprises" or DeFi companies and projects. DeFi is essentially the cryptocurrency version of Wall Street and aims to give people access to financial services credit, loans, and trading - without having to rely on legal institutions like banks and brokers, which often charge high commissions and other fees. Instead, "smart contracts" automatically execute transactions when certain conditions are met. DeFi is growing in popularity, and investors are pouring tens of billions of dollars into the sector.

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What is Distributed Ledger Technology?

Distributed Ledgers (DLT) are a new technology being developed to replace traditional databases and centralized ledger systems. The main difference between these two types of ledgers is location: DLTs use separate computers around the world, while central banks store their data in a place like New York or London. Another major advantage of distributed ledgers is the security system, which makes it difficult for criminals/hackers to penetrate this network, as multiple nodes are spread across different parts of the world. So they have no chance to steal information as each piece can be verified by other parties on another computer that maintain the value. The blockchain only requires a personal copy as every single transaction has to be sent back had physical data on what was happening).

What is blockchain?

Blockchain is a DLT with special characteristics. It too is a decentralized and shared database but shared through blocks that form a chain. It is a secure and transparent method of exchanging information over computer networks. A common misconception about this technology is that it is related to Bitcoins, but the two are not synonyms as Bitcoin only serves as an incentive system for transaction verification. Blockchain is being used in a variety of sectors, from banking to energy efficiency certification programs around the world. In many sectors, these users are benefiting from blockchain because they can develop their own transaction methods without involving third parties or risking losing money to fraudulent activity that occurs on a large scale. It will be interesting to see how much this concept catches on over time, as many companies are already trying to implement these new techniques into existing systems.

With the growing popularity of Bitcoin, Ethereum, and other cryptocurrencies, blockchain technology has been used for many applications such as legal contracts, real estate sales, and medical records. (Voigt, 2021)

Are fiat currencies and cryptocurrencies different?

Yes, the biggest difference between these two is that the fiat currency is backed by the government and controlled by the central bank while cryptocurrencies are subject to any form of government control.

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Also, Fiat currency has no intrinsic value while cryptocurrencies have intrinsic value. What does this mean? The value of fiat currency is created when the loan is taken out. Banks create money when people borrow money. Take the US dollar as an example: If there were no borrowing, there would likely be no dollars in circulation. In other words, without consumers borrowing from banks, the US dollar would not exist.

Unlike Bitcoin, Bitcoin has created a new form of trust for the future global monetary system. The system behind Bitcoin is completely transparent and based on mathematics and the actual consensus of everyday users. (bitpanda, n.d.)

In general terms, cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

(Frankenfield, 2021)

ECONOMIC NATURE OF CRYPTOCURRENCY

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What is cryptocurrency?

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Crypto as gold

Figure 1: Bitcoin VS Gold Source: MarketWatch

Gold serves a unique function in the global financial system. It is both a useful commodity and a money-like, “store of value” asset. Gold has dominated the safe-haven asset arena, while bitcoin was launched just over a decade ago and has only achieved widespread recognition in the last few years. There are some degrees of similarity between gold and cryptocurrencies like bitcoin. Both physical gold and bitcoin have limited supply and perpetual shelf life.This is due to this only 21 million bitcoins can be mined in total. Also, bitcoin will never reach that cap due to the use of rounding operators in its codebase. Furthermore, Bitcoin is more mobile but less mutually interchangeable than gold. Bitcoin requires a technical network and energy input to exist - if it loses a critical mass of computation, it becomes utterly unfeasible and therefore could be seen as a store of value within but not outside of this network. (Peetz & Mall, 2017) Another instance is with Tether, a so-called "stablecoins." It is linked with the U.S. dollar in much the same way that gold was prior to the 1970s.

Investors looking for less volatility than bitcoin may wish to actually look elsewhere in the digital currency space for safe havens. (Investopedia, 2020)

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Figure 2: Total Market Capitalization Source: CoinMarketcap.com

While cryptocurrencies are traded, they are not being truly used as a means of exchange. As seen in figure 2, the daily volume is minor compared with their market cap. (Barrons,2021) Studies have found that a high percentage of Bitcoins have not changed IP addresses for a couple of years. The more they are hoarded, the less they can achieve the networking effect that bestows money-ness, making it more of an asset than a currency, which is how the Internal Revenue Service regards crypto.

Bitcoin, if used as a means of exchange, does have benefits. It is a digital currency that replaces the need for an intermediary with its own network of computers and transactions. The technology underlying it can be used globally making global payments easier than ever before. Bitcoin also enables instant peer-to-peer payment transfer between parties anywhere in the world , regardless of differences in national currencies . Although no central authority dictates how much bitcoins should cost within each country's borders; there exists what amounts to market competition among exchanges operating internationally – allowing users from different countries significant freedom when deciding how much risk they want bear versus paying higher prices related directly correlated with exchange rate volatility - this makes buying Bitcoins less risky than traditional methods like bank deposits since deposited funds may lose value unexpectedly.

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Crypto as money

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Crypto as asset class

Figure 3: Average Annualized Volatility Source: Bloomberg

An asset class can be interpreted as a group of instruments that share similar characteristics and are governed by the same regulations. Today, more people view cryptocurrencies as a tool for investment rather than a currency. In fact, the view that a cryptocurrency like Bitcoin could become a widely accepted currency is now restricted to Bitcoin maximalists. In India, cryptocurrency adoption is rising quickly, businesses involved in the space are outpacing the ideas of Satoshi Nakamoto — the pseudonym of the person who developed Bitcoin — to paint cryptocurrencies as an asset class. Also, they are trying to lobby the government and the monetary authority against banning this form of digital cash. (Chakraborty, 2021) However, cryptocurrency is not a good asset class, which requires liquidity, stability, value, and a low transaction cost. Cryptocurrencies like bitcoin have high transaction costs and are highly volatile in value.

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Put it in a simplified way, the movement of a cryptocurrency can be described by the following algorithm: 1. One party sends from their wallet a hash-encrypted cryptocurrency in the form of a transaction block.

2. This block is sent to the rest of the subjects in order to establish its validity, that is, verification.

3. The sent block is summed up with the rest in case of validation.

4. The cryptocurrency is transferred to the second party wallet.

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A CryptoTransaction

Figure 4: A Crypto transaction Illustrated

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Demand and Supply of Cryptocurrencies

Figure 5: Illustration of Market Equilibrium of Bitcoin

In the cryptocurrency market, such as the Bitcoin trading market, the price is determined by the intersection of supply and demand in the market. The demand for Bitcoin is the quantity of Bitcoin that buyers are willing and able to buy at a given price, c.p., while the supply of Bitcoin is the quantity of Bitcoin that sellers are willing and able to sell at a given price, c.p. In the case of Bitcoin, the price elasticity of supply tends to be perfectly inelastic due to the limited supply.

Unlike traditional fiat currencies with an unlimited supply that is adjusted at the whim of central banks and governments, the creator of Bitcoin, Satoshi Nakamoto, intentionally limited the lifetime supply of Bitcoin to 21 million coins through the algorithm built into the Bitcoin network. Moreover, Bitcoin has a non-falsifiable preciousness that costs a lot of electricity to produce new Bitcoins. (Riverfinancial, n.d.) All of these factors cause the value of PES to be much closer to 0. As for the price elasticity of demand, it tends to be elastic due to factors such as a large number of substitutes and the amount of time it takes to react to changes. The increase in demand, for example, due to positive publicity in the media, leads to a leftward shift in demand from DD1 to DD3, as can be seen in the above diagram. Upward pressure on the price is created as many buyers are willing to bid higher prices to bid for the limited supply of Bitcoin. The market adjustment process stops when E3, the new equilibrium is reached, where the price is at P3 while quantity remains unchanged.

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IOn 8th Feb 2021, Tesla announced that it has bought $1.5 billion worth of bitcoin as it wanted to have more flexibility to further diversify and maximize returns on its cash.It also made known to the public that Tesla will start accepting payments in bitcoin in exchange for its products “subject to applicable laws and initially on a limited basis. Tesla’s move into bitcoin represents an investment of a significant percentage of its cash in the investment. The company had more than $19 billion in cash and cash equivalents on hand at the end of 2020, according to its most recent filing. (Kovach, 2021) However, the plan of making bitcoin as payment has been held back due to environmental concerns.Cryptocurrencies are criticized for energy usage because they do indeed use up an awful lot of energy, at least many of them do. Bitcoin and Ethereum, the space’s two biggest currencies, use a mechanism called proof-of-work to power their networks and mint new blocks of each currency. While Ethereum has already committed to transitioning away from proof-of-work to something called proof-of-stake, which vastly reduces energy usage, Bitcoin seems less likely to make this transition. So, becoming environmentally friendly doesn’t mean making any major underlying changes to Bitcoin, but rather shifting what energy sources are powering those mining centers. (Alamalhodaei & Matney, 2021)

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Case Study 1: Tesla Plans To Consider Bitcoin As Payment

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ADVANTAGES AND LIMITATION OF CRYPTOCURRENCIES

Like any other type of financial asset, there are some significant risks and disadvantages that come along with the growth potential and benefits of cryptocurrencies. Distinct from the discussion on cryptocurrencies, there are a number of potential advantages in utilizing blockchain technology more broadly within the financial system. Some are discussed below.

Advantages Avoidance of double-spending Our modern economy is heavily dependent on digital means of payment.

In a digital currency system, the means of payment is simply a string of bits. This poses a problem, as these strings of bits as any other digital record can be copied effortlessly and re-used for payment.

Fundamentally, the digital token can be counterfeited by using it twice which is the so-called double-spending problem.

Cryptocurrencies such as Bitcoin can remove the need for a trusted third party. Instead, they bank on a decentralized network of (possibly anonymous) validators to maintain and update copies of the ledger. This entails consensus between the validators, which maintains the correct record of transactions. This is to ensure users are able to receive and keep ownership of balances. However, such a consensus ultimately requires that users do not double-spend the currency and trust the validators so that it can specifically update the ledger.

Potential for quick gain One of the main reasons for explaining why cryptocurrencies are gaining traction is due to their quick gain. Bitcoin has had many short periods of significant gains. Evidence can be seen in the first four months of 2021, where it more than doubled in price before falling again. Some of the top daily gains in crypto have surpassed 200%. (Thune, 2021)

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Disadvantages The list of disadvantages is not exhaustive but it’s important to understand the potential for large losses. Supporters of cryptocurrencies would argue that this downside risk is offset by the potential for large returns and that the risks can be managed by appropriately sizing a cryptocurrency position within a portfolio of other investments.

Crypto-currencies are very volatile means of storing value. The value of crypto-currencies as measured in US dollars fluctuate wildly in value compared with the volatility of the US dollar in comparison to other foreign currencies. This makes the use of crypto-currencies an issue of trust. (Noam, n.d., #)A recent example can be seen that there was a 50% price drop for Bitcoin in just two months from April to June 2021.

Cyber Securities issues As a digital technology, cryptocurrencies will be prone to cybersecurity breaches, and may fall into the hands of hackers.A study conducted by the Association of Certified Anti-Money Laundering Specialists (ACAMS) and the U.K.’s Royal United Services Institute have found out that nearly 63% of respondents who work in the banking industry perceive cryptocurrency as a risk rather than an opportunity.

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Price Volatility

AML/KYC Concerns Cryptocurrencies allow for peer-to-peer transactions without a regulated intermediary, giving the user the ability to easily transfer funds quickly without having to pay transaction fees. Instead of identifying the transaction by an individual bank account through a financial institution, transactions are simply linked to the transaction ID on the blockchain.The convenience of the act worries many banks who are concerned about the lack of anti-money laundering (AML) and know your customer (KYC) regulations surrounding digital currency transactions. Banks are usually under the impression that cryptocurrency transactions can’t be tracked for AML and KYC considerations, which could lead to illegal activity and scams on the network.

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Low scalability The low scalability is one of the main reasons that make cryptocurrencies unsuitable to become day-to-day currency. Bitcoin, like Ethereum, places great emphasis on ensuring that each blockchain records Bitcoin transactions and Bitcoin ownership at all times without any help from a central authority. However, as the number of users increases, it becomes increasingly difficult to maintain a balance between decentralization and accurate recording. This is particularly so for the day-to-day usage of Bitcoins for payment within apps. The application is currently unlikely to record each payment directly, decentralized, and accurately within the Bitcoin blockchain. (investerest, 2019) The overall decision of cryptocurrency is based on each individual’s assessment of the balance of advantages and disadvantages, the main ones are highlighted above.

POTENTIAL FOR IMPROVEMENTS Cryptocurrency advocates tend to respond to the criticisms, especially on scalability, by pointing out that improving the performance of computer hardware is a misleading optimism. Such computers are far from being developed and built widely distributed. In contrast, cryptocurrencies such as Bitcoin exist today. To improve them, it is a matter of software design not in terms of technology which they use for their work. (Noam, 2020) How to make cryptocurrencies become sustainable?

Figure 6: Annual power consumption in TWh Source: BBC

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THE EQUILIBRIUM 2021 In the last few years, more and more cryptocurrencies have been developed based on Proof of Stake(PoS) systems. These types of cryptocurrency are eco-friendly because they require a smaller amount of energy for mining compared to proof of Work(PoW) protocols as used by Bitcoin shown in figure 6. This is highly advantageous in terms of environmental impact as it creates less carbon emission during its manufacturing process that could otherwise be released into our atmosphere through conventional power production methods such as electricity or fossil fuels. While there has yet to be much conclusive data regarding how environmentally friendly PoS tokens actually are when compared with their counterparts, research indicates that these new staking mechanisms can help reduce global emissions by 60% over next 30 years which would count towards the United Nation's Sustainable Development Goals (SDGs). (Blinder, 2018)

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Bitcoin and other cryptocurrencies can best be described as potential currencies. As noted above, they are not widely accepted today as a medium of exchange. From the economic perspective, cryptocurrency does not fully meet the characteristic currency due to high price volatility. They have significant limitations holding them back from developing into fully-fledged currencies. However, It seems to be an unstoppable trend that people use cryptocurrency to pay for goods and services, but it's more commonly known as a speculative type of investment asset. Digital currencies have downsides like a perceived volatility and some uncertainty around whether regulators will need to step in. Meanwhile, most big banks are now acknowledging that the technology behind cryptocurrencies should be treated as the next big thing, perhaps like the invention of the motorcar to the railroad. Other potential uses of the blockchain technology behind cryptocurrencies are also a matter of interest. It’s possible that this technology will be adopted for other purposes, including legal transactions, security programs, and voting systems.

Some predict the coins will forever change how we understand and interact with money and others warn by saying cryptocurrencies are just part of a financial bubble. Nonetheless, it’s getting harder to imagine a future without them.

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PREDICTION OF THE MARKET

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MARKET STRUCTURE OF THE CRYPTOCURRENCY INDUSTRY

BY TEO KANG QI 27

INTRODUCTION

The history of cryptocurrencies Bitcoin, the world’s first and most popular cryptocurrency, was developed by someone known as Satoshi Nakamoto in the 1990s. It was then introduced to the public in October 2008. (Forbes, 2017) Bitcoin was initially created to be a peer-to-peer electronic cash system and had a concept of being a decentralized digital currency. This allows people to make transactions without a need for any administrator or authority. With just a simple click on the peer-to-peer Bitcoin network, users can make transactions easily.

(PwC, n.d.) Even though Bitcoin was introduced in 2009, it only caught the interest of the mainstream media in 2012.

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You must have heard about the buzz about investing in cryptocurrency lately, but what is cryptocurrency exactly?

Cryptocurrencies are an enhanced version of the medium of exchange-money, which are being developed through programming.

In 2011, Bitcoin’s rival cryptocurrency-Litcoin was created. Like Bitcoin, Litecoin is a peer-to-peer cryptocurrency and open-source software project that was created under the MIT/X11 license. So, what is the differentiating factor? As of March 2021, Bitcoin's market cap is $1 trillion, while Litecoin is at $13.7 billion. Both cryptocurrencies use different algorithms and technology. Bitcoin uses the longstanding SHA-256 algorithm, and Litecoin uses Scrypt, a newer software. (Investopedia, 2021)

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TYPES OF CRYPTOCURRENCIES As of April 2021, it is said that there are more than 10,000 cryptocurrencies in the market. Cryptocurrencies can be differentiated into coins and tokens. Coins are assets that run on their native blockchain. On the other hand, tokens are assets which are foreign to the blockchain they live on. For example, Bitcoin (BTC) and Ethereum (ETH) are coins, but cryptocurrencies like Uniswaps (UNI) and Chainlinks (LINK) are tokens which use the Ethereum blockchain. (SoFi, 2021)

Store of Value According to Binance Academy, a ‘store of value’ is used to describe the property of an asset that can avoid depreciation. In order for a cryptocurrency to be considered a ‘store of value’, its value should be positive, and should not decrease. (Gitconnected, nd.)

Figure 1: Bitcoin Returns Versus Gold and S&P 500, 2020 Source: Coindesk, Bitcoin Prices in 2020: Here’s What Happened.

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Bitcoin is considered to be a ‘store of value’ by analysts as it is often compared to gold. As of October 2020, the percentage returns of Bitcoin is significantly higher than the percentage returns of gold and S&P 500. As Bitcoin is scarce, with only 21 million coins in supply, its value is able to increase over time. In order for new Bitcoins to be created, users would need to do technological mining, and it is not guaranteed that coins would be found. However, there has been an ongoing debate on whether Bitcoin can be considered a store of value by definition, as its value is constantly fluctuating and unstable. (Binance Academy, n.d.)

Figure 2: Bitcoin Active Addresses Per Day Source: Medium, 12 Graphs That Show Just How Early The Cryptocurrency Market Is.

As seen in the above figure, the highest number of daily active users (DAU) within the Bitcoin network was approximately 1.1 million. However, if the main feature of Bitcoin is viewed as purely a store of value, then it would assume a much lower DAU than any traditional mobile application or website. (Medium, 2018)

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Smart Contracts Smart contract is a program that is operated on blockchain. Like Bitcoin, they can operate without any intermediaries as they are irreversible once deployed. This allows the two parties to make transactions without the need for mutual trust as the transfer would not be executed without fulfilling the conditions. (Binance Academy, 2020) Ethereum (ETH) and Cardano (ADA) are some examples of smart contract cryptocurrencies. The idea of smart contracts was first proposed in 1994. Although the idea was initiated before Bitcoin was introduced to the public, it was the Ethereum protocol that allowed blockchain technology to evolve and be enhanced.(Cryptopedia, 2021) What makes Ethereum stand out from other cryptocurrencies is the program known as the Ethereum Virtual Machine (EVM). The EVM is more than just a payment method. The EVM allows developers to make use of its existing infrastructure to develop an entirely new blockchain. (Levi, S.D, Lipton, A.B, 2018) In consequence, Ethereum’s market share increased substantially. It hosts several of the largest coins that are specifically designed for the Ethereum ecosystem. The market share continues to improve as more developers use it.

Exchange Token An exchange token is a digital asset that allows users to carry out multiple activities. The Binance Coin (BNB) is one of the widely used exchange tokens in the world. The Binance Coin powers the Binance ecosystem which includes Binance.com, Binance DEX, and Binance Chain.

It is also a mode of payment on some websites like Crypto.com. (CB Insights, 2021) Another unique feature about Binance Coin is that it had multiple partnerships with high-end companies. One of which is with Uplive, a live-streaming platform that allows users to broadcast and view realtime videos on their mobile phones. This collaboration allows Uplive users to send the Binance Coin as a gift to their favourite broadcasters, thus allowing the value of the coin to increase. (Investopedia, 2021)

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Utility Token

Digital Currency Digital currencies are used for making transactions. One example would be Ripple (XRP), the main cryptocurrency for products developed by Ripple Labs. Ripple is used for payment settlement, asset exchange, and remittance systems which allow international money and security transfers. Ripple is considered to be pre-mined as only 46% of its supply is circulating (as of the day of research).

So, what differentiates Ripple from Bitcoin? The Ripple ledger is not based on a proof-of-work algorithm and hence, does not rely on mining to verify transactions. Instead, Ripple has its own customized algorithm known as Ripple Protocol Consensus Algorithm (RPCA) which allows its transactions to be validated. (Binance Academy, 2021)

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As the name suggests, utility tokens are cryptocurrencies that are traded with the expectation to get some utility. It can also be used as a medium of exchange within an ecosystem.(Binance Academy, n.d.) One example of it would be the Basic Attention Token (BAT). It is a token used for tracking media consumers' time and attention on websites using the Brave web browser. The Basic Attention Token is programmed on the Ethereum blockchain, and it is created with an aim of making transactions more effective and efficient. (Binance Academy, 2020)

Non-fungible tokens (NFT) According to Forbes, a non-fungible token (NFT) is “a digital asset that represents real-world objects like art, music, in-game items and videos.”

NFT can be traded online, and is built with the same programme as many cryptocurrencies.

Physical money and cryptocurrencies are considered to be “fungible,” as they are equal in value and can be traded or exchanged for one another.

However, NFTs are different. Each NFTs have a different digital value which makes it impossible for trading to take place. (Forbes, 2021)

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Meme coins There is another category of cryptocurrency which is created without any physical representation. These coins are known as Meme coins. What differentiates meme coins and other cryptocurrencies like Bitcoin and Ethereum? The major difference comes down to the utility value. Bitcoin and Ethereum were initially developed to solve real-world problems. Its goal was to be a new kind of currency and to be used for transactions.

However, meme coins are only created for the hype and ‘quick money’.

These coins experience explosive growth when they are promoted on platforms. When the value of such coins increases, many investors will sell it to make ‘quick money’. (Nasdaq, 2021)

Market Power The promotion of cryptocurrencies can have a direct effect on the market.

This can increase the competition and market power among cryptocurrencies.

This can cause inflation and financial institutions to reduce their ability to conduct monetary policies. The cryptocurrency market was once a monopoly as Mt. Gox, a Tokyo-based cryptocurrency exchange, handled 70-80% of the trading volume. It was also considered to be the world’s largest bitcoin exchange from 2011 to 2014. However in 2014, the exchange was hacked and it declared bankruptcy. That was also the year where the market became an oligopoly where three firms held 84% of the market share. Cryptocurrency was then considered to be a competitive market in 2019 where the top three firms held just 13% of the market.

By having a monopoly in the market, positive externalities, also known as “network effects”, will occur as other people will join it on the assumption that it will have a benefit against other cryptocurrencies.

This can also affect cryptocurrency exchanges and wallets. Cryptocurrency exchanges applications that allow users to trade digital assets like Bitcoin, Ethereum and Litecoin. These exchanges also offer differentiating features like rewards and trading tools, which caters to different users. Some of the most popular cryptocurrency exchanges are Coinbase and Binance.

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Source: Statista

Binance, the cryptocurrency exchange with the highest 24 hour volume, was founded in 2017. It supports more than 50 cryptocurrencies and has attractive perks for their users. For example, one differentiating feature of Binance is the utility token, Binance Coin (BNB). It has been a major part of Binance's success. Besides that, Binance gives its users perks such as staking rewards. This gives the user rewards for holding a cryptocurrency asset for a set period of time. (Forbes, 2018) Cryptocurrencies that are supported in the exchanges can affect the volume of exchanges, as well as the popularity of the application.

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Figure 3: Cryptocurrency exchanges based on 24h volume in the world on August 16, 2021 (In US Billion Dollars)

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Figure 4: Positive externality

Bitcoin has a first-mover advantage and it allows them to establish strong recognition and network before its competitors enter the market. Besides that, Bitcoin also has advantages including setting the market price and it plays the central role for the price dependency network. This can cause a ‘'FOMO effect'. The ‘FOMO effect’ stands for ‘fear of missing out’, and it refers to the feeling or perception that other coins are better, or more valued. It is known to be a powerful force in all markets, and is especially potent in a market where the asset has no fundamental value. Cryptocurrency analysts often cite FOMO as one of the factors that attracts investors to buy cryptocurrencies, especially when it is in the midst of a rally.

Bitcoin’s strongest competitors are Altcoins. It refers to a group of cryptocurrencies that has financial transaction functions and allows companies to build applications on its blockchain. This includes cryptocurrencies such as Ethereum, Tether, Binance coin and Polka Dot. The increasing number of cryptocurrencies in the market have brought several implications. This can affect the availability of other cryptocurrencies and cause a substitution effect, causing the users to find it beneficial to substitute one cryptocurrency for another.

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Source: Barchart

As of August 2021, Bitcoin had a market capitalization of more than US $712 billion. By being the first cryptocurrency to be developed, does it mean that it is dominating the industry? Positive network effects can arise when there is a direct relationship between the number of users and the value of the coin. In such situations, a winner-take-all situation can result in having one dominant player.

Based on figure 5, it is observed that there is a sharp increase in Ethereum’s value. This caused its overall market value to be worth US $322 Billion, which is around 30% of bitcoin’s market cap. What caused the increase in price? One reason often cited by cryptocurrency analysts is Ethereum’s technology, which allows other cryptocurrencies to be built on it.

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Figure 5: Comparison chart between Bitcoin and Ethereum FY 2021

What differentiates Bitcoin and Ethereum? Bitcoin uses a Proof-of-Work (POW) blockchain-based algorithm while Ethereum is transitioning from a Proof-of-Work algorithm to Proof-of-Stake. Proof-of-work is a fundamental process of adding new blocks to the Bitcoin blockchain. A new block is accepted by the network whenever there is a mining reward. On the other hand, the Proof-of-Stake (PoS) algorithm is where a user can mine or validate block transactions according to the number of coins they hold, allowing a miner with more coins to have more mining power. Bitcoin was also created to decentralise finance, while Ethereum was created to decentralise the entire internet. Another difference between these coins is on the environmental impacts. Ethereum’s technology is said to produce 60% less carbon emissions than Bitcoin.

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The great potential of Ethereum has allowed some experts to suggest that Ethereum could surpass Bitcoin’s standing as the top cryptocurrency. The more popular a currency is, the more useful it is, and the easier it attracts new users. Therefore, it can be assumed that the most popular cryptocurrency can dominate the whole market. This is also known as the reinforcement effect as the price of the top coin increases while its competitors decrease. (Gandal, N. & Halaburda, H., 2016)

Figure 6: Cardano Price FY 2021 (1 Year) Source: Coindesk

Cardano (ADA) has become the world’s third-largest cryptocurrency by market capitalization. In February 2021, it had reached its all-time high at US $1.30 per coin. Despite being only created in 2017, Cardano has shown great results. It has been observed that there is an uptrend of value in the cryptocurrency.

Based on the graph, Cardano had a dip of US$1.06 per coin on 21 July.

However, it had reached a peak of US$2.96 on 24 August, allowing the price to swell by almost 190%. This allowed Cardano to improve on its standing, and be ahead of Binance Coin and Tether. Although Cardano does not have a first mover advantage, the surge in value allowed it to gain market power to be the third cryptocurrency in the market. (CoinBase, 2021)

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Mining

Since the reward is not guaranteed, mining pools are a potential way to get higher returns. It has advantages such as increasing efficiency and achieving economies of scale. Although mining pools is one of the strategies used by many miners and developers, it could harm the credibility of cryptocurrencies. For example, miners could manipulate cryptocurrency prices as they can control the coin supply in the market. They can also restrict and limit the number of coins available for trading. As of 2021, mining is the most profitable major industry on the planet. It is also said that cryptocurrency mining can generate just as much revenue as the gold and silver mining. (Fortune, 2021)

Cryptocurrency Halving Cryptocurrency halving refers to the number of coins that miners receive for adding new transactions to the blockchain being cut in half, and this usually takes place every four years. For example, for Bitcoin halving, after every 210,000 blocks are mined, the reward given to Bitcoin miners for processing transactions is reduced by 50%. This reduces the rate at which new bitcoins are being circulated in the market. The first halving took place in 2012, when the block reward was reduced from 50 Bitcoins to 25 Bitcoins per block. It is said that this halving system will continue until around the year 2140.

Cryptocurrency halving is significant as by constantly reducing the supply, the currency would forever remain a deflationary currency, rather than an inflationary one.

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Cryptocurrencies are decentralised and users have to mine in order to obtain them. Hence, this gives us the question- does market power exist in coin mining? Mining is an expensive yet time consuming process with no guaranteed rewards. Nonetheless, mining is still appealing to those interested in cryptocurrency.

Does halving affect the cryptocurrency value? Taking Bitcoin as an example, the value of Bitcoin rose significantly in the 18 months after the halving. After the first halving that occurred in 2012, Bitcoin hit an all time high of over US$1,000 in November 2013. In April of that year, before the halving, Bitcoin was trading at less than US$50. The second halving occurred 4 years later, in 2016.

In December 2017, Bitcoin reached another milestone of nearly US$20,000.

Observing the trends, the value of Bitcoins is analysed to be positively affected by halving. After the surge in price, it was observed that the value will depreciate, crash and be stagnant for some time. This cycle continues until the next halving. (SoFi, 2021)

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Case Study 1: “Bitcoin is controlled by China” One of the most popular cases of cryptocurrency manipulation happened in China.

Ripple CEO, Brad Garlinghouse, shared his opinions on the cryptocurrency market at the Stifel Financial 2018 Cross Sector Insight Conference. "A number of prominent people, even Steve Wozniak, has said that he sees a world where Bitcoin is the primary currency. I think that's absurd. I don't think that any major economy will allow that to happen. By the way, it doesn't make sense." He continued to say that Bitcoin is controlled by China, with four miners controlling more than half of the market cap of Bitcoin. (Bitcoin.com, 2018)

Figure 7: Bitcoin Mining by Country Source: Statista

From Figure 7 above, it showed that China owned the most Bitcoin. This also supports the fact that “China controls Bitcoin”. China has two advantages as far as Bitcoin is concerned. Firstly, there are multiple mining operators for Bitcoin. This gave China the power to control the price and supply of the coins in the market.

High transaction fees could dissuade use of bitcoin for daily transactions and make it more expensive for trading. Secondly, China is home to multiple cryptocurrency exchanges for trading Bitcoin, such as Binance. These exchanges have low trading fees and hence, it is able to attract many investors.

(Investopedia, 2019)

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Can Big Tech Companies and Financial Institutions Legitimize Cryptocurrencies?

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At present, cryptocurrencies only constitute a small portion of the economy.

Not many companies adopt the use of cryptocurrencies as it is volatile and evolving. Besides that, the use of cryptocurrencies may reduce the trust between the producers and consumers as cryptocurrencies can be used for illegal means in the black market. But this could change if larger, better known, and more established financial companies enter the fray.

Figure 8: Top Banks Investing in Cryptocurrencies and Blockchain Companies Source: Blockdata

As of July 2021, major banks such as Standard Chartered, BNY Mellon and Citibank have invested in cryptocurrencies and blockchain companies. For example, Standard Chartered had invested US$380 million into 6 companies, such as Ripple, Cobalt and Dianrong. As these major financial institutions are investing in cryptocurrency, we can probably see more merchants using cryptocurrencies as one of their modes of payment.

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In February 2021, Tesla announced that they will be accepting Bitcoins as a mode of payment. Tesla has also purchased US$1.5 billion in Bitcoins. This news caused the value of Bitcoin to increase and reached an all time high of US$48,000. However in May 2021, Tesla’s founder, Elon Musk, mentioned on Twitter that Tesla may be considering or may have sold off its Bitcoin holdings. On May 12, it was confirmed that Tesla will no longer accept Bitcoin for car purchases. This had greatly affected the cryptocurrency market as most cryptocurrency value dropped after the news was known to the public.

However, other major technology companies such as Google, Apple and Amazon, are trying to incorporate cryptocurrency as their payment methods despite Tesla selling off their Bitcoin holdings. One of the top cryptocurrency exchanges, CoinBase, allow its users to purchase cryptocurrencies using Apple Pay and Google Pay. This integration is important as it can reduce complexity of transferring funds via unconventional mediums. The integration is a huge step for the cryptocurrency industry as it is able to mark the beginning of a partnership between payment companies, such as VISA and MasterCard, with Coinbase. As cryptocurrencies are used by tech giants, the popularity and dominance of the cryptocurrency industry would increase, and thus a possibility of using cryptocurrency as a payment method in our daily lives. (Business Insider India, 2021)

Implications for Entrepreneurs and Companies Cryptocurrencies can allow blockchain startups to raise money through Initial Coin Offerings (ICO), a form of crowdfunding based on cryptocurrency tokens. Projects can launch an ICO by issuing cryptocurrencies on the blockchain. This allows their investors the chance to acquire tokens. ICOs are limited, and its value and number of tokens released can either be fixed or calculated based on the amount raised. Cryptocurrency crowdfundings can be attractive to both startups and investors as the companies can receive fundings for their projects while people can invest in the projects that seem attractive to them.

However, this is highly risky and volatile as the coins are developed without real backing and their prices are determined by the market. This causes questionable coins to be traded in the market. (Tech Crunch, 2017) While some of the startups have raised millions of dollars, several companies have failed to deliver the results. The problem with these crowdfunding platforms is that the startup owners can scam the investors to attract the attention of potential backers. The early backer accounts can be created by acquaintances who can withdraw their pledges without any penalty. Fake accounts can also be created easily and make an invalid pledge with fraud.

Hence, such crowdfunding platforms can give others the impression that it was actually a scam to attract users. (Baber, H., 2019)

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Case Study 2: ICO Scam in Ho Chi Minh, Vietnam

In the end, the company raised around $660 million from approximately 32,000 investors. The company soon developed their second coin-iFan. Pincoin investors first received cash from their initial investments and then were subsequently given iFan tokens. This incident is one of the largest cryptocurrency scams worldwide. (Tech Crunch, 2018) Hence, issuing cryptocurrencies can give startup entrepreneurs an easy way to have access to funding and an ability to raise money.

However, cryptocurrencies and ICOs are still a double-edged sword, and investors and enthusiasts have to do sufficient research to prevent questionable coins from being issued, bought, and traded.

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In 2018. a Ho Chi Minh based cryptocurrency company, Modern Tech, launched an ICO to get fundings its Pincoin token. (CCN, 2018) To attract investors, the developers claimed that the tokens are from Singapore and India, and claimed that they would enjoy a profit of around 48% per month, and are able to recoup all investments in just four months. The investors would also be given a commission of 8% for every new member they introduced to the network.

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What does the future hold for cryptocurrencies? As more companies integrate cryptocurrencies as payment methods, one could see the possibility of using cryptocurrencies in our day-to-day lives. This would also signify the increase in the number of cryptocurrency wallets. As such, there could be government regulations on the utilization of cryptocurrency.

With more people holding cryptocurrencies, the FOMO effect is expected to play a greater role and have a greater effect on the cryptocurrency market.

With the emergence of more kinds of cryptocurrencies, the once monopoly will become a stronger competitive market. Although Bitcoin is now the top cryptocurrency that is owned by many cryptocurrency fans, it is believed that Ethereum may come out and replace Bitcoin’s standings.

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PREDICTION OF THE MARKET

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THE FUTURE OF MACROECONOMIC POLICIES IN THE HANDS OF CRYPTOCURRENCY

BY NG WEI MENG 45

WHAT DOES CRYPTOCURRENCY DO?

Now while the Crypto Market is rising everyday, the most direct way that crypto can affect the economy of the country is the effect on the money supply that the central bank can control. How? Because without being able to control the money supply of the economy, macro-economic policies will not be as effective as the desired result.

Simply because of the reason for having another alternative as currency.

Macro-economic policies consist of Fiscal policies, which refers to the changes in the government expenditures and taxations and Monetary Policies, which refers to the change of money supply.

In the economy without the use of cryptocurrency, the domestic currencies are affected by the policies due to inflation, disinflation or deflation. For example graph shifting, affecting the interest rate and causing the value of domestic currency to drop. These are the changes that can be achieved through the use of policies thus being able to achieve the desired results that they want.

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The technical foundation of Cryptocurrency dated back to the early 1980s when an American cryptographer named David Chaum invented a “blinding” algorithm that remains central to modern web-based encryption (Martucci, 2021). However people only consider Bitcoin to be the first true Cryptocurrency which was created back in 2009.

Cryptocurrency however, its value is determined by the market, whether it is decentralized finance or centralized finance. The real impact is when people are able to start financing most of their requirements then that is where the impact will be the heaviest.

Reason being that people talk about crypto being a hedge against inflation (Handagama, 2021)

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Case Study 1: Venezuelans Usage of Cryptocurrency

Figure 2: Venezuela Inflation Rate from 1985 to 2022 Source: Statistica, 2021

From Figure 2 above, one can see the Hyperinflation in the economy and wonder what caused such crazy fluctuations? The answer is that potential causes include: Money-Printing and Deficit Spending. (CarusoCabrera, 2014) Cryptocurrency helps to play a part against fighting such hyperinflation in Venezuela mainly because of a few reasons: Stability, Humanitarian Aid and Security (Randon, 2021).

While cryptocurrencies such as Bitcoin is volatile, it will still provide more value than the paper money of Venezuela, and protect the wages of the people from the inflation in their economy where the paper currency is worth less than toilet paper with the exchange rate of 1 USD = 416,484,435,433.47 Venezuelan Bolívares as of Aug 2021.

The Maduro Regime continues to reject international aid as well, which is a worrying concern. However, it should be noted that some nongovernmental organizations (NGOs) are already exploring the use of cryptocurrency donations to buy and distribute food to the Venezuelens.

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VOLATILITY OF CRYPTOCURRENCY Some crypto assets, such as Bitcoin, in principle have limited inflation risk because supply is limited. However, they lack three critical functions that stable monetary regimes are expected to fulfill: 1) Protection against the risk of structural deflation 2) The ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle 3) he capacity to function as a lender of last resort.

The way around such a problem would be to make the valuation more stable, in other words, less volatile. Which is with the use of “Stable” coins which will be talked about in the other reports.

The stability of certain countries might be affected when using cryptocurrency mainly because of the lack of regulation over and in one case study, we can see that CBN banned the use of crypto mainly due to the worry of it used for laundering, terrorism financing etc.

Also, there is always the worry with regard to the volatility with crypto where it was warned by the CBN. With regard to the crash in 2008. Most economies work in cycles and cryptocurrency is no exception to it. During down periods, the demand for bitcoin may also drop (worse case scenario completely crash) due to the lack of demand for it (or more accurately more people not having enough money to acquire more of such assets or having to sell it for daily necessities). Which are more than likely to affect the overall GDP of one country and cause the policies to be even harder to implement. Thus with cryptocurrencies that cannot be regulated by the government or supervised, it is definitely a source of concern whereby the government may have to result in more policy implementations to try to revive or stimulate the economy.

Possible solutions to work around these regulation problems might be that government authorities should regulate the use of crypto assets to prevent regulatory arbitrage. That means rigorously applying measures to prevent money laundering (AML) and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.

Central banks should continue to make their money attractive for use as a settlement vehicle. For example, they could make central bank money user-friendly in the digital world. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are.

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IMPACT ON STABILITY

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When the policies affect the domestic currency of the country, these cryptocurrencies are not affected by the changes in interest rates that result in inflation or deflation which can devalue the domestic currency and thus make the people poorer. While cryptocurrencies are subjected to volatile value changes as seen in Figure 1 below.

Figure 1: Change in Cryptocurrency Prices F’Y 2021 Source: Yahoo, 2021

As you can see from the figure above, when looking at the last 3 months for Bitcoin and Etherum the volatility of cryptocurrency is a prevailing factor and what certain traders would enjoy (the thrill of trading).

This would reinforce the impact that crypto will have on the effect on policies, and the government is unable to control it at the moment, and that is why there is a healthy amount of individuals preferring cryptocurrency, despite its volatility.

With this we will talk about how Cryptocurrency can affect certain MacroEconomic factors like Inflation, Stability, Capital Flow, and Reserve Requirements.

IMPACT ON INFLATION Inflation is always a prevailing factor in the economy and the government of the countries would definitely take certain steps like implementing the necessary policies so that the inflation is used in a way to help the country.

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Fan of inflation?

However, not everyone is a fan of inflation, and definitely not when the price of the daily necessities increases. Thus, hedging against inflation would be one of the methods that people will take up to protect the value of their hardearned money, and on that issue, crypto which is not controlled by the government would definitely let people find solace in owning them despite the volatility of the asset.

The upside of cryptocurrency is also the limits of the issuance of coins, in other words, it cannot be printed like paper money.

While bitcoin can be an alternative to paper money, the worrying factor that comes into play is actually the stability of the currency. There is a lot of friction when it comes to accepting the value of cryptocurrency when there are many fluctuations to the value. One day it can be high, the other day it might be rock bottom. Despite having entrepreneurs like Elon Musk accepting the payment of bitcoin, it cannot create an optimal outcome. Mainly because of self-fulfilling inflationary episodes.

Inflationary psychology can become a self-fulfilling prophecy when consumers spend more and save less, increasing the velocity of money and boosting inflation. In other words, it becomes more and more expensive to hold this currency, and if people do get it, the value of the coin might be much lower than it was yesterday.

Inflationary psychology can become a self-fulfilling prophecy when consumers spend more and save less, increasing the velocity of money and boosting inflation. In other words, it becomes more and more expensive to hold this currency, and if people do get it, the value of the coin might be much lower than it was yesterday.

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Alternative to Paper Money

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Case Study 2: CBN concerns on stability

Source: CoinDesk, 2021 Figure 3: Change in Price of Bitcoin from 2016 to 2019

The volatility and riskiness of cryptocurrency caused the CBN to warn their people after the crash of bitcoin in 2018.

Following up on the concerns, CBN banned cryptocurrency transactions by commercial banks and other FIs in the country, with particular concerns of money laundering, terrorism financing and tax evasion.

However, It is to be noted in the volatility of bitcoin that we talk about could be potentially reduced as Jay Z and Jack Dorsey (CEO of Twitter) announced a $23.6million investment to fund bitcoin investment into the cryptocurrency space in Africa which could potentially increase the investment flows into the country which is a potential upside on the capital flow of the country. (Porter, 2021)

IMPACT ON BALANCE OF PAYMENTS Cryptocurrency is globally traded on many different platforms in many different countries. Due to that, we definitely have to talk about the Balance of Payment when it comes to how cryptocurrency can affect countries in Macroeconomic terms. To talk more about the Balance of payment, it mainly consists of 3 accounts: The Current Account, The Capital Account and The Financial Account.

In this section, the account that can be affected the most is the Financial Account as Crypto has a high volume of trade which is deemed by many to become the next gold. The financial account has the possibility of offsetting the trade deficit, which can mean that the country is selling off its assets to pay for purchases of foreign goods and services. That's like selling off your land to pay for groceries which is ultimately not desirable.

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KIMCHI PREMIUM For example, in Korea Crypto can possibly affect the BOP of a country. Why? The main reason is due to the supply and demand of cryptocurrency in the country. In this example, there is a phenomenon in Korea where we can see the Kimchi Premium.

The effects are essentially that there is more demand on crypto outside of Korea's market, which actually causes an outflow that can be considered more than usual due to the result of arbitrage, thus causing an even bigger Financial Account Deficit.

If we were to think along the lines of Financial outflow, the BOP deficit can cause downward pressure on the Korean won. Since the Bank of Korea has a flexible exchange rate the government won’t intervene and allow the currency to depreciate which can cause capital inflow to Korea since domestic products are cheaper.

However, it is ambiguous as to how much cryptocurrency can outweigh the effects of import coming in, and uncertain what steps the government will need to take to meet the equilibrium.

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Due to this lack of supply and high volume of demand, one can actually buy bitcoin outside of Korea and go into Korea to sell them at a premium. Which essentially is an arbitrage, where the same assets are simultaneously purchased and sold in different markets in order to profit from tiny differences in the asset's listed price, and individuals can exploit these variations in the price of identical or similar financial instruments in different markets or in different forms. In this case, it is Bitcoin for Korea. (Park, 2021)

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CRYPTOCURRENCY PLAYS A PART IN STABILIZING THE ECONOMY

Source: Lisa, 2021

Figure 4: Top 10 Crypto Countries Yahoo Finance

The demand of cryptocurrency is constantly rising in the world and more and more countries are slowly integrating crypto into their economy and possibly with the hopes of using it as a stabiliser for the economy.

As mentioned earlier, where countries are beginning to make use of cryptocurrency, the most notable of them all would be regarding the usage of Stable coins.

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CENTRAL BANK CRYPTOCURRENCY

From a monetary policy transmission perspective, CBDCs, a public–private entanglement, means that in the absence of strong capital control by central banks and enforceable regulations against holding foreign CBDC, emerging economies may face the risks of currency substitution as the Banks for Foreign Trade (BFTs) may prefer a mode of currency preferable to them, such as US Dollars. Privately issued stablecoins used as a store of value, backed by commercial bank fiat or other assets, present an asymmetry to CBDCs backed by central bank reserves. This could reduce bank retail deposits in favour of protected accounts and consequently reduce the central bank’s ability to implement monetary policy via the commercial banking system. One of the major benefits of improved electronic payment and settlement systems that would go with the proliferation of digital currencies is the reduced transaction cost and increase in speed and security of transactions. This benefits services like trade-related transactions as well as remittances.

Interest Bearing?

Central Banks can eventually decide between paying or charging interest, depending on what the CBDC is based on. Initially, the concern is that interest-rate decisions will affect the monetary policy, beyond the scope of this note. However, when thinking along that line, the second concern would be the relative attraction of a CBDC to commercial bank money. Reason being that banks compete for deposits in the interest rates they pay as well as each bank’s strategy for managing risk and price loans.

In a case where the Fed provides interest-bearing CBDC, their chosen rate would have a heavy impact on the interest rates that banks would charge on their customer deposits. While the Feds already have a significant indirect influence on deposit rates through Monetary policy, do note that the influence here would be even more direct and stronger.

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Monetary Policy Changes due to CBDCs

This is largely due to the possibility of bank deposits and CBDC being such close substitutes, and a bank that offered a rate much below the CBDC rate would probably experience significant deposit outflows. Alternatively, a bank can possibly attract deposits by offering an interest rate only slightly above the CBDC rate, with the absence of other competitive pressures of course. Thus, the CBDC rate would serve as a floor and suggest a ceiling for bank deposit rates.

In the event of a central bank’s coup de grace, this instability likely would be reflected in banks’ liquidity requirements, which would require them to hold high quality liquid assets (cash or cash-like assets) against their now more unstable deposits. The biggest threat would be that the low-risk but low-yielding assets would displace higher-yielding loans on bank balance sheets. In turn raising the costs of borrowing for businesses and consumers. (Baer, 2021)

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Despite the disadvantages that Cryptocurrencies has when compared to paper money like the lack of stability and less security, there is still an obvious upside on how it can play apart in stabilizing the economy as seen from stable coins and with a certain amount of regulation without the hijacking of coins, or usage in terrorism financing.

For central banks, Their role as an intermediary is challenged.

Their earnings through seignories revenue declines.

Their monetary policy tools lose efficacy Their control over the money supply and interest rates becomes smaller.

They are tasked with controlling and becoming larger.

Thus, crypto currencies, if they reach a substantial size, will impede the traditional tools of macroeconomic policy. It’s a world to explore and the only constant in the world is change where the economy of the world can only move exponentially upwards if used correctly and with enough research and efforts, cryptocurrency can potentially help to play a part in flourishing the economies of the countries. If not, it can still provide the day traders with the thrill of trading.

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PREDICTION OF THE MARKET

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MONETARY STABILIZATION OF CRYPTOCURRENCY

BY KHYATI GUPTA 57

It is given by its name that these coins distinguish themselves from their more popular but highly volatile cryptocurrency brethren, in their focus on price stability.

By definition, a stablecoins is a digital asset that pegs its value to a target price in order to achieve price stability (ftserussell, 2020). What gives an upper edge to Stablecoins is its ability to maintain volatilityresistant valuations from backings or algorithms of buying and selling the reference asset or derivatives. Initially Stablecoins were used during transactions of various cryptocurrencies by replicating the instant transaction and settlement abilities of cryptocurrencies. This was because many cryptocurrency platforms did not have access to traditional banking. Stable coins provide a certain level of stability in cryptocurrency that replicates features of fiat currency. This makes us believe that stablecoins can definitely play a part as to help stabilise certain economies, especially the ones that are hyper inflated.

Basically, what this means is that stablecoins hope to avoid experiences like Laszlo Hanyecz did in 2010. A U.S. based software programmer, Laszlo Hanyecz, made a transaction with someone of 10,000 Bitcoin for only two Domino’s pizzas. Today, this transaction would be worth almost $100 million. Now this legendary story has become an allegory of the pitfalls of using a notoriously volatile tender for day-to-day purchases. (Platias, 2021)

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STABLECOINS

Fig 1: Nature of stable coin in relation to Time and Volatility Source: opentezos.com

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TYPES OF STABLECOIN Stablecoins arrangements are complex ecosystems and their designs differ markedly. They generally function within a broader ecosystem delivering the following core functions: 1. Issuance, redemption and stabilisation of the value of the coins.

2. Transfer of coins among users.

3. Interaction with users (i.e., the user interface).

Based on these three design models market participants actively use multiple types of stablecoins in digital asset markets. To talk about how stablecoins can become a stabilizer for the economy, let's discuss characteristics of different types of stablecoins. Below, we discuss five types of stablecoins.

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Fiat Collateralized The most common type of stablecoins is backed (or collateralized) by fiat currencies. such as Fiat currencies or similar assets collaterals in bank accounts or other custodians to support the value either on a 1:1 ratio or on a fractional basis example, the most well-known being Tether (USDT) by Bitfinex/iFinex claims that its circulation in the market is anchored on a 1:1 ratio with the US Dollar. Other coins include USD Coin (USDC) by Coinbase and Circle. (Wayne Chang)

Crypto-collateralized stablecoins are backed by other cryptocurrencies and promote DeFi (decentralized Finance). Instead of relying on credit, these coins tend to enforce over-collateralization. This means that the buyer needs to store a substantially larger amount of capital in the protocol to receive the stablecoins. It will mitigate liquidation risks during volatility events. If the underlying value of the collateral drops below the peg, the collateral will automatically be liquidated. This not only promotes transparency and decentralization but flexibility. The most popular cryptocollateralized stablecoins is DAI by MakerDAO. (BIS, 2019)

Algorithmic Non-Collateralized These stablecoins aim to stabilize the price of a token without requiring collateral. With the use of algorithms to adjust and balance the circulating supply of the token, they increase the total supply as the price goes up and vice versa, in order to shift the price of the token toward the target price. To this point, algorithmic stablecoins have not seen much adoption due to their token protocols having trouble maintaining price stability. (Wayne Chang)

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Crypto Collateralized

Private company stablecoins Some large firms are trying to create their own stablecoins that can potentially replace parts of the existing financial infrastructure if the projects become successful. The most popular one is Facebook’s digital currency, diem, previously known as Libra. (Wayne Chang)

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Case Study 1: FACEBOOK Facebook announced Libra on 18 June 2019. As described in its whitepaper, Libra’s aim is to ‘enable a simple global currency and financial infrastructure that empowers billions of people’. The coin’s value will be stabilised through the backing of a reserve of real assets comprising a basket of bank deposits and short-term government securities. The basket of currencies to which Libra’s value will be tethered is much like the International Monetary Fund’s special drawing right, based on five global reserve currencies: the dollar, euro, renminbi, yen and pound.

In cryptocurrencies, Facebook saw both a threat and an opportunity.

With the idea of eliminating transaction fees common with credit cards, the concept of Libra comes dangerously close to Facebook’s ad business that influences what is bought and sold. If a competitor like Google or an upstart built a popular coin and could monitor the transactions, they could muscle in on the billions spent on Facebook marketing. (Constine, 2019) If Libra were to reach wide-scale adoption in some jurisdictions and experience a run, the sovereigns whose assets make up the Libra reserve would face the choice of allowing the system to collapse or offering a bail-out. However, since developed countries bear the supervisory burden, while the benefits of the store of value and medium of exchange accrue to developing nations, it is unclear whether a positive outcome is, on balance, possible. Pushback from regulators and traditional financial institutions has induced Facebook to pull away from its original vision of a global currency that competed with monetary authorities. (PKcrypto, 2021) Although there is still a lot of uncertainty surrounding the project, it might look more like Venmo, with people sending dollars through Facebook.

Central bank digital currency There are two types of central bank digital currencies. The first is in the wholesale realm, for payments between financial institutions and large commercial parties. In the last few years, there has been a lot of activity around both private and central bank-issued wholesale digital currencies.

Digital central bank money for wholesale purposes already exists, in the form of central bank reserves. Notably, privately issued wholesale digital currencies, also called utility tokens or wholesale stablecoins, are not separate currencies per se. The second type of digital currency is in the retail space, and it is here where the real disruption lies. Retail digital currencies could be used in daily transactions by households and businesses, and depending on their design, they could upend our existing financial system.

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Due to the nascent nature of cryptocurrency markets, volatility has remained a staple for both outside observers and users. The volatility problem is important to solve because its resolution in the short-term unlocks the financial and technical engineering groundwork necessary for cheap, swift, secure, and disintermediated global payment systems based on blockchains. The highest profile attempt so far has been Facebook's Libra. Another one is Terra is a new stablecoins adopted by several online merchants across the SEA region. In contrast to Libra, it employs a form of automated monetary policy to keep its price stable, contracting the supply when prices are too low and expanding it when prices are too high. This is achieved using a second cryptocurrency, Luna, which acts as a monetary policy instrument and earns transaction fees as a form of reward. And while criticism of Libra has mainly been centred on how its governance mechanism is controlled by a few large corporations, Terra’s policy is coded directly on its blockchain and therefore is transparent and impervious to human interference. (ftserussell, 2020)

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SOLVING PRICE VOLATILITY PROBLEM

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Fig 2: Tether supply on the rise Source: Digital asset research

Tether is the most utilized stablecoins in the digital asset market. Tether price deviations tend to stay under 40 bps. 97.10% of the time in 2021. This is despite experiencing record trading activities due to Bitcoin’s price appreciation. Tether volume grew alongside total digital asset market capitalization, with a significant increase in January 2021. (ftserussell, 2020)

Adaptability of Stablecoins TFor most of the world, the use of cryptocurrency to pay for goods and services is limited to certain niches. There are still major barriers for blockchain currencies to overcome, no matter what incentives exist. Regulation could change that. Banks have been reluctant to get involved in cryptocurrency projects because of the transparent nature of them, fearing potential scrutiny from sceptical regulators. Policymakers worry about transferring control of monetary policy from sovereigns to commercial enterprises. The ability of central banks to expand and contract the money supply is an important part of their policy toolkit, allowing them to stabilize growth and inflation in times of need. Data privacy is also a major concern; it will be a key focus of any future stablecoins.

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Fig3: Dual Currency System – overview Source: Bankinghub.eu

As Figure 3 illustrates, with a CBDC system, any conversion of existing noncash assets into the Central Bank digital currency will cause outflow of financial assets from the existing banking system. Another distinctive feature of this system will be to conduct payments directly between participants through deposit and settlement accounts, without engagement of third parties (such as clearing houses, settlement institutions, payment systems operators, etc.). This would lead to the elimination of all intermediaries that are currently present in traditional payment systems and revenues generated from them, also by banks. (Wojtuszko, 2018) A major advantage to a central bank of issuing CBDC is the tool it provides to control interest rates. To achieve monetary stabilization, short-term interest rates need to be targeted. This rate then directly affects other short-term and long-term interest rates, and thus spending and pricing decisions in the economy. A primary tool of monetary policy for central banks would be the interest rate on CBDC for deposits and settlement accounts held at the central bank.

Figure 4 spots which central banks are considering issuing CBDC and they are working on the general design of such a system. 5 countries (Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada) have now fully launched a digital currency. Additionally, 81 countries are now exploring central bank digital currencies (CBDCs). Fourteen major economies, including China and South Korea, have tested CBDC pilots.

China is currently leading the race of CBDCs, reportedly they have released $ 5.5 billion worth of transactions carried out during the digital Yuan pilot run. (Pasuthip, 2020) China has plans to introduce digital Yuan in the winter Olympics next year. The Bank of England is also pushing a pilot programme for bitcoin in the next few weeks.

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CBDC

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CBDC developments across countries.

Source: Bankinghub.eu

CBDCs versus stablecoins A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. (HBL, 2021) Only its form is different. A key difference between CBDCs and their fiat equivalent is their accessibility to national residents.

Residents in high-inflation countries can issue CBDC from a low-inflation country. Commercially issued stablecoins, which share many characteristics with CBDCs, could present an alternative or for the unbanked, a primary store of value for their assets. (Katherine Foster, 2020) CBDCs are not meant to replace fiat currencies but to complement them. They are, in the true essence, a digital version of fiat currency

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Fig 5: The money flower: A taxonomy of money Source: Bankinghub.eu

An approach to evaluating the policy options for CBDC Policy responses for CBDC can be grouped into three categories.

First, the existing rules and regulations governing traditional financial firms could be applied to the new tech-based firms offering financial services.

Tech-based payment mechanisms will need to demonstrate a used case, where the objective is not simply attempting regulatory arbitrage. (G30, 2020)

Third, the public sector should play a more active role in providing the core, foundational infrastructure, so as to promote equal conditions for all that nevertheless reap the benefits of network effects, while ensuring legal and regulatory compliance, including with AML restrictions and extinctive KYC screenings. (G30, 2020) As you can see, it is obvious that a central bank digital currency must be designed carefully. More importantly this means that major changes might be afoot for central banks, regulators, and the financial sector. These changes could bring a host of benefits, but also new and very real risks.

Let’s discuss them in detail.

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Second, just as in the banking sector, it will be important to develop and implement regulations to mitigate a range of adverse effects of introduction of CBDC, including those associated with conventional market dominance as well as new-age data monopolies. (G30, 2020)

Fig 6: CBDC functions Source: Bank of England

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BENEFITS CBDC might not be a panacea for all the challenges that payments are facing today. However, if it is well designed, made interoperable and set up thoroughly, CBDC could be an attractive, additional option to improve payments globally.

Ease in Cross border payments Cross-border settlement could benefit from CBDCs developments. DLTs offer decentralization and disintermediation, greater transparency and easier auditability, and automation and programmability for reliable tracking of different stages of trade and financial transactions. For emerging market economies, the expansion of conduits for cross-border financial flows with greater efficiency and lower costs could be a double-edged sword, making it easier for them to integrate into global financial markets but at the risk of higher capital flow and exchange rate volatility. Such volatility, in part related to spill overs of monetary and other policies from the U.S. and other advanced economies, has often caused significant stresses for corporate and sovereign balance sheets in these economies. (Pasuthip, 2020)

Promoting the Financial Inclusion of Disadvantaged Groups In the current system, checking and savings accounts with financial institutions are the primary means of gaining access to credit. In developing economies, financial institutions are not easily accessible.

Through the establishment of an inclusive digital payment ecosystem and the creation of financial data identities, opening and operating accounts can be made much easier. For instance, individuals can have a CBDC account on the central bank’s ledger. A digital wallet application linked to the CBDC account through application programming interfaces can allow users to access their accounts and engage in transactions.

CBDCs can thus promote financial inclusion of low-income groups and small and medium enterprises. (Kshetri, 2020) For Example, since e-CNY is highly traceable, the central bank, PBoC, can monitor the flow of money in the Chinese economy. This allows the government to deliver targeted programs to improve the well-being of high-risk and disadvantaged groups. CBDC could serve as a gateway for unbanked and underbanked individuals to have access to financial products and services.

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Flexible monetary policy

Combating Economic Crimes and Frauds Governments are also likely to use CBDCs to combat economic crimes.

Making CBDC a controllable anonymity rather than full anonymity. This is based on international consensus to satisfy (AML)anti-money laundering, antiterrorism financing, and anti-tax-evasion requirements.

By tracking and recording the details of all transactions and inclusion of extensive KYB and KYC processes, the government is in a better position to prevent and control illegal transactions which has proven to be an issue with cryptocurrencies in the past. (Kshetri, 2020)

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The zero lower-bound constraint on monetary policy (interest rates set by central banks) could in principle be relaxed, with a central bank instituting a negative nominal interest rate by reducing CBDC account balances at a pre-announced rate. Similarly, CBDC would ease the implementation of non-distortionary helicopter drops or withdrawals of central bank money (without relying on fiscal transfers). (cornell, 2020)

Transaction Cost While CBDCs’ benefits such as the low cost of producing and storing, ease of use, and protection against counterfeiting are obvious, they can also reduce transaction costs by removing third-party intermediaries such as commercial banks. They can address various barriers to financial inclusion. An instance of this was with e-CNY, where consumers involved in an e-CNY trial completed transactions with NFC technology, which did not require an Internet connection. The possibility of using DCEP with NFC is especially attractive for individuals and organizations in remote areas who lack Internet access or bank accounts.

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Payment efficiency If CBDC involves tokens, then the cost efficiency, facility, and speed of CBDC payments would likely be attractive relative to most alternatives, at least assuming continued evolution of the technology. Increase in the efficiency of the payment system would increase the speed and extent of passthrough of policy rates into various private sector interest rates.

Indeed, the central bank has the possibility of offering interest rates (typically negative) on CBDCs. If the central bank rules out negative interest rates on CBDCs, however, then the introduction of a CBDC would likely place an effective floor of zero on central bank deposit rates.

CHALLENGES AND RISKS While the aforementioned benefits are attractive, CBDCs may also present some risks and operational costs for the central bank that could be daunting. Let’s discuss what they are and how to combat them.

Privacy Violation and Surveillance-Related Concerns Cross-border settlement could benefit from CBDCs developments. DLTs offer decentralization and disintermediation, greater transparency and easier auditability, and automation and programmability for reliable tracking of different stages of trade and financial transactions. For emerging market economies, the expansion of conduits for cross-border financial flows with greater efficiency and lower costs could be a double-edged sword, making it easier for them to integrate into global financial markets but at the risk of higher capital flow and exchange rate volatility. Such volatility, in part related to spill overs of monetary and other policies from the U.S. and other advanced economies, has often caused significant stresses for corporate and sovereign balance sheets in these economies. (Pasuthip, 2020)

Financial stability One concern over a generally available CBDC has been the risk of a run to CBDC, especially during times of funding stress in the banking system, when a flight to safety from commercial bank deposits to central bank liabilities might trigger broader financial instability.

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While higher deposit rates on commercial bank deposits would make commercial bank deposits attractive to retail depositors during normal times, a concern is whether differentiated remuneration of commercial bank deposits and central bank liabilities would be sufficient to preclude a run from bank deposits during stressed times. Access to physical cash has not led to such generalized runs, but an open question is whether the general availability of an electronic form of the central bank's liabilities renders the run scenario more likely. These concerns should be weighed against potential advantages of CBDCs.

Operational risks for CBDC include cyber-attacks and accidental software outages. There is potential for the risks to grow exponentially as any given token or protocol becomes more valuable and important in the international financial system. Thus, if central banks ever underpinned a large enough fraction of the system, there could be major vulnerabilities.

A failure to be proactive could result in an extremely suboptimal development path, for example a failure to establish a satisfactory level of interoperability between different systems. (G30, 2020)

Financial risks Due to lack of regulatory expertise and capacity: With increased speed and efficiency and financial innovation new risks will arise, they will be both financial and technical, many enumerated above. Regulators may struggle to develop the tools and expertise to address these risks in the face of a dramatic change in the basic operation of the financial system. (G30, 2020)

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Operational risks

OTHER CBDC IMPACTS On Both banks and nonbank financial institutions The provision of the core, foundational infrastructure is a natural fit for a central bank through its role in providing settlement accounts for commercial banks and other payment services providers. In this context, a direct central bank digital currency (CBDC) may find a rationale when the CBDC can enhance the effectiveness of that infrastructure.

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Disruption of legacy bank franchises Large and profitable payments-related banking franchises could be impacted, in both volumes and markups (Vives 2019). For example, credit card volumes, interchange fees, payment transaction fees, and deposit interest margins could be seriously affected. This could weaken the viability of banks that rely heavily on these forms of rent taking. (G30, 2020) The costs of disruption are to be weighed against the goal of improving competition in payment-related services. Concerns about disrupting banking franchises are not specific to CBDCs and are likely to arise with any efficient and open upgrade of the payment system. CBDCs may adversely affect the businesses of financial and payment intermediaries, such as mobile and online payment platforms, banks, and microfinance institutions.

(Kshetri, 2020) In China, for instance, e-CNY may pose a direct challenge to the existing payment systems, such as WeChat Pay and Alipay.

Fig 7: Assessment model results Source: Bankinghub.eu

As we can see in figure 7, in countries where cashless transactions are more prevalent, and a given bank is more reliant on card transactions and financing from retail deposits, potential issuance of CBDC may have significant negative impacts on its revenues, assuming a do-nothing scenario, especially if transactions in a new system will be replacing mostly card transactions. (Wojtuszko, 2018)

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On Other digital currencies

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CBDC’s might have a negligible direct impact on private digital currencies such as Bitcoin, Matic, Doge, etc. These private cryptocurrencies are based on ‘decentralization’. “The sovereign digital currencies are in stark contrast to decentralization, as the central banks govern and control them. However, as and when CBDCs start gaining more adoption, people would get to learn more about private cryptocurrencies as well. It would indirectly act as a catalyst to creating awareness of the practical usage of cryptocurrencies.

That is when the crypto markets would start getting increased retail participation as well. (FE, 2021)

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It is well established that a monetary system based on private currencies is volatile and inflationary. Struggling and weak economies are particularly at risk. Their governments have limited resources in terms of reserve currencies to add liquidity in the case of a crisis. For countries with political and social instabilities, crypto-currencies provide means for capital flight, leading to further destabilization.

Central banks, which are institutions tasked with providing monetary stability, are more essential than ever. The problem is that their responsibilities rise while the power of their traditional tools over money supply and interest rates is declining. But the new digital technologies and approaches also provide regulatory bodies with new and powerful tools.

The launch of CBDCs could affect economic growth, given it is impossible for commercial banks to rely on consumer deposits to finance loans. The impact is more profound in developing countries where most lending still comes from traditional banks. CBDCs could create financial inclusion creating access for segments of society deprived. Concerns on cyber warfare will be serious given that attacking servers supporting central bank digital wallets could shut down an entire part of the economy. Even draconian measures like information control are possible e.g., you could program your money in any country so it can't be used to pay for content, media, news, etc. from foreign sellers. While the pros and cons of stablecoins CBDC may be debatable, their rise isn’t.

The task for central banks and policy makers is not to resist monetary innovations such stablecoins and CBDCs, but to create opportunities to use, regulate, incest, and emulate them in shaping the macroeconomic path of the economy.

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THE REALM OF INTERNATIONAL TRADE

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FOREWORD As budding young economists, we are interested in unfolding the multifaceted world of international trade. The Realm of International Trade is our venture to explore the dynamic nature of international trade and focus on some of its facets.

It covers a spectrum of topics from the impact of Covid-19 and geopolitics on international trade to the macroeconomic perspective on trade and the symbiotic relationship between trade and the environment.

The topic on Covid-19 and International Trade highlights the disruptions caused by the pandemic and the resulting draconian measures to global supply chains, inducing bottlenecks in the export and import sectors and rising transportation costs across the globe. We also study the pivotal role international trade can play to build resilience and prevent such a pandemic in the future.

Besides, the topic Geopolitics and International Trade examine the recent developments brought about by the G7 summit and the economic implications of the changes advocated by the G7. It also looks at the current political climate in the BRICS nations to analyse the impact of political situations of these emerging nations on global trade. The ongoing trade war between the US and China would also be under scrutiny to understand the externalities associated with the trade tensions between two economic superpowers on the rest of the world.

Moreover, the macroeconomic perspective on trade examines the integral role trade and trade policies play in creating a conducive environment for research and development and innovation which in turn can result in economic growth. It also highlights how international cooperation and globalisation through trade organisations and trade agreements can maximize positive externalities of innovative activity and hence promote innovation and economic growth.

The topic on Environment and International Trade explores the bidirectional nature of their relationship. It discusses the impact of trade on the environment through the aid of the environmental Kuznets curve theory and looks at the impact of the environment, climate change, and resulting environmental policies on international trade.

Finally, the dynamic, volatile world of commodity trade will also be scrutinised in the context of the current Covid-19 pandemic and the impact of the draconian measures and the resulting disruption in global supply chains on commodity trade. The topic will also be viewed through the lens of geopolitics and theenvironment since these are a few of the prominent factors that influence commodity prices.

Sumair Jalan, Research Director at SIMES.

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THE IMPACT OF COVID-19 ON INTERNATIONAL TRADE

BY THAUNG MYINT OO 77

TRANSPORTATION COST IN TIMES OF COVID-19

International transport and logistics services such as sea, land, and air cargo are severely disrupted by the measures instituted by governments to contain the spread of the virus. For cross-border B2C and B2B transactions, the shipping prices have been increased and the transport capacity has been reduced because of the cancellation of passenger flights which were used to transport postal shipments.

The International Air Transport Association (IATA) has indicated that because of the crew quarantine, cargo transport flights are not able to fulfil the demand. Customers have therefore been faced with delays and cancellations of their orders. Commercial B2B ecommerce which rely mostly on large-scale imports has also been affected. Consequently, there will be price gouging , cybersecurity concerns, product safety concerns, the need for increased bandwidth and development-related concerns. Thus, several online tradingrelated challenges have arisen or been further amplified during this pandemic. Online shopping also experiences the same supply chain bottlenecks as physical purchases.

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Covid-19 virus started in December 2019 and spread quickly to the world in January 2020. As of August 2021, there are 200 million Covid19 cases around the world and 4.26 millions of people died because of the Covid-19 pandemic. This is a disaster for all human beings.

Impact of the epidemic is smaller in Japan, China and Singapore compared to western countries. However, poor countries with relatively poorer healthcare facilities will need billions in aid to avert Covid-19 catastrophe. The World Trade Organization (WTO) has predicted that international trade will fall 13% to 32%. Global economic output is projected to shrink by 4.5 per cent in 2020 because of the pandemic, according to estimates by the International Monetary Fund (IMF). As of 6 October 2020, WTO economists expect global trade to contract by 9.2% in 2020.

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Due to the travel ban and restrictions, there is a drastic reduction in passenger flights which account for half of air cargo volume. At the early phase of Covid-19 crisis, air freight transport was sharply disrupted with global air cargo capacity shrinking by 24.6 % in March 2020. However, air cargo yields in April 2020 were almost twice as high as in April 2019 (WTO, 2020-a). This is because while some airlines started without passengers just to carry cargo, it was the historically high prices that induced them to do so.

This cost shock is likely to subside only with a rebound in passenger transport. Consequently, this results in rising freight rates and falling air cargo capacity.

Shipping Containers sitting stacked at Nansha Port in China on June 8 2021

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Regulatory differences and trade policy barriers also account for 10% of trade costs in all sectors (WTO, 2020-a). Sanitary measures such as measurement of the temperature of drivers and border controls such as closure of border posts have severely affected international land transport. This has resulted in a lack of drivers, thereby causing delays in road cargo transport. Thus, some exporters have shifted the load from road to rail, as the latter needs far fewer drivers and controls per amount of cargo. In addition, products essential in the fight against the pandemic are affected by temporary importfacilitating and export-restrictive measures. Even though the former will push down trade costs, the latter will raise them. Governments and institutions are trying to keep trade flowing by exempting truck drivers, cargo crews, and freight transport staff from quarantine requirements and entry restrictions. Nevertheless, for countries with low regulatory capacity, travel restrictions generate relatively more disruptions to trade. In East Africa, international trade mostly happens through small-scale traders. But travel restrictions will severely disrupt regional trade.

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Maritime transport also copes with logistic issues. Many countries have changed their port protocols, crew-change restrictions, additional documentation requirements and physical examinations on vessels and of crew members originating from which in turn disrupt the shipping services. China closed down Ningbo-Zhoushan port when one worker was found to be infected by Covid-19. This approach will likely put further pressure on already stressed supply networks. Besides, the maritime freight transport industry has decreased its supply of sailings in order to prevent lower demand from depressing shipping rates. The recovery of the Chinese economy started pushing the prices up in mid-March, and the rebound of consumer demand in the United States caused a surge in May. For example, it was the first time for container shipping rates from Southeast Asia to North America to exceed $20,000 per twenty-foot equivalent unit. The sharp rise in the global container freight index in such a short period of time is because of the commodities boom that is boosting demand for transportation and economic recovery when part of the world bounces back from the pandemic. Moreover, authorities are pumping cash into the system through stimulus measures to fuel economic growth which in turn is driving commodity demand. Consequently, the cost of container shipping in January and February was even higher compared to the same period last year because of a spike in demand for shipping as part of the world economy is recovering from the pandemic.

Inefficiencies and port congestion could also contribute to increasing shipping cost.

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IMPACT ON TRADE IN SERVICES AND GOODS Impact on Trade in Services Covid-19 has triggered an unprecedented crisis on international service trade.

Tourism industries such as hotels, restaurants, tour operators, and travel agencies are mostly affected by the border closures and travel restrictions. On the supply side, due to the lockdown measures, many nature sites and destinations remain closed to the tourists. On the demand side, border closures and travel bans have limited people’s mobility. For example, in Rwanda, some 20 conferences and meetings scheduled for March and April, which had been expected to generate around $8 million for the economy, were postponed as a result of travel bans.

Health services or medical tourism which grew rapidly from $2.4 billion to $11 billion between 2000 and 2017 , are not able to resume at the pre-crisis rate because of the enforcement of border closures and local lockdown measures.

Similarly, many higher education institutions and colleges have experienced a potential drop in international student enrolment of between 50 % and 75 %. Due to travel restrictions implemented to contain the spread of the pandemic, many education institutions have to switch to online teaching and examination. The American Council on Education has predicted that international student enrolment will decline by 25 % in April 2020 (WTO, 2020-b)

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Due to widespread travel restrictions, global tourism registered the worst-ever performance in 2020 since 1950 with international arrivals dropping by 74% and a $1.3 trillion estimated loss in export revenues (The World Tourism Organization, 2021). Asia and the Pacific region recorded the largest decrease in arrivals in 2020 with a 84% decline. The reason behind it is that the countries impose the highest level of travel restrictions. Both Africa and the Middle East recorded a 75% decline. The American region recorded a 69% decrease in international arrivals while Europe saw a 70% decrease in arrivals with over 500 million fewer international tourists in 2020. Research has predicted that it could take two to four years for international tourism to return to 2019 levels.

Due to the lockdowns, many economies’ factories came to a halt, thereby resulting in a decrease in production and labour shortages. Regarding the time needed to halt production to stop the spread of virus, in February 2020, Chinese enterprises such as Lenovo factories gradually resumed operation amid epidemic outbreak after halting the manufacturing and operation for 20 Days. However, it would take longer periods for western countries’ factories to resume their manufacturing.

Even though Covid-19 has been bad news for some markets but good news for others such us Brazil which has seen a bounty in its exports of agricultural products. Brazil's frozen beef export increased from $464 million in April 2020 to $639 million in May. Its soybean exports grew more sharply by more than $1 billion on a year-on-year basis in April 2020. In the transportation market, car exports were down by billions in Spain, Canada, Japan, and the US. For example, US delivery truck exports declined sharply by $1 billion in the months of April and May. There is also a sharp drop of $6 billion in US aircraft part exports in May and June. However, global bicycle exports declined sharply in February and March and rebounded up more than 50% year-over-year during June and July. Garment exports also declined sharply in 2020. There is a significant reduction in China apparel exports and footwear exports of more than $1 billion during the months of February, April and May. Yet, this decline may have been compensated by the stellar performance of a highly related product such as face masks which can also be produced by apparel and footwear manufacturers. In the early phase of the Covid-19 pandemic, the shortage of medical personal protective equipment (PPE) causes the production and trade to expand to meet the unparalleled demand spike. Thus, trade in medical goods expanded by 38.7% in the first half of 2020.

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Impact on Trade in Goods

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For the least developed countries (LDC), pandemic consequences are the most severe. This is because of their economic affordability and the dependence of a very limited range of exports to a very few markets. In 2019, LDC exports of goods and services decreased by 1.6% which is greater than world export reduction of 1.2%. As a result, there is a marginal decline in the share of LDCs in world exports to 0.91% in 2019 (WTO,2020-c) . The merchandise exports of LDCs are concentrated in a few markets such as China, France, Germany which are also the worst affected by the outbreak of the virus. This makes them more vulnerable to decline in demand in these markets. On the import side, due to the fact that economies in Asia and developing economies are the major suppliers for LDCs, when supply chains in these economies are disrupted, LDC imports from these countries are also severely affected. Many LDCs have to lower duties on medical goods to ensure their availability at more affordable prices to their citizens.

THE ROLE OF TRADE IN BUILDING RESILIENCE IN A POST-COVID WORLD The pandemic has underscored the risk that animal diseases pose to human health. Experts have warned that zoonotic epidemics may become more frequent due to factors including further environmental degradation, intensive farming practices, and the effects of climate change. Timely trade data and transparency are playing a key role not only in tackling the Covid-19 pandemic, but also in fostering economic recovery and trade policy to ensure that the trading system will promote sustainability as well as environment protection.

Improve trade data to fight Covid-19 Supply chain issues raised by the pandemic required to be grounded in data. If there is no timely trade data , it would put governments and institutions under greater pressure to take informed decisions ,and could lead to counter-productive measures. For instance, detailed trade data of vaccines and other essential products required to tackle the Covid-19 such as personal protection equipment (PPE), pharmaceuticals, and medical equipment are currently not available as the information captured at the time of importation is not detailed. Because of these information gaps, governments and institutions find it difficult to make full use of trade policy cooperation in their efforts to combat Covid-19.

Many institutions and the public sector are trying to remedy the data gaps.

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THE EQUILIBRIUM 2021 To take urgent action to ensure that the relevant statistical information on trade in products for 2020-21 are not entirely lost, we can create new national tariff lines or new statistical codes. WTO has introduced Integrated Database which can aggregate information at a national tariff line level and allows the possibility of identifying goods beyond the Harmonized System six-digit code system (codes used to classify goods for customs purposes) so that the members can use it to compile and disseminate data on the relevant products. Additionally, private companies may also have an important role to play since they have detailed information that they might be willing to volunteer. However, to establish public-private partnership to obtain more timely and precise information, governments should guarantee the private sector in terms of confidentiality and other considerations.

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Pangolin bust in Medan, Indonesia, April 201

Increase Transparency of wildlife trade Wildlife trade is an important source of income and nutrition in many regions.

Legal wildlife trade in the European Union alone is estimated to be worth $112 billion a year. Besides, the value of illegal wildlife trade is estimated at between US$ 7 and $23 billion per year (WTO, 2020-d). Since wildlife diseases can adversely affect public health, it is important to pay attention to disease surveillance in wildlife. However, global wildlife trade is difficult to estimate and control because it ranges in scale from local barter to major international routes, and relies on informal, unregulated or illegal networks.

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In order to increase transparency in this regard, in April 2020, the World Organization for Animal Health (OIE) issued a Statement on Wildlife Trade and Emerging Zoonotic Diseases with sound standards, risk assessment, and risk management tools to support responsible and sustainable wildlife use. The OIE has also initiated the Wildlife Health Management Programme to reduce and manage risks of spill-overs between wildlife, livestock, and humans, while ensuring the protection of biodiversity. The aim of the programme is to promote good practices in wildlife trade and facilitate the implementation of integrated wildlife surveillance systems, thereby producing new guidelines and international standards, which will cover the transportation, capture, farming, marketing, and consumption of wildlife, and to raise awareness on best practices

To manage the risks related to emerging diseases of animal origin, the Food and Agriculture Organization of the United Nations (FAO), the OIE, and the WHO are collaborating on a One Health approach. WTO started the Standards and Trade Development Facility (STDF) to help developing countries to engage in safe trade. This document has been prepared with important implications for livelihoods, food security and nutrition worldwide.

Besides, The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) was negotiated to ensure that measures affecting trade taken by governments to protect human, animal, and plant health and to ensure food safety do not create unnecessary barriers to international trade. In addition, the SPS Agreement will help governments to take interim measures in circumstances of emerging diseases. Besides, WTO provides a "peer-review mechanism" so that the members are able to comment on other members' SPS measures and share information to ensure that trade measures contribute to enhancing future resilience to diseases of animal origin.

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15. Around 97 were rescued alive and 77kg of scales were confiscated.

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Case Study 1: One Health Approach

One health approach is a collaborative, multisectoral, and transdisciplinary approach to achieve optimal health outcomes and recognize the interconnections between people and their shared environment. “One Health” concept was first used in 2003 to have a direct impact of environmental epidemiology on human and animal health, and it has become more important in recent years. We have to revisit the approach since the world is experiencing a major health crisis of Covid-19. In March 11, 2020, the World Health Organization (WHO) declared Covid-19 as a public health emergency of severe consequences.

The foundation of the One Health approach, as mentioned by Centres for Disease Control and Prevention (CDC), consists of communication, coordination, and collaboration. This combined method will reduce the occurrence and spread of the pandemic with the supervision of experts from different sectors like animal health (veterinarians), environmental health (ecologists, agricultural workers) . Moreover, it would require various institutions like WHO, WTO to lead the formulation and implementation of stringent policies including laws and penalization for successful application of One Health idea at a global level.

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Case Study 2: WTO SPS Agreement

The agreement says regulations must be based on science to protect human, animal or plant life or health and should not discriminate between countries where identical or similar conditions prevail. It is recommended for member countries to use international standards and guidelines as they are unlikely to be challenged legally in a WTO dispute. Nevertheless, if there is scientific justification, the members may use measures which produce higher standards. As long as the approach is consistent and not arbitrary, they can also set higher standards based on appropriate risk assessment.

Moreover, since the SPS Agreement allows temporary precautionary measures, the member countries can apply precautionary principle which is a “safety first” approach to deal with scientific uncertainty. Therefore, the agreement allows countries to use different standards and methods of inspecting products. For instance, If an exporting country can demonstrate that the measures it applies to its exports achieve the same level of health protection as in the importing country, the importing country is expected to accept the exporting country’s standards and methods. The SPS agreement consists of provisions on control, inspection, and approval procedures. Governments should establish a national enquiry point to provide information and notice of new sanitary regulations. The agreement complements that on technical barriers to trade.

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The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) was first established by WTO on 1 January 1995 with the concern of the application of food safety and animal and plant health regulations. The main purpose of the SPS Agreement is to maintain the sovereign right of any government to provide the level of health protection and to ensure that these sovereign rights do not result in barriers to global trade.

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The Covid-19 pandemic represents an unprecedented disruption to the global economy and world trade in services and goods as production and consumption are scaled back throughout the world.

Shipping prices also begin to surge because of the soaring demand, shortage of containers and too few ships and docks workers.

Nevertheless, the role of international trade is obvious in response to Covid-19. Not only in scaling up vaccine production, global trade can also help in economic recovery to prepare more effectively for future pandemics. Upgraded trade rules and regulations can help to raise living standards and reduce poverty. However, it will require governments , institutions and the private sectors to work together to strengthen the multilateral trading system and take collective action towards a sustainable future. Only then, international trade can support resilience to crises and contribute to economic recovery.

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PREDICTION OF THE FUTURE

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GLOBAL POLITICAL COMPETITIVENESS & COMMODITY TRADING

BY LEONARD ONG XIA WEI 91

The content of this article aims to provide the understanding of certain global trade disputes and resolutions of ongoing mishaps around the world whilst endeavouring to offer an alternative perspective on how the current situations evolve soon. This covers the scenario of the recent G7 summit, the economic progress of BRIC countries, the Covid-19 pandemic on an economic scale, and the ongoing US-China trade war.

The Group of Seven (G7) represents an informal organisation comprising the world’s top 7 countries with so called advanced economies. They consist of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. It was held at Carbis Bay, Cornwall, UK from the 11th to 13th of June 2021. Although China and India are currently advanced economic countries, they were not part of this organisation as back in 1975 when it was founded, these 2 nations were lagging in terms of productivity, commerce, international trade, and technology.

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THE KEY DISCUSSIONS MADE AND CHANGES IMPLEMENTED DURING THE RECENT G7 LEADERS’ SUMMIT IN JUNE 2021

G7 2021 Summit at Cornwall, United Kingdom

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The first change that was finalised is the donation of Covid-19 vaccines by the volume in billions of doses. The G7 leaders pledged to deliver an additional 870 million vaccine doses for the developing world apart from the 250 million already promised by the US and 100 million from the UK. Deliveries will commence over the next year. (Douglas Broom, 2021) The second change advocated was eradicating the usage of coal firing as a source of energy. The leaders pledged to phase out coal-fired power generation at home and to end funding for new coal-burning power plants in the developing world. They were committed to offering developing nations a sum of $2.8 billion to help them switch to cleaner fuels as a more environmentally friendly alternative. The summit also assured to make good on a pledge, first made in 2009, “to jointly mobilize $100 billion per year from public and private sources, through to 2025” to developing countries to help them tackle the adverse impact of climate change. Coal is an abundant fuel source that is relatively affordable to produce and convert to useful energy. However, producing and using coal produces adverse effects on our natural environment. According to the US Energy Information Administration (EIA), methane emissions from coal mining and abandoned coal mines accounted for about 11% of total U.S. methane emissions and about 1% of total U.S. greenhouse gas emissions.

According to the US EIA in 2018, 15% of US coal production was exported to other countries, with exports reaching their highest level in five years mainly due to strong demand from Asian countries. This has resulted in global prices to soar until the Covid-19 pandemic outbreak took place.

This triggered many US coal producers to increase their investments in coal mining.

The third topic that was brought up was concerning major Technology Multinational Companies & the corporate taxes meted out. The summit came up with precautions to dissuade multinational companies from shifting profits to low tax havens. Leaders signed up to levy a minimum 15% corporate tax rate. They also moved to help protect the global financial system from the impact of climate change by agreeing on rules to require companies and financial institutions to disclose the extent to which their business is exposed to climate change risks.

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ECONOMIC IMPLICATIONS OF THE CHANGES METED OUT

A pledge executed on donating Covid-19 vaccines to poorer and developing nations can help to strengthen bilateral relations further. In the best-case scenario, the G7 nations might win them over from China in the game of tug of war with respect to competing over global trade as well as military strength. This can be a double-edged sword. In a politically inclined world, it is difficult to determine the ulterior motives of various governments and which sides they choose to take eventually. To date, for instance, nations such as Singapore and Switzerland are politically neutral countries that are supportive of the interests of western imperialism and the communist movement mainly from China. Some health experts have claimed that the Covid-19 virus will become endemic which in fact, no empirical evidence has been discovered that society must learn to live with this airborne virus and be immune to it. To add on further, nobody could predict or estimate how long this pandemic would last. Some health pandemic experts claimed that it will last until sometime in 2024 and 2025 where air travel and tourism can return to normalcy. Thus, in relation to the pledge of donating Covid-19 vaccines to poorer nations, it is tough to project the estimated costs incurred on G7 countries as the virus keeps mutating and forming newer variants.

Pharmaceutical researchers are currently working round the clock to produce vaccines that provide better protection against the newer variants and booster shots for the vaccinated. Those booster shots are highly recommended to be taken on a cyclical time frame. This can be a worrying issue as those developing nations who were promised to receive medical aid from G7 leaders might not be granted the full benefits. In addition, the pandemic itself has already placed most of such first-world countries into a budget deficit for the fiscal year of 2020 and has induced them to accumulate a public debt at an all-time high as well. This would jeopardise the financial situation of the global economy as the International Monetary Fund (IMF) would reach a point where there are insufficient funds to bail out developing nations and give monetary assistance to G7 nations for upholding this pledge. A serious review of the philanthropic initiative needs to be conducted in time to come, as soon as possible before the next summit in 2022.

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Donation of Vaccines in billions

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Corporate Taxes on MNCs Implementing a sort of corporate tax floor for MNCs can help to channel a guaranteed amount of revenue for the state which in turn, utilize it for other areas that require urgent monetary aid. However, improvising this would risk obliging them to pull out of the home country and seek another location, probably China or an ally of China, to conduct its operations. This will turn out to be damaging to the labour market due to lesser employment and productivity. Governments of countries with such MNCs must develop a second opinion on making this financial decision as it will drive the unemployment rate higher. The actions might not be reversible due to tighter competition soon when the global economy starts to recover swiftly. If this were to persist, both the income gap and wealth gap in the country can only grow wider creating a huge economic divide.

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Offering financial aid to developing nations to switch to cleaner fuels is easier said than done. Many developing nations do not have a transparent governance system which results in state-owned agencies and ministries performing window dressing techniques to appear as if they have taken appropriate action in tackling the climate change problem. A more plausible alternative would be to encourage local companies, be it start-ups, small and medium enterprises (SMEs), and multinational corporations (MNCs) in the clean energy field to set up investments in those developing countries which can, in turn, provide employment for the citizens. This is a win-win situation as those nations will gradually have a lower unemployment rate while G7 nations will profit off from such overseas investment ventures.

Likewise, for the case of US coal companies and those that heavily invested in coal, should look to other alternate sources of energy to ensure that their businesses remain sustainable and profitable by securing their business ties with their clients from Asian nations. This can only be possible and successful if both the US and China can reach a win-win situation in ensuring that no further conflict of interests happen.

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Using coal and renewable sources of energy

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HOW DO THE POLITICAL SITUATIONS IN G7 AND BRICS COUNTRIES AT THIS STAGE AFFECT THE GLOBAL ECONOMY? Background of BRICS and future plans BRICS was founded in 2001 and it was an acronym for 5 countries. In order, they are Brazil, Russia, India, China, and South Africa. These nations were ranked among the world's fastest-growing emerging market economies since then, thanks to low production costs, favourable demographics, and abundant natural resources at a time of a global commodities boom. Two of which are the key focuses as the big fishes in the global market, China, and India. The political situation in China has been rather stable all this while it is being governed by a single party, the Chinese Communist party (CCP).

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The political climate in India has been wavering slightly off ever since the second wave of the Covid- 19 broke loose. The mismanagement of this mishap has resulted in the approval ratings of Prime Minister Narendra Modi to plunge to an all-time low. This was at a different political climate from pre-pandemic levels where Former US President Donald Trump’s visit to India had enhanced trade relations with the US and brought opportunities for labour and production amongst the lowly educated and blue collared population. However, given China’s worsening relations with the West, we can expect more MNCs to seek India for labour and production opportunities. The Organisation for Economic Co-operation and Development (OECD) has predicted India’s economy to expand by 9.9% and become the fastest-growing G20 economy this year. According to McKinsey Global Institute, India’s manufacturing and construction sectors will experience 9.6% and 8.5% in annual GDP growth which creates 11 million and 24 million jobs respectively from 2023 to 2030.

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The CCP evoked an economic transformation in the country since the late 1970s when Deng Xiaoping was the ruler. Since then, it has progressively developed economic relations with other developing nations as well, and ever since 2001 when it joined the World Trade Organisation (WTO), it has progressively forged Free Trade Agreement (FTA) with many nations. Ever since its economy was reformed in 1978, its GDP has averaged 10% per year and more than 800 million people have been lifted out of poverty. In the present day, it is classified as an upper middle-class country, and has achieved significant advances in access to healthcare, education, technology, and the military. From manufacturing the currently world’s fastest production maglev train to assembling their local commercial aircraft, the C919, and based on the unpredictable positive economic growth achieved in 2020, it is anticipated that it will surpass America as the number one economic powerhouse by 2028. China’s GDP growth of 2.3% in 2020 is mainly attributed to expansionary fiscal policies and intact exports which allowed more money of their local currency (Yuan) to be circulated in the economy, which in turn increases consumer spending, investments to a small extent and overall net exports that led to the minor increase in the overall GDP. Given how the CCP has managed the pandemic thus far and how they deal with the latest situation in Nanjing and Wuhan, it will not be surprising that by the 4th quarter of 2021, the country’s economy can rebound to pre-pandemic levels. (World Bank, 2021)

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The United States as the key representative of the G7 and its future plans The United States has been perceived and observed as the biggest superpower and economic powerhouse of all time. However, ever since China joined the WTO, the American dream has perished. As most manufacturing moves to developing nations, including China, India, Vietnam, and Bangladesh, gone are the days of the industrial revolution. Under Joe Biden's Administration, more new spending and new taxing economic strategies were introduced unlike his Democratic predecessors Barack Obama and Bill Clinton. No negotiation of new FTAs was passed as well. It is pretty obvious that at this point, Biden’s approach in handling the economy differs from Trump’s as the health of the citizens is placed of higher significance than growing the economy on an international scale. Doing this can affect the GDP growth in the short term despite the $1.9 trillion American Rescue Plan Act. However, in the long term, gradual GDP growth can be projected and the dollar will be strengthened back to the original price level.

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How will the ongoing Covid-19 pandemic affect trade relations amongst G7 and BRICS countries?

The battle over types of Vaccines used in the Covid-19 pandemic

In reference to a report by the IMF, in 2017 when the global economy was in normalcy before the technical recession took place, BRICS had a combined nominal GDP of USD 18.55 trillion while G7 nations produced USD 36.75 trillion in nominal GDP. The G7 nations developed a common goal of gearing towards fair trade practices around the world by manipulating the domestic policies and trade negotiations. This, however, was not the case for the US as Trump withdrew support in the IMF citing unfair treatment towards handling of the funds provided to them. The US-China trade war has also caused many job losses Thus, the topic on global trade has been a pressing issue for them all this while. In comparison to BRICS nations, they tend to be united and ambitious where they advocate a stronger say for emerging economies in international institutions in the hope to foster prosperity.

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Case Study 1: The pre-pandemic economic situation in BRICS and G7 nations

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Long-term Impact of vaccine distribution on global trade The world is in the race of securing as many vaccines and in time to come, booster shots to inoculate their citizens to reopen the economy as fast as possible in a calibrated manner. China, Russia, and the US are using vaccines as diplomatic tools to reshape the geopolitical dimension of certain nations, alliances, and organisations. Based on the political nature and ideologies of certain nations, it came to no surprise that Indonesia, Philippines, Malaysia, and Vietnam are importing vaccines from China due to the indebtedness faced from the borrowed funds by the fast-growing economic powerhouse. This in turn will be a wakeup call from Western powers to increase their presence and involvement with ASEAN apart from Singapore that uses Pfizer and Modena vaccines to inoculate their citizens. Likewise, the US has supplied Pfizer vaccines to Canada, the European Union, and UK while other developing nations such as Brazil and India are using AstraZeneca vaccines from China. Russia and China have also built a strategic partnership plan to make vaccines at competitive prices to deliver worldwide that mainly targets third-world nations.

This is a smart and strategic move by China. Given its increasing number of infrastructure projects in ASEAN in correspondent to the one-belt-oneroad (OBOR) initiative agreements signed with these nations, this will make those nations feel more indebted towards China. Therefore, it is projected to see a growing middle-income group in ASEAN while China’s poverty rate will also become marginalised over time. In response to this, it is a deciding factor whether to position one’s vaccine as a superior brand at a higher price or to adjust it at an affordable level and supply it to poorer nations to gain a political ground over advancing bilateral relations.

Competitiveness in Commodity Trade With regards to the commodity market, it is forecasted by the World Bank that commodities such as crude oil and metal will remain on a decline throughout 2021 till mid-2022. This is due to the prolonged effects of the spread of the newer virus variants and the need for extra time to adjust for market corrections across the global economies. Many countries to date are still reliant on oil revenues when it is still uncertain when air travel or other industries reliant on oil and metal can return to pre pandemic levels.

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The political situation in Afghanistan has proven to be a lose-lose situation while a win-win one for China. The sudden withdrawal of the American troops has resulted in mayhem and widespread chaos, as the control of the Taliban became increasingly prominent. This caused certain countries to doubt America’s trust in enforcing sovereignty and economic stability in any region. At the same time, China made a wise move in hosting a meeting with the visiting delegation led by head of the Afghan Taliban Political Commission Mullah Abdul Ghani Baradar shortly after the incident took place. (MFA of PRC, 2021) This meeting is a promising one for both Afghanistan and China as it is an opportunity for the OBOR initiative to come to light given how the multinational project is materializing in Central Asia and the Middle East. With the withdrawal of US and NATO troops, this will be an effortless negotiation for China and looking at Afghanistan’s poor economic stability, there is no doubt that new infrastructure projects and increase in commodity trade between the 2 nations will come to pass.

In response to the military coup in Myanmar, the condition might not seem dire as it is. Being part of the OBOR initiative as well, the current projects discussed and agreed by both countries are likely to have their progress undisrupted as much as the Commander-In-Chief, General Min Aung Hlaing has long standing relations with Chinese President Xi. China has always been looking forward to establishing the China-Myanmar Economic Corridor where the oil and gas fields are located. With the gas and oil pipelines and a railway route being constructed, the Bangladesh-ChinaIndia-Myanmar Economic Corridor (BCIM) will come to fruition earlier than expected despite the military coup situation. It envisages greater market access for goods, services and energy, elimination of non-tariff barriers, better trade facilitation, investment in infrastructure development, and joint exploration and development of mineral, water, and other natural resources (Chris, 2021). Hence, with all the above stated factors into play, we can expect commodity prices to inflate from time to time and will be competitive globally as the US will be fighting for market share too.

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It was reported in January 2021 that ASEAN countries have become China’s biggest trading partner in 2020, creating a total trade volume of US$731.9 billion by the Global Times. High level interactions were observed when China’s Foreign Minister, Wang Yi, visited Myanmar, Indonesia, Brunei, and the Philippines in January 2021. Experts are foreseeing that the aforementioned countries will foster stronger trade links in the manufacturing and service sectors, new energy, digital finance, and public health for cooperation. The contributing factor for the rise in trade volume between both parties was mainly due to ASEAN nations having faith in China to inoculate their citizens. This will be a good negotiating strategy in securing more deals involving commodity products. (Global Times, 2021)

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Due to the ongoing US - China trade war, how will the global production line evolve in the near future?

Case Study 2: The Inception of the US-China Trade War

The inception of the ongoing US-China trade war dates back to 28 June 2016 when Trump decided to combat unfair trade practices from China by improvising tariffs. In April 2017, Trump and Chinese President Xi Jinping agreed to a 100-day plan for trade talks but it failed to reach a mutual consensus. In the first quarter of 2018, tariffs were imposed on imported washing machines, solar panels, aluminium, and steel. China retaliated by imposing 25% tariffs on 128 US products resulting in Trump implementing 25% tariffs on $50 billion of Chinese imports. Thereafter, China planned tariffs for $50 billion of US imports and the tit-for-tat approach carried on until December when both nations agreed to a 90day halt to new tariffs. On 16 May 2019, Trump banned Chinese Telecommunication Giant Huawei from purchasing components from US companies but eased the restrictions during the G20 summit in June and Xi agreed to new purchases of US farm products. Unfortunately, the tit-for-tat approach carried on from both sides from August until October when phase 1 deals were brought up by Trump. (Reuters, 2020)

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Consequences of US-China Trade War The ongoing trade war has resulted in many farmers going bankrupt, and manufacturing and freight transportation sectors have been hit low since the last recession in the US. In fact, it has cost America 245,000 jobs and a total loss of $108 billion in GDP according to an Oxford study.

Should the trade war worsen further, a Solow’s Growth Model can be projected to be observed in other countries with a great source of labour and production that keeps up with China’s level of manufacturing.

The Solow’s Growth Model showcases that the change in the level of output in economic growth over time increases at a decreasing rate due to the changes in population growth rate, the savings rate, and the rate of technological progress. It clearly states that if the weightage of these 3 variables remains constant throughout, a steady state is forecasted which reflects that there is no economic growth in the long term. This, in turn, develops a convergence path and hence, it explains why a poorer nation grows at a faster rate than a rich country. Looking at the geographical landscape of those nations, it serves as strong evidence that the challenge for cheaper labour for production, expanding overseas investment opportunities, and gaining a stronger common political ground. This drives the start-up and capital costs to be very low and as production from the huge population grows over time, the revenue and costs incurred will eventually increase over time too. Developed and highly advanced countries such as the US and China have reached a point where the maximum GDP growth can be achieved when all resources are fully utilized. In comparison with the other nations mentioned in the top 10 largest population list in 2100, they have the potential to scale up their economies to match up with those first-world nations. The US and China have attained that level of economic progress desired by poorer nations and having a larger population as forecasted will either cause no effect at all or make the situation worse due to the effect of transfer of wealth. Hence, this has also proven a race between the US and China in competing over territorial allies in forming bilateral trading partners to boost their economies further while those supporting the 2 biggest economic powerhouses can have their economies skyrocketed in the longer term. Those that are not supporting or contributing to either party might tend to lose out in GDP growth as a matter of fact. Countries that are rich or are equally rich in natural resources that are required to manufacture those goods that involve a trade war are the best alternatives for both parties to reduce the opportunity costs incurred.

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The Solow’s Growth Model Theory in Practice

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In a nutshell, no free meal is being served to any party or nation in this world. As the common saying goes, in this geopolitical society, nobody is friends with each other. This is due to political differences which results in a different common goal. It works best if both empires put their differences aside and focus on common good for their individual needs and goals. It is indeed tough to achieve a win-win situation as there is nothing wrong in a nation trying to pursue her own interests. However, in such a competitive era, it is a race to develop the best strategy in securing the most rewarding trade agreement for the long term to prevent oneself from being trapped in a zero-sum game.

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MACROECONOMIC ASPECTS OF INTERNATIONAL TRADE

BY SUMAIR JALAN 107

TRADE, INNOVATION, AND ECONOMIC GROWTH

In the digital age, an increasing number of governments have implemented policies targeted at promoting growth through innovation and technological developments. The domestic economic fallout associated with the Covid-19 pandemic has catalysed the adoption of such policies across the globe. Here we discuss the role trade, trade policies, and international cooperation play to attain economic growth by promoting innovation, technological development, and digitalization.

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Trade as a percentage of GDP in the World was a stunning 58.24% in 2019, as reported by the World Bank collection of development indicators (Figure 1) (2021). The economic theory identifies various channels through which trade influences economic growth: trade promotes efficient resource allocation, enables countries to realize economies of scale, facilitates knowledge diffusion, promotes technological advancement and product development, and fosters competitive domestic and international markets (Blavasciunaite et al., 2020).

Figure 1: World Trade over World GDP (1970-2019) Source: Trading Economics

The transition towards digitalization and knowledge-based economies accentuate the rising importance of innovation and technology to economic growth. The new government policies, termed as new industrial policies, primarily focus on innovation, technological development, and upgrading in the digital field (World Trade Organization(WTO), 2020).

Innovation is defined as the transformation of an invention into market products and services, new business processes and organizational methods, and absorption, adaptation, and dissemination of new technologies and know-how.

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Trade and trade policy have been vital engines for innovation. Countries increasingly implement outward-oriented policies because openness by access to global markets and increased competition forces firms to innovate (WTO, 2020). Hence, trade and trade policies are an integral facet of the new industrial policies. International cooperation through a multilateral trading system resulted in the advent of Global Value Chains (GVCs). It provides a framework of certainty and predictability in global markets that fosters innovation and technology diffusion. Besides, new industrial policies have positive externalities – generating growth, creating new markets, and encouraging technology diffusion. However, these strategies can also have negative externalities – distorting trade, diverting investment, or promoting unfair competition. International organizations like the World Trade Organization (WTO) play an integral role in international cooperation to maximize positive externalities from the new industrial policies.

RATIONALE FOR GOVERNMENT INTERVENTION

Trade and trade policy have been vital engines for innovation.

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Characteristics of public goods Innovation possesses the characteristics of public goods (non-excludable and non-rival in consumption). Since private benefits are lower than social benefits, markets supply inefficiently low quantities of public goods. For instance, data can be used by multiple firms simultaneously without experiencing any reduction in value. Hence, firms that collect and process data may be unable to fully capture the benefits, disincentivizing them to perform data collection and sharing. Governments can implement policies to incentivize the collection, processing, and sharing of data and reap these benefits while protecting private information.

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There are five types of market failures in innovative activity that rationalize government intervention (WTO, 2020).

Positive externalities Digital innovation results in the introduction and adoption of general-purpose technologies (GPTs) which generate large benefits for the entire economy. Such technologies generate positive externalities (the production and consumption of these technologies benefit a third party not directly involved in the transaction) leading to their underprovision by market forces. GPTs like the steam engine and electricity create positive, economywide spill-overs, through their provision of affordable computers and an internet connection, which induce complementary innovations.

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Asymmetric information Asymmetric information (an information gap) persists between the potential innovator and the potential financier in innovative activity. The innovator usually knows more about the innovation than the financier. It makes it difficult for the financier to predict returns from a potential investment in innovative ventures.

Consequently, the entrepreneur may not have access to the required source of finance. The lack of funding may inhibit firms from investing in innovation, and R&D investment will be underfunded. Government can intervene to improve financing for new firms and reduce their regulatory burden Coordination failures Complex activities are subject to coordination failures among stakeholders due to their complicated and intricate nature. The inability of stakeholders to coordinate their decision-making can result in suboptimal economic equilibrium. Government can intervene to support the economic development of the digital economy by coordinating the co-financing of communication infrastructures.

Network externalities Digital technologies are subject to significant network externalities or effects - the value of the network rises with more users. There can be a gap between the private and social benefits of joining a network, which leads to inefficiently small networks and necessitates government intervention. Besides, government mandates or de facto standardization can result in a single technology dominating the whole market and induce dynamic inefficiencies in networks. Therefore, government intervention can address such risk of anti-competitive behaviour.

DETERMINANTS OF INNOVATION ACTIVITY Innovation persists in several forms, from the development and commercialization of new products to modifying existing products. Multiple factors influence innovation activity in the economy (WTO, 2020).

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Market size influences a firm’s decision to invest in R&D. When the market size is large, the firms’ potential profits are large, which acts as an incentive to innovate. Increased access to global markets and government procurement in innovative activities enlarge the size of the market and incentivize firms to invest in R&D and innovate.

Product market structure

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Market size

Besides, product market structure is another factor. The extent of competition in the product market impacts the potential benefits of investing in R&D since it determines the level of profits and the likelihood of displacing competitors. Trade policy and its influence on foreign firms’ access to domestic markets is a factor that influences the degree of competition.

Appropriability of research results Moreover, the appropriability of research results is important. The degree to which firms can reap the benefits of the results of their research impacts their willingness to invest in R&D. There are two aspects to this factor: the nature of innovation (whether it can be replicated by competitors with ease) and the extent of legal protection granted to the innovation through intellectual property rights (IPR).

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Productivity of research & development Finally, the productivity of R&D influences firms’ decision to invest in R&D. Higher productivity of R&D increases the incentive to invest in it.

Policies implemented to enhance innovation typically target one of these factors.

ROLE OF TRADE & TRADE POLICY Openness and Competition Trade deduces the level of openness of an economy. It influences the size of the markets firms can access and affects the product market structure by shaping the degree of competition in the domestic economy. Besides, trade determines domestic firms’ access to foreign technology, knowledge, and know-how (WTO, 2020).

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Access to larger markets increases the production scale, enabling firms to realize economies of scale and raise revenue from innovation. This incentivizes firms to incur the sunk (already incurred or irrecuperable) costs of implementing new technology or investing in R&D. Bustos (2011) highlights that easier access to the Brazilian markets after the establishment of MERCOSUR (Southern Common Market – a South American trading bloc) allowed Argentinian exports to increase their spending on computer and software, technology transfer and patents, and on inputs into innovation activities. In addition, Aw et al. (2011) conducted research using data on exporting and R&D expenditure of electronics producers from Chinese Taipei. They deduced that a reduction in the average tariff incurred by exporters from approximately 10 to 5 percent would raise the proportion of firms that invest in R&D by 2.5% points after two years and 4.7% points after 15 years. It is a significant improvement given only 18.2% of plants in the sample engaged in R&D.

Besides, the expansion of markets has a snowball effect that ripples through the economy along the supply chain. An increase in production by an exporter enables its suppliers to benefit from the larger scale as well.

Linarello (2018) found that the increased export opportunities provided to Chilean companies had a positive impact on the productivity of their suppliers (as cited in WTO, 2020). Lastly, interactions with foreign buyers lead to knowledge diffusion. A study conducted

by Atkin et al. (2017) indicated that Egyptian artisanal rug producers that exported via an intermediary enhanced their production techniques and the quality of their rugs. It highlighted the dual role of trade intermediaries: they match suppliers with foreign buyers and transfer knowledge about production techniques.

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Improved access to foreign markets

Therefore, trade policies that reduce export costs raise firm profits. Consequently, the expected profits from innovation increase which induces technology adoption and innovation in firms that have access to global markets. The expansion of exports raises demand for inputs and stimulates firms in their supply chain to engage in innovation and technological development.Firms in small and developing nations also benefit from technology transfer through their interaction with foreign buyers.

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Imports of capital goods and intermediate

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Trade enhances knowledge spillovers by facilitating the diffusion of knowledge embedded in intermediate inputs. Intermediate inputs are goods and services that help produce other goods and services. Cheaper imports increase productivity through learning, variety, and quality effects. Numerous studies highlight that imports of intermediate inputs with high technology content can raise total factor productivity in an industry.

According to a study by Keller (2002), foreign R&D, embedded in intermediate input imports, accounted for 20% of the total effect of R&D investment on the productivity of eight countries that belonged to the Organization for Economic Co-operation and Development (OECD) (as cited in WTO, 2020). Amiti and Konings (2007) found that a reduction of 10% points in input tariffs results in a 12% gain in productivity for Indonesian firms that import their inputs. The results from the research conducted by Nishioka and Ripoll (2012), using international input-output data for 32 developed and emerging economies, reinforce the positive externalities generated from R&D-intensive imports.

Liberalization of input trade promotes imports and innovation by reducing production costs. By sourcing cheaper inputs internationally, firms can lower production costs and raise profits. More affordable access to intermediate inputs increases expected profits, increases the incentives to invest in R&D, and thus induces innovation. Firm-level studies conducted in Argentina, Chile, Hungary, and India demonstrate the rise in plant productivity due to better access to foreign intermediate inputs.

Import Competition Competition from foreign producers can have diametrically opposite effects on innovation. Competition diminishes the profits of domestic firms and thus the availability of their funds to invest in innovation. On the other hand, domestic firms can evade the competition by increasing productivity or differentiating their goods from foreign competitors. It acts as an incentive for domestic firms to adopt new technologies and engage in innovation.

Empirical studies highlight that foreign competition increases innovation.

The data collected from 27 emerging market economies by Gorodnichenko et al. (2010) present a rise in innovation in manufacturing and service sectors due to import competition. The tariff liberalization in Colombia induced higher productivity in larger plants and those in less competitive industries (Fernandes, 2007). Besides, import competition drives the less productive firms to exit the market, which has a significant impact on aggregate productivity (Eslava et al., 2013).

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Besides, a study conducted by Bloom et al. (2016) examines the impact of foreign competition on firms in high-income economies. They analysed the impact of Chinese imports on the firms in 12 European Union (EU) countries.

The study indicates that firms most affected experienced higher innovation, measured by the number of patents procured. The increased competition also forces less productive firms to exit the market, inducing a reallocation of employment to technologically advanced firms. These two forces work in tandem to cause 14% of European technological upgrading from 2000 to 2007.

However, the Chinese imports hurt the innovation activity in US firms. The domestic US firms that failed to compete experienced a decline in sales and productivity. As a result, their investment in R&D decreased, and that reduced patenting. The smaller and less capital-intensive firms succumbed to competitive pressure which can result in a positive reallocation of resources to stronger, more innovative firms. The juxtaposing impact of Chinese imports on EU and US firms can be because of the varied initial conditions of competition in the market and the greater intensity of the import shock in the US. Therefore, trade liberalization has a twofold positive impact on innovation. It increases innovative activity within the firm and also induces a shift in resources to more innovative firms. In contrast, raising trade barriers can have detrimental long-term implications since it weakens the competitive pressure and reduces innovation incentives.

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Topalova and Khandelwal (2011) present an account of the trade liberalization episode in India in 1991, which was sparked by a severe balance of payments crisis. The reduction in trade protection led to higher levels of productivity.

There were two forces that were at play. The pro-competitive forces that induced competition by lowering output tariffs fostered greater efficiency in firms. Second, the reduction in input tariffs led to an influx of more affordable imported inputs which stimulated firm-level productivity. The study found that the impact of the imported input channel on productivity gains was more acute compared to the imported competition channel.

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ROLE OF INTERNATIONAL COOPERATION: TRADE ORGANIZATIONS & TRADE AGREEMENTS

Globalization & Global Value Chain participation Globalization refers to the integration of the world’s economy through trade, financial flows, and know-how (Siddiqui, 2017). The second half of the twentieth century experienced massive multilateral trade liberalization by developed nations. It was driven by the reduction in trade barriers induced by the General Agreements on Tariffs and Trade (GATT) initiated in 1947 and later the World Trade Organization (WTO) in 1995. Governments in richer economies reciprocated each other’s liberalization decisions, and liberalization applied to all trade partners. The liberalization of international capital markets and extensive international migration took place in tandem. Trade agreements, facilitated by international organizations, unanimously agreed on rules of conduct regarding the protection of property rights, including those related to proprietary knowledge. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) initiated by the WTO was one such trade agreement. The outcome of such liberalizing and integrative processes resulted in globalization.

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Besides, Alfaro-Urena et al. (2019) highlight that Costa Rican firms that supplied to foreign multinationals experienced a strong and consistent improvement in their performance. The survey attributed the positive performance to interrelated transformations in the production process. They widened product scope with higher quality products, enhanced managerial and organizational practices, and improved reputations. Therefore, GVCs facilitate international knowledge spill-overs that promote domestic innovation.

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The turn of the millennium saw the advent of the Global Value Chain (GVC) framework. Factors associated with globalization, including trade liberalization, enabled countries to spread their operations across the globe, resulting in international production chains called GVCs. A GVC refers to a network of interlinked stages of production for the manufacture of goods and services that overcome international borders (Mouriaux, 2017).

Countries participating in global supply chains benefit from technology transfer. International product sharing requires a high degree of interdependency between producers from different countries. The production of a good in the domestic country is dependent on the timely delivery of inputs from a factory abroad. Also, these foreign inputs must be perfectly compatible with the domestic production line. Thus, to ensure efficient production of the outsourced input, foreign firms share the knowhow, technology required, and managerial practices with domestic producers.

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Case Study 1: World Trade Organization

From the ancient days of the Silk Road to the establishment of the General Agreement on Tariffs and Trade (GATT) and the inception of the WTO (1995), trade has played a pivotal role in catalysing economic development and stimulating peaceful relations among nations (WTO, n.d.-a). Presently, WTO is the only global international organization that deals with the rule of trades between countries. It provides a forum for negotiating trade agreements targeted at reducing barriers to international trade and ensuring a level playing field for all. It also offers a legal and institutional framework for implementing and monitoring trade agreements, and for resolving disputes between members. Currently, the WTO has 164 members, of which 117 are developing nations or separate customs territories.

Although established about a quarter of a century ago, the WTO agreements have proved to be forward-looking in providing a framework that induced the development of an ICT-enabled economy in nations across all levels of development. The fundamental principles of GATT and now WTO, including transparency, nondiscrimination, reciprocity, and prohibition of unnecessary trade restrictive measures, have stimulated trade liberalization and innovation.

For instance, the Information Technology Agreement (ITA) administers a nondiscriminatory, progressive elimination of tariffs on ICT goods. The tariff liberalization has made essential technologies, tools, and infrastructure equipment, particularly internet infrastructure, more affordable. The ITA covers a broad spectrum of high technology goods, from computers and telecommunication equipment to semiconductors and software.

The General Agreement on Trade in Services (GATS) has allowed WTO members to design and implement innovation policies in a non-discriminatory and transparent manner. It has stimulated the liberalization of telecommunications and internetbased services.

In this digital age where innovation policies and economic integration drive technological progress, but where the two can also conflict, it is paramount for international cooperation and organizations to ensure modern industrial policies maximise positive externalities (expansion, exchange, diffusion of knowledge) and eliminate negative externalities (one nation’s technological advancement at the expense of others). Therefore, an effective WTO could prove more important than ever.

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Case Study 2: The Economics of TRIPS Agreement The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is the most comprehensive multilateral agreement on intellectual property (IP) (WTO, n.d.-b).

An outcome of the Uruguay Round (1986-94), TRIPS is integral in facilitating trade in knowledge and creativity, resolving trade disputes over IP, and assisting WTO members to achieve their domestic objectives.

Knowledge possesses characteristics of public goods that result in chronic underinvestment in the creation of knowledge. Once knowledge is public anyone can benefit from it which makes it difficult for the producers to reap the returns from their investment to recover costs. It acts as a disincentive to invest in knowledge, and markets fail to produce it in socially optimal quantities. Patents provide one way for the creator of a protectable work to restrict its use, reproduction, and distribution for a limited time. It allows the originator to gain part of the social benefits of their creations. IPRs such as patents provide producers of a work market power to set its price above the cost of production. The extent of market power depends on the price and availability of substitutes. The higher the availability of substitutes, and the closer the degree of substitutability, the greater the competition in the specific market, and the lower the market power of the producer. However, patents reduce societal welfare from the optimal level under the perfectly competitive markets as it lowers consumer surplus and consumers accrue deadweight losses.

The TRIPS agreement allows WTO members to tailor their approaches to IP protection and enforcement to meet their needs and public policy goals. Its flexible nature helps members balance between the long-term benefits of incentivising innovation and short term costs of limiting access to IP.

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IP refers to the creations of the human mind. Intellectual property rights (IPRs) are legal rights that protect these creations (WTO, n.d.-c). An IPR provides its owner only timelimited rights to exclude others from using their property. They are divided into two categories based on their economic purpose. One set of IPRs stimulates creativity and innovation by producing new or improved products, services, or creative works. It includes IPRs such as patents and copyrights. The other category consists of IPRs like trademarks that correct information asymmetries and maintain the integrity of the marketplace.

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INNOVATION & ECONOMIC GROWTH

As per the economic theory, long-term economic growth is dependent on the accumulation of capital stock, increase in labour inputs (in terms of workers or hours worked), and technological advancement (Chien, 2015). A production function highlights how the quantity of output behaves as a function of the inputs used in production. The CobbDouglas production function, invented by Charles Cobb and Paul Douglas, is a specific mathematical form (Cottrell, 2019).

Aggregate output Y is a product of the two factors of production: Capital, K, and Labour, L. Besides the two quantitative factors, aggregate output is also determined by Total Factor Productivity (TFP), A, which is the “quality” factor. The value of A highlights the state of technology and the skill and education level of the workforce.

Theoretical and empirical evidence suggests that technological progress is the prominent driver of long-run economic growth. The Cobb-Douglas production function exhibits a positive but diminishing marginal product of capital, MPK, and labour, MPL. According to the law of diminishing returns, keeping other input factors constant, the additional output obtained when adding one more unit of capital or labour will eventually fall. Hence, a country cannot sustain long-term economic growth by simply accumulating capital or labour.

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Innovation is a significant factor of economic growth as it affects the level of aggregate output via TFP. Innovation consists of technological innovation, which involves producing new goods and services, and nontechnological innovation, in terms of organizational or marketing improvements. Innovation induces higher productivity in the economy as the same input generates a greater output. As productivity increases, more goods and services are produced that results in economic growth.

This profound effect can be viewed through the lens of the Cobb-Douglas production function. Innovation leads to higher TFP, raising the value of A, which in turn increases the value of Y and promotes economic growth.

Figure 7 highlights the positive correlation between past TFP and future economic growth among developed countries (Chien, 2015). Nations that experienced economic growth driven by TFP before the Global Financial Crisis experienced higher output growth in the aftermath.

Figure 2 : Total Factor Productivity’s Contribution to Economic Grow Source: Federal Reserve Bank of St. Louis

Note: The blue line indicates correlation which was 0.5

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In this digital era, a growing number of countries are depending on innovation to keep pace with the rapid technological advancements and to drive economic growth. The realm of trade has been encapsulated by this wave of digitalization and this has given birth to various forms of digital trade. With the Covid-19 pandemic exacerbating these trends, it is imperative for nations across the globe to leverage their trade relations and policies to stimulate innovation, and for effective international cooperation to ensure maximization of positive externalities from innovative activity.

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PREDICTION OF THE FUTURE

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THE SYMBIOTIC RELATIONSHIP BETWEEN TRADE AND THE ENVIRONMENT

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The environment, which consists of anything and everything around us, is vital in maintaining ecological balance for all life on Earth.

Unfortunately, that balance has been tipped by mankind. Trade and its related activities may very well be one of the roots behind the upending of mother nature. Taking our wondrous nature for granted, we have wounded and taken too much from it, leaving it to collapse. Thus far, efforts employed to promote environmentalism, although triumphant, are arguably vastly insufficient as the effects of our ailing planet continue to be felt today.

Trade involves exports and imports. Profit from trade is known as net export earnings which are derived by deducting import expenditure from export earnings. Net export earnings are a component of gross domestic product (GDP), an indicator of how an economy is performing. GDP is calculated by summing consumer, investment, and government expenditure and total net exports. Besides that, trade also contributes to GDP via consumption expenditure on imported goods and investment expenditure in trade-related businesses or infrastructure.

With the world becoming increasingly integrated, international trade is booming more than ever. Furthermore, international trade has been increasingly significant in its contribution to economic growth over the past few decades. According to statistics from the World Bank Group (n.d.), world exports for goods and services as a percentage of GDP has risen from approximately 13.3% in 1970 to approximately 29.5% in 2019 (Figure 1).

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TRADE, INDUSTRIALISATION AND ECONOMIC GROWTH

Figure 1: Exports of Goods and Services from 1970 to 2019 (The World Bank Group) Source: The World Bank Group

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Economic growth, however, is a double-edged sword to the environment, depending on the state of growth the country is in. This can be analysed through the environmental Kuznets curve (EKC) (Figure 2). According to the EKC, as an economy develops till a certain level is reached, environmental quality will deteriorate before beginning to improve (Halton, 2021). This occurs as a country progresses from a pre-industrial state to a post-industrial state.

Figure 2: The Environmental Kuznets Curve

Industrialisation poses negative impacts on the environment. Large areas of forests have been cleared to make way for factories. Forests are essential for life on earth. Firstly, they are the homes of countless species of diverse plants and animals. Deforestation causes the loss of biodiversity and displaces the animals that have forests as their natural habitat, disrupting the ecosystem. Secondly, forests are carbon sinks. They absorb more carbon dioxide than they release, purifying the air. Significant loss of forested areas increases carbon dioxide levels in the atmosphere. Carbon dioxide is a greenhouse gas that contributes to global warming when it is in excess. Furthermore, industrial activities lead to the production of greenhouse gases, chemicals, and toxic waste that will consequently result in air, water, and land pollution. For example, burning coal, a common energy source for production, emits pollutants such as sulfur dioxide, nitrogen oxides, carbon dioxide and mercury. Sulfur dioxide reacts with rain to form acid rain which removes nutrients and minerals from the soil that is important for the growth of trees (United States Environmental Protection Agency (US EPA), n.d.). It also leaches aluminium from the soil that might be detrimental to plants and animals (US EPA, n.d.). Nitrogen oxides along with other particulates that can also be produced via coal combustion will catalyse groundlevel ozone, known as smog, upon reacting with sunlight (National Geographic, n.d.). Hence, rapid industrialisation in developing countries will lead to a sharp increase in pollution.

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However, once the economy develops past the turning point as shown on the EKC (Figure 2), the environment will start to improve. When countries become richer, greater emphasis will be placed on services instead of heavy industries, galvanising a structural change in GDP. This shift from industrialisation to a post-industrialisation economy generally results in lower carbon emission. At this stage, government policies and regulations would have evolved over time to better address environmental concerns. Additionally, the country will now have greater resources to invest in cleaner production techniques that generate less pollution. In this aspect, international trade has a part in enabling the transfer of such innovation and technologies across countries.

Consumers can contribute as well, by switching to eco-friendly products. As eco-friendly products tend to be more expensive due to higher costs of production, their remoulded preference may be invoked by higher income levels in an ameliorated economy, alongside increased environmental consciousness.

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Trade is a driving force of industrialisation in several ways. Some examples include exportation of manufactured products, importation of technology, materials and other goods for production, and increased competitiveness of manufacturing firms. The increase in competitiveness can unfortunately bring about undesirable effects on the environment. To uphold international competitiveness, countries have relaxed various regulations, including those related to the environment in a bid to reduce costs. This is known as the “race to the bottom” hypothesis. The spike in pollution is exacerbated by the lack of green technologies and infrastructure, as well as heavy reliance on cheaper, “dirtier fuels” such as coal. Since such developing countries are in the infancy stages of industrialisation, they are typically more focused on remaining competitive and achieving rapid economic growth, thus having little consideration for environmental wellness.

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Case Study 1: China

China is the world’s largest manufacturer and exporter of goods. In 2019, China was responsible for 28.7% of global manufacturing output (Richter, 2021) and in 2020, it exported USD 2.591 trillion worth of goods around the world (Workman, n.d.).

Having to rely heavily on coal for energy generation, air pollution in China soared as the country went through rapid industrialisation. This caused widespread smog across the country. In 2020, 56.8% of energy consumption in China was powered by coal (Cheng, 2021), with the steel industry being the largest consumer (Myllyvirta, 2020). China is the world's largest emitter of greenhouse gas, exuding 27% of the total emissions in 2019 (British Broadcasting Corporation, 2021). Besides taking a toll on the environment, the catastrophic levels of air pollution in China had led to premature deaths of approximately 30.8 million people from 2000 to 2016 (Yirka, 2020).

The country has made efforts to reduce coal consumption in a bid to reduce air pollution. China has replaced some of its older, less efficient coal plants with newer and more viable “ultra-supercritical facilities” that are designed to consume less coal, yet still able to produce more energy (ChinaPower, n.d.).

It also champions the use of clean and renewable energy. A total of 83.4 billion US dollars was used to finance clean energy research and development in 2019 (Jaganmohan, 2021).

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OTHER NEGATIVE IMPACTS OF TRADE ON THE ENVIRONMENT Trade itself cripples the environment in a plethora of ways. This harm is not done on purpose but rather, is an undesirable outcome that is part and parcel of economic activity engagement. From facilitating trade to producing the goods necessary for trade, such actions are deleterious to our environment and are inevitable during the process.

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Crude Oil

Locating, producing, and transporting crude oil are detrimental to the environment. On land, forested areas are often cleared to make way for oil wells and under the sea, marine animals are at risk of being harmed when seismic techniques are used to search the seafloor(Energy Information Administration (EIA), n.d.). Hydraulic fracturing, also known as fracking, is a method used to pump chemicals and large amounts of water at high pressure to obtain oil from deep within the Earth (National Geographic, n.d.). The wastewater produced as a by-product contaminates the environment. In 2014, wastewater that leaked from an underground pipeline in Bear Den Bay, North Dakota, the United States, killed the shoreline vegetation (Dakota Resource Council, 2014). Furthermore, accidental oil spills may occur during the transportation of oil, creating explosions and contributing to water and land pollution.

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Fortunately, technological advancements have helped reduce some of these negative impacts. These include utilizing horizontal and directional drilling to allow each oil well to harvest more oil over a larger area so that fewer wells will be needed, having smaller and portable drilling rigs to reduce the extent of area impacted by drilling, and using technology such as satellites and remote sensing devices to locate oil reserves while reducing the number of exploratory wells needed (EIA, n.d.). However, these new techniques only serve to mitigate the unfavourable effects but not completely eliminate them.

Fishing

Bottom Trawling Fish is one of the most commonly traded food commodities around the world.

The European Union is currently the largest exporter of fish, standing at a value of USD 36.2 billion in 2019 (Shahbandeh, 2020).

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Overfishing causes drastic changes in the fish population, subsequently affecting the balance of the ecosystem and upsetting the food web.

Besides that, certain methods of fishing such as bottom trawling, hurt the environment further. Bottom trawling involves large, heavy-weighted nets being dragged across the ocean floor to sweep the catch. Thus, it results in a large bycatch impact, collecting everything in its path including other non-targeted marine creatures. In the process, bottom trawling disturbs the ocean bed and has, in some instances, damaged coral forest habitats.

Coral forests are some of the most biodiverse ecosystems and can take up to centuries to form (Hooper, 2020). Destroying coral forests will eradicate the entire community that has formed around them. Moreover, coral forests have a high level of endemism (species that are found only there) (Hooper, 2020), thus the loss of coral forests may lead to the extinction of some marine species. Despite repercussions on the environment, for some, bottom trawling remains a preferred method of fishing due to its high efficiency as it can catch large quantities of fish at a single time.

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Illegal, unreported and unregulated (IUU) fishing is a pressing problem in the industry. Fishers who fish without a license, overfish, avoid or underreport their catch to fall within quotas as well as fish in marine protected areas are just some examples of IUU (Burgener, n.d.). It remains a persistent problem as there have been difficulties in ensuring the legality of fish production. Insufficient deterrents, poor traceability and complex supply chains provide opportunities for illegal traders to exploit regulations.

Additionally, fish products which are traded in high volumes make it difficult for less capable ports to carry out inspections due to the lack of supporting infrastructure or technology. According to Burgener (n.d.), IUU fishing is accountable for 11 to 26 million tonnes of fish being fished every year and as they enter trade, they threaten the economies of local fisheries and the supply of fish to local markets

TRADE IN THE CHANGING ENVIRONMENT Glaciers are melting and sea levels are rising. Global temperatures have increased by 0.08 degrees Celsius per decade since 1880 and the rate of warming from 1981 onwards is more than twice that, 0.18 degrees Celsius per decade (Lindsey & Dahlman, 2021). As for global sea levels, it has increased by an estimate of 8 to 9 inches since 1880 and around a third of that increase occurred in the last two and a half decades (Lindsey, 2021).

The changing environment has severely impacted us humans and trade.

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Melting ice in the Arctic has opened up a new shipping route – the Northern Sea Route. Currently, the route opens only for a few months during summer in the Northern Hemisphere but due to rising global temperatures, it has been forecasted to remain viable during winter as well. The new route is expected to reduce traveling time by 30% as compared to the traditional Suez Canal-Malacca Strait Route (as seen in Figure 3) (Liu, 2020). While this shorter course is a boon for countries like Russia and China, it is a bane for countries lying along the Suez Canal-Malacca Strait route as fewer ships will pass by their seaports. Singapore, a thriving maritime hub that sits at the tip of the Straits of Malacca welcomes more than 130,000 vessels every year (Liu, 2020). However, that position will be threatened by the advent of the Northern Sea Route. In order to safeguard Singapore’s economic and commercial interests, new developments must be introduced to restore Singapore’s competitiveness and relevance. The Tuas mega port, which is set to complete by 2040, will allow Singapore to remain as a crucial player in the global supply chain, by utilising automation and artificial intelligence to increase its efficiency, and continue supporting high shipping activity from the expanding global population (Liu, 2020).

Figure 3: The Northern Sea Route (in red) and The Suez Canal-Malacca Strait Route (in blue) Source: The Economist

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Brazil has been a site of erratic weather events this year. Severe drought has plagued the country, diminishing crop production. On top of that, snow started falling in several parts of Brazil around the end of July, a rare occurrence that last happened 64 years ago. The bewildering phenomenon was a sight enjoyed by the public, though it brought about concerns regarding crop production. Among the affected produce are corn crops.

Both the drought and cold weather are set to affect the yield of Brazil’s second corn, the country’s second and main corn crop that accounts for 70% to 75% of yearly corn production (Mano, 2021). Already, the current low supply has led to higher prices for corn due to high demand from China.

Earlier in May this year, corn prices shot up by an estimate of 142% over the past year to USD 7.56 per bushel, the highest price for corn in the last eight years (Daniel, 2021). The negative impact of extreme weather on crop production faced by Brazil is not a first and will certainly not be the last, as the country’s rising greenhouse gas emissions and deforestation of the Amazon rainforest carry on, perpetuating climate change.

Additionally, extreme weather events can affect transport routes and the operation of ports, significantly hindering trade activity. For small island developing states (SIDS), the United Nations Conference on Trade and Development (UNCTAD) (2018) has highlighted substantial challenges SIDS face from extreme weather conditions because of their increased vulnerability due to their climate, geographical and topographical features, as well as their paramount dependency on coastal transport infrastructure such as airports and seaports.

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The changing climate has led to extreme weather events that are not only increasing in frequency but also intensity. These extreme weather conditions can directly impact trade by disrupting trade-related supply, transport and distribution chains. Record hurricanes, extreme droughts and torrential rainfalls are only some of the many extreme weather events that have occurred and hindered trade.

Even though our changing climate can bring about some benefits, it is without doubt that it has and will continue to bring us more harm than good. Hence, we need to put an end to climate change. Destructive human activity is the main culprit for causing rapid changes to the climate, resulting in extreme weather conditions. According to Carbon Brief (2021), 79% of all 405 extreme events analysed up till 2020 were influenced by some form of human impact and 70% were made more likely or more severe by humans. Therefore, we ought to take more decisive and targeted actions to save the planet from worsening climate change.

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BATTLING CLIMATE CHANGE

Environmental pollution is considered a negative externality to economists and businesses. Negative externalities are costs borne by third parties as a result of an economic transaction. Therefore, very often, environmental pollution due to economic activity is not addressed voluntarily but rather, it tends to be reliant on government intervention. Laws of all sorts exist worldwide for the sole purpose of curbing environmental pollution.

Common rules and regulations cover safe waste disposal and permitted levels of emissions to stem pollution. Policies and subsidies have also been rolled out to bolster clean energy adoption.

Some countries have imposed carbon tax to dissuade businesses from emitting copious amounts of greenhouse gas. With the implementation of carbon tax, carbon-heavy industries such as the electric power industry will face a rise in production costs. This cost may then be passed on to other industries as they require electricity to operate. Down the cascade, the cost may be further passed down to consumers and this will negatively impact their purchasing power. All these direct and indirect impacts will eventually wound the economy. However, this was not the case for Sweden despite having the highest carbon tax rate in the world (as of 2021) at SEK 1,200 (USD 138) per tonne of fossil carbon dioxide emitted (currency conversion based on an exchange rate of SEK 8.69 per USD) (Government Offices of Sweden, 2018). The tax was first implemented in 1991 at a rate of SEK 250 (USD 28) and was moderately raised over the years, giving businesses and households time to adjust to the rising costs (Government Offices of Sweden, 2018). This allowed Sweden to reduce emissions while maintaining economic growth. Schiebe (2019) noted that Sweden achieved a decrease in domestic greenhouse gas emissions by 26% between 1990 and 2017 while GDP increased by 78% in the same period. Although Sweden’s success might be attributed to the abundance of renewable energy sources that the country can tap on, it still sets an example for the world that it is possible to reduce our greenhouse gas emissions with the right attitude and policies.

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Pertaining to combined international efforts, we have the 2015 Paris Agreement. The Paris Agreement was an international treaty adopted in 2015 to battle climate change. It currently has 191 parties closely involved in the agreement (United Nations Framework Convention on Climate Change (UNFCCC), n.d.). Countries that have signed the agreement are to commit to reducing their pollution. It also serves as a platform for richer countries to help their less wealthy counterparts in achieving this global goal, by capping the increment of global temperatures to 2 degrees Celsius, though the ideal target is set at an ambitious 1.5 degrees Celsius (UNFCCC, n.d.).

There are ways in which trade can help restore the environment. As mentioned earlier, trade drives economic growth, expanding the capacity of the country to invest and manage the environment more effectively. It also promotes the transfer of innovation and green technologies and plays an integral role in facilitating environmentally-friendly projects across countries. One such endeavour which has been made by Sun Cable, draws on Australia’s resources to export renewable energy to other nations.

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How can Trade Play a Part?

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Case Study 2: Sun Cable Pte Ltd

The Australian-ASEAN Power Link (AAPowerLink) from Australia to Singapore Source: Sun Cable Pte Ltd

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Their flagship project, the Australian-ASEAN Power Link (AAPowerLink) will combine the world’s largest solar farm and battery storage facility in Australia’s Northern Territory with a 5,000km HVDC transmission system to provide Darwin, Singapore and ASEAN markets with renewable electricity (Sun Cable Pte Ltd, n.d.). It is projected to provide up to 15% of Singapore’s electrical energy needs when supply begins in 2027 (Sun Cable Pte Ltd, n.d.).

This project will make renewable energy more accessible to targeted countries and will subsequently reduce greenhouse gas emissions. Not only will it benefit the environment and slow down global warming but this green energy export project will also provide a new avenue of income for the country, stimulating economic growth.

Additionally, the giant project will generate plenty of job opportunities for the community. Moreover, with increased employment, consumer spending is bound to surge, further spurring economic growth. Furthermore, the expansion of the labour force will raise economic output.

THE EQUILIBRIUM 2021

Sun Cable is a multinational company founded in Australia and Singapore in 2018 (Sun Cable Pte Ltd, n.d.). It is developing the world’s largest solar energy infrastructure network that eventually aims to extend from New Zealand to India (Smyth, 2020). In order to do so, high-voltage direct current (HVDC) submarine cables are used to transmit electrical power over long distances under the sea.

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Though trade-related environmental damage may not be the main cause of environmental degradation, it poses enough of a threat, and it is of utmost importance that immediate action must be taken to lessen the impact. Measures of various forms have been taken domestically and internationally to tackle environmental damage but it is still not enough. The exponential rate of climate change and global warming due to environmentally harmful human activities only shows us that more must be done to save our planet. While continuing to pursue a cleaner and greener environment, trade and the economy should not be forsaken as those too, are of great importance. Striking a balance between them might be challenging but the world should look towards achieving both long-term environmental sustainability whilst ensuring economic prosperity.

THE EQUILIBRIUM 2021

PREDICTION OF THE FUTURE

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EVENTS

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ANNUAL GENERAL MEETING 26 June 2021

MACROPERSPECTIVE 1: BEGINNING YOUR POST GRADUATE JOURNEY IN ECONOMICS

15 August 2021

PHOTONOMICS COMPETITION 15 October 2021

AMPLIFYME FINANCE ACCELERATOR SIMULATION 21 October 2021

MACROPERSPECTIVE 2: ALUMNI PERSPECTIVE ON NAVIGATING THE JOB SEARCH

20 November 2021

ECONOMIC SUMMIT 2021 (1) BLOCK BY BLOCK: A STEP TOWARDS THE AGE OF CRYPTOCURRENCY (2) THE REALM OF INTERNATIONAL TRADE: THE GLOBAL SUPPLY CHAIN PERSPECTIVE

11 & 12 December 2021

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THE MACRO PERSPECTIVE SERIES Still unsure of your plans after graduation? Figuring out the answer to this question can be a tricky process for several students. The number of options often puts students in immense pressure and stress. Our Macro Perspective Series helps students with these decisions and is organized in two parts. The first part is to help students with the master’s application where our alumni talked about the important things which one is supposed to keep in consideration while filling out their applications. The second part is mainly focused on the process of making choices regarding a professional career after graduation.

15.8.2021

BEGINNING YOUR POST GRADUATE JOURNEY IN ECONOMICS

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We invited 4 SIM alumni, 3 of which are our SIMES alumni, to share their experience with the students and members of SIMES. They spoke about their life after graduation and the skills they acquired to secure their future paths. Each alumnus had a different experience in terms of their overall student lives, which gave more layered and detailed dimension to the discussion. The panel spoke, in detail, about the job finding process, how important it was to focus on one’s application, when to start applying from jobs and how to measure the pros and cons of the sectors that you want to work in. They laid emphasis on the leadership qualities and encouraged students to participate in other CCAs and activities. Students also got the opportunity to interact with our alumni directly during the networking session where they were able to discuss their goals and got advice on the same.

20.11.2021

ALUMNI PERSPECTIVE ON NAVIGATING THE JOB SEARCH

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1.12.2020 & 2.12.2020

PHOTONOMICS COMPETITION This year we have organised a Photonomics competition, SIMES first ever photojournalism contest. Participants were required to submit a photo taken by them, which represents any economic aspect, while also explaining how it fits the category. The aim of this competition is to see how aware we are of economical concepts being used around us, in our day-to-day life.

We are thrilled to announce 5 winners in this competition. Writeups and photos are included in the newsletter from next page.

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THE ECONOMICS SUMMIT The Economics Summit is our flagship event, where we have a panel discussion with economists at big banks and universities while helping our members get a better understanding of current pressing Economic issues. It also gives SIMES members an opportunity to conduct in-depth analysis of the topics being discussed through research articles and the chance to participate in mock panel discussions.

This year, the topics of our Summit are “The Realm of International Trade: The Global Supply Chain Perspective” and “Block by Block: A Step Towards the Age of Cryptocurrency”. These are hot topics in the current economy, and it would give invaluable insight to students into a new perspective of economics and how these topics will affect our daily lives. We have invited 8 well-esteemed panelists, 4 for each panel, to speak at our panel.

The Realm of International Trade: Terence Chua, Assistant Vice President of Phillip Securities Pte Ltd, Thilan Wickramasinghe, Head of Equity Research of Maybank Kim Eng, Umang Moondra, Secretary of Singapore Fintech Association, and Aisling Winston, Clinical Assistant Professor of University at Buffalo Block by Block: A Step Towards the Age of Cryptocurrency: Dr Sean Stein Smith, Strategic Advisor of The Central Bank Digital Currency Think Tank, Sagi Bakshi, CEO of Coinmama, Alexander Sugiharto, Chairman & Founder of Indonesian Legal Study for Crypto Asset and Blockchain, and Amanjot Malhotra, Country Head - India of Bitay

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PHOTONOMICS WINNERS

1 Adit Abraham Mathew The image represents how, despite the stale economic environment around the world, alternative investment, such as cryptocurrency, has blossomed through the despair. The blossoming of the flowers represents how despite economies being severely hit and becoming stale, like the leaves in the background, it has not stopped people from benefiting through investing in cryptocurrency, which has been flourishing during these tough COVID times. The economic topic that this is related to is economic growth. They are related as cryptocurrency gives governments and consumers more comfortable and simplistic access to financial services and capital. Bitcoin (BTC) has been accepted as a method of payment around the world in companies such as Twitch, Microsoft and PayPal. It is slowly becoming widely accepted around the world. Cryptocurrency provides a more transparent view of transactions that take place due to the blockchain technology eliminating the involvement of third-party companies in transactions. This can help in reducing corruption and fraud with the transparency. With BTC, there is a low cost of transaction, which could influence companies to own more BTC, thus increasing economic development. With all these factors in mind, cryptocurrency can drive towards economics growth in countries world over.

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2 Sumair Jalan "MAS and its Monetary Policy": The Monetary Authority of Singapore (MAS) is Singapore’s central bank and financial regulator. Unlike most central banks that conduct monetary policy by influencing the interest rates, the MAS uses the exchange rates as its policy tool. Situated on the Straits of Malacca, one of the most important shipping waterways in the world from an economic and strategic standpoint, Singapore is at the epicentre of world trade. Since gross exports and imports of goods and services exceed 300% of GDP, the exchange rate influences inflation to a greater degree compared to interest rates.

Hence, MAS’ monetary policy revolves around managing the Singapore dollar against a trade-weighted basket of currencies from its major trading partners. This is known as Singapore dollar nominal effective exchange rate (S$NEER).

To combat the rising inflation risks from supply chain disruptions and soaring energy prices, and the inevitable economic recovery, MAS implemented a contractionary monetary policy on October 14, 2021. It increased the slope of its currency band, allowing the Singapore dollar to appreciate about 0.2% to 1.349 per US dollar. This adjustment will ensure price stability over the medium term. Besides, it will help curtail imported inflationary pressures that will persist amid a surge in global demand and supply constraints. This is because a tightened monetary policy induces an appreciation of Singapore dollar, an increase in its value to trade-weighted basket of currencies.

Consequently, the price of imports falls in terms of the Singapore dollar to contain the imported inflation.

The unique policy stance of MAS on monetary policy about using the exchange rate and its recent implementation of contractionary monetary policy after 1.5 years compelled me to choose this topic.

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BEST P

3 Jasmine Lim Back in 1960, crowds of people living in unhygienic slums and squatter settlements are a common sight. There was simply no place to call home here on our Little Red Dot, Singapore. Today, the distinct HDB (Housing and Development Board) flats have become a landmark that highlights Singapore's rapid economic growth over the years. Not only did it provide a safe shelter for many Singaporeans and the generations to come, it also built a sense of belonging. Eventually, owning a BTO(Build to order) or any type of housing became a representation of independence for any couples looking to start a family in Singapore. These are represented by the droplets of water to showcase how each family have the ability to lead their own lives but also come together to form a strong united community.

However, there won't be sunshine without rain. New droplets will always form especially when it rains, just like how there will always be a rapid demand for new housing estates due to the increasing population. Therefore, it is an unavoidable yearly challenge as Singapore strive to innovate new ways in meeting the demands for housing.

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Rohe

"The C of Cen

HONORABLE MENTIONS

PICTURE:

4 n Veera

Comparative Advantage ntral Business Districts"

5 Teo Kang Qi "The Grey Swan"

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MEET OUR TEAM WRITERS, EDITORS

KHYATI BHARAT GUPTA

SUMAIR JALAN

LEONARD ONG XIA WEI

NG YANTING

CHEN WEI YU

TEO KANG QI

NG WEI MENG

BRYAN THAUNG MYINT OO

DESIGN

LUONG KIM BAO NGOC

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CHAN WAN NI

KHOR JEH RONG

SIM ECONOMICS SOCIETY

WHO ARE WE? SIM Economics Society is a studdent-led society at the Singapore Institute of Management, formed by a community of students who are passionate about economics, committed to learn and research global economic challenges.

OUR VISION SIM Economics Society aims to make learning economics fun and enjoyable through a variety of activities ranging from economics-related discussions to seminars and fun-filled activities and beyond the context of the classroom.

OUR MISSION We aim to foster students' understanding of economic concepts and their application in real life, and encourage discussions regarding global economic issues and possible solutions for them.

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The Future of Macroeconomic Policies In the Hands of Cryptocurrency Baer, G. (2021, April 7). Central Bank Digital Currencies: Costs, Benefits and Major Implications for the U.S. Economic System.

Bank Policy Institute. https://bpi.com/wpcontent/uploads/2021/04/Central-Bank-Digital-CurrenciesCosts-Benefits-and-Major-Implications-for-the-U.S.-EconomicSystem.pdf Caruso-Cabrera, M. (2014, October 13). Creating inflation is easy.

Just look at Venezuela. CNBC. https://www.cnbc.com/2014/10/13/venezuelan-economycreating-inflation-is-easy-just-look-at-venezuela.html# CoinDesk. (2021, August 20). Bitcoin Prices. CoinDesk. https://www.coindesk.com/price/bitcoin Handagama, S. (2021, Jan 29). Bitcoin and Inflation: Everything You Need to Know The cryptocurrency was designed to counter the harms of inflation, but is this really such a big issue?

CoinDesk. https://www.coindesk.com/markets/2021/01/28/bitcoin-andinflation-everything-you-need-to-know/ Lisa, A. (2021, June 29). Which Countries Are Using Cryptocurrency the Most? Yahoo Finance. https://finance.yahoo.com/news/countries-usingcryptocurrency-most-210011742.html Martucci, B. (2021, May 18). What Is Cryptocurrency – How It Works, History & Bitcoin Alternatives. MoneyCrashers. https://www.moneycrashers.com/cryptocurrency-historybitcoin-alternatives/ Noam, E. (2018, April 12). The Macro-Economics of CryptoCurrencies: Balancing Entrepreneurialism and Monetary Policy.

SIPA. https://sipa.columbia.edu/sites/default/files/25222_SIPAWhite-Paper-MacroEconomics-web.pdf

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