2020/08/28

Review of Monetary Policy Strategy. Fed won't hike FFR in preemptive manner until inflation target hits above 2% "over time".

STATEMENT ON LONGER RUN GOALS AND MONETARY POLICY STRATEGY

"U.S. economy will struggle against dis-inflationary pressures" - Jerome Powell

"The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.." - Federal Reserve

Fed Chairman Jerome Powell delivered a speech at the Kansas City Fed’s annual Jackson Hole policy symposium on 26th of August under the theme of "Monetary Policy Framework Review."

The Jackson Hall Meeting, a conference of renowned economists, is one of the annual events that attracts the most attention to the world every year. This is because the chairman of the Fed attends and presents directions for future interest rate policy.

The event is drawing keen attention as it could make remarks regarding the Fed's review of its interest rate policy for a year and a half. Considering on the continuing changes economic environment, the Fed said it will review its current rates so far and re-establish future policy directions.

“Our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Mr. Powell underlined. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

Interest rates will not be raised even if the inflation rate exceeds 2%.
The Fed's most likely review is the abolition of its previous "2% inflation target" adopted in 2012. The Fed saw 2% as price levels that induce growth without adversely affecting the economy. They responded by raising interest rates if prices were likely to rise higher than 2%.
The inflation rate in the United States has been well below the threshold for the past eight years. When the unemployment rate fell, the demand for labor increased and wages and inflation rose. Despite the low unemployment rate, wages did not rise and prices hit the bottom due to the low growth trend and technological innovation.

Fortunately, central banks around the world were able to lower their policy rates to a record low in response to the economic slowdown without worrying about rising prices.

However, growing concerns about low inflation troubled Japanese economy over the past two decades and Europe for a decade, which means when low prices continue and people think that prices will fall further than they are now, could spread by cutting back on consumption. If the economy gets worse here, there's no way to do anything about it anymore. (This is the reason why Japanese government bond were popular among its nation even though the yields were near zero. Almost 90% of Japanese nation holds their government bond which won't damage severely despite their fiscal deficit is over 200%. Greek situation is unlike Japan since they have foreign debts.)

The Fed mentioned about "average inflation targeting" that will have an average inflation rate of 2 percent "over time". Despite inflation rate reaches at 2%, Federal Reserve will remain short term interest rate pinned near zero for a while. PCE(personal consumption expenditures price index), which determines whether the Fed reaches its inflation target, rose only 0.9 percent in June after rising 1 percent in May. Experts predict that prices of some food and meat, which have been hit by supply chains in the aftermath of COVID-19, may rise, but not enough to reverse the low price trend.

Policy focus, price stability, employment and economic stability
It is not new that Powell and other Fed officials stressed job security by mentioning low inflation rate. It is more than a one-time comment because it means that the government will maintain this stance no matter how the economic situation changes in the future.

The Fed's policy focus is expected to shift completely from inflation stability to job security and economic growth. (So called dual mandate) Lewis Alexander, chief economist at Nomura Securities, said the Fed would not do anything that would put a damper on the job market unless it causes unfavorable inflation.

Some worry that the Fed is trying to play a policy role beyond its capabilities. "The monetary policy is approaching its limits," Paul Ashworth of Capital Economics, the U.K., said. "We don't publicly acknowledge it, but we can see that they are demanding stronger fiscal policy from the U.S. Congress."

Treasury bond yield rises
The implications of the announcement weren’t immediately clear for bond investors. The Fed’s long-telegraphed strategy means the central bank will likely leave short-term interest rates near zero for years to come (call money rate), an outcome that by itself should support demand for Treasuries. At the same time, higher inflation erodes the purchasing power of bonds’ fixed payments, potentially making longer-term bonds less appealing.

Following their initial drop, bond yields turned higher as investors focused on the less supportive aspects of the Fed’s policy, analysts said.

Aiding the move: the Fed didn’t commit to buying more longer-term Treasurys as part of its inflation strategy. That disappointed some investors who are concerned that the Fed’s current purchases could be overwhelmed by a deluge of new debt entering the market as the federal government funds efforts to revive the economy. (If Fed buys long term bonds, then there will be problem of austerity)

Source: Federal Reserve
https://www.federalreserve.gov/monetarypolicy/guide-to-changes-in-statement-on-longer-run-goals-monetary-policy-strategy.htm?fbclid=IwAR2vh7TkdObo6GRhihOX_r7bLBFMm9qEwOnai3vU-1yRDUYLeHWTUJ6ECmY

Source: Global Monitor
https://www.globalmonitor.co.kr/view.php?ud=2020082005303583651a6a872ef5_41

https://mobile.globalmonitor.co.kr/view.php?ud=202008200658229728915ce92b70_41

Source: New York Times
https://www.nytimes.com/2020/08/27/business/economy/federal-reserve-inflation-jerome-powell.html

Source: CNBC Television
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2020/08/26

Cross-Boarder Trade when exporting to China. (跨境)

Chinese government started levying excise tax on foreign consumer starting from January 1st, 2019. This is new policy called 跨境, which is China's own cross-border trading. CBT is to replace The rise in Chinese CBT is originated as platforms such as Alibaba, Kaola, JD are developing infrastructure of e-commerce system from fin-tech to delivery. This system is to ease regulation of general trade and it is form of new and legal trade. There are four benefits using CBT in trade with China.

1. Fighting with smugglers
The Chinese government has to impose tariffs on cross-border logistics transactions, but smugglers are interrupting it. The government wants to get rid of them by strictly regulating to those parties who did not register as an official business.
Therefore, the Chinese government designated CBT possible product lists and levied unified tax rates of 9.1% by registering as a white list and minimizing customs clearance lists.

2. Logistics
CBT transaction method is divided into individual special delivery and bonded area. It can be selected according to volume of transaction, enabling more efficient operation and management of logistics costs.

3. Risk hedge
Items must have FDA such as CIQ during general trade method (bulk trade) but CBT do not require authorization since it is traded in small amount. Unlicensed products are allowed in small amount.

4. Security
Since CBT is permitted by government, it has a safe transaction management of buyer information, payment method, and delivery detail.
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Understanding of CBT (Cross-Boarder Trade)

CBT exists in countries of borders, act of the buying and selling of goods and services between businesses in neighboring countries. CBT is beneficial for reduction of excise tax by buying consumer products from countries with low regulation of tax.

EU
Europe has many countries; CBT is crucial in EU area. Borders between Ukraine and Russia, between Norway and Denmark/Sweden/Finland/Russia/Estonia, between Denmark/Switzerland and Germany, and between Lituania and Poland benefit from CBT.

For example, the tax on alchohol is very low in Estonia than in FInland and Sweden. It is common to purchase massive alcohol from Estonia when returning to their countries. Other examples are down below in EU.

Lithuania - Poland : Food (Poland is cheaper)
Northern Ireland - Republic of Ireland (Petrol is cheaper in the Republic, where as groceries, furniture and clothing are cheaper than in Northern Ireland.
Netherlands - Belgium, Germany, France: Marijuana trade
U.K - France/Belgium: Brooze cruise (Alcohol, tobacco, etc)

North America
Cross-border trading between three countries in Canada, Mexico, and the United States is robust. The North American Free Trade Agreement (NAFTA) has reduced barriers and tariffs, facilitating cross-border trade. Each day from 2008, $2 billion of cross-border trade was conducted between Canada and the United States alone. However, president Trump has announced a new tariff of 10% on Canadian aluminum to protect American industry. The measure is said to be re-established just a month after the NAFTA came into force, which could worsen relations with Canada. 'Era of Nationalism'

Asia
Singapore has cross-boarder trading with Johor Bahru in Malaysia or Batam in Indonesia, to take advantage of price differences and differing product availability. For example, the Singaporean government has a law that requires a car leaving Singapore to have the fuel tank filled by at least 75 percent, to prevent it from being filled with fuel from outside Singapore.

Shenzhen, on the border of mainland China with the special administrative region of Hong Kong, also benefits from CBT. South Korea also benefits from CBT with China by exporting Korean consumer products such as cosmetics and foods.


Source 1: Border Trade
https://en.wikipedia.org/wiki/Border_trade

Source 2: Trump to Reimpose Aluminum Tariffs on Canada
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Incoterms 2020 (by ICC)

Why is Inconterms 2020 important?
There are more than 200 countries in the earth that are engaged in cross-border trade (CBT). Each country has different culture and history, which has to be a unified rule to make transaction easier and more convenient. 
In this regard, the International Chamber of Commerce (ICC) established Incoterms to limit the risks and costs that may arise in the process of exchanging goods between countries.
Incoterms 2020: Classification of eleven rules.

< RULES FOR ANY MODE OR MODES OF TRANSPORT>

1. EXW EX WORKS 
- Refers to the sellers (or also regarded as shippers) handing over contracted product from their factory or warehouse to the buyer (or also considered as consignee)
- The seller has minimum obligation, on the other hand, buyer covers all costs and organizes transport. (Buyer takes resposibility from seller's factory)
- Convenient condition for exporters who are not familiar with trade transactions since buyers takes own risk and cost for carrying out all the trade process.
- EXW is proceeded when seller is in A's position and buyer is in B's position.

2. FCA FREE CARRIER
- Seller's obligation: EXW + Transportation to specific place + customs clearance cost
- When the seller clears the delivery to the specific designated place nominated by the buyer, seller's obligation is terminated (risk and cost)
- If FCA takes place within the seller's territory, the seller must load the goods into the buyer's transportation, but in a place other than the seller's area, the seller is not obliged to unload the goods from their vehicle. It is the buyer's duty to unload and reload it on the new vehicle.

3. CPT CARRIAGE PAID TO 
- Seller's cost: FCA + transportation costs to designated destinations (where the destination is an agreed point inland)
- The seller must enter into contract of carriage. When the seller delivers the goods to the frieght forwarder, only the junction of the risk is terminated, and the bifurcation of the cost is terminated only when the goods arrive at the designated destination of the export destination. The bifurcation of risk and cost is different.
- If CFR, which is a maritime transport condition, is changed to a combined transport method, it becomes CPT.
- The seller must clear export customs, but the seller has no obligation to clear import customs and pay customs duties.

4. CIP CARRIAGE AND INSURANCE PAID TO
- Seller's cost: CPT + insurance contract settlement obligation
- If the CIF, which is a condition for sea transport, is changed to a combined transport method, then it becomes CIP condition
- The conditions under which the seller is required to pay the shipping cost and additional insurance premiums to the designated destination, which are mostly similar as the CPT. As with CPT, the junction of the risk is terminated upon delivery to the freight forwarder.

5. DAP DELIVERED AT PLACE
- Seller's Cost: When the goods are left at the designated destination without being unloaded, the breakpoint of the seller's risk and cost is terminated.
- Arrival transportation method can be ship and designated destinations can be a port.

6. DPU DELIVERED AT PLACE UNLOADED
- DPU rule [seller's obligation of concession] is added in Incoterms 2020.  
- This is a condition in which delivery takes place after the seller dismisses at the destination or at the agreed point of agreement.
- The seller bears the risks and costs of the transfer and the arrival of the destination is the same. If the seller does not want to bear the risks and costs of the transfer, the DAP condition must be used.

7. DDP DELIVERED DUTY PAID
- Seller's expenses: DPU + import duties and payment of VAT or GST.
- Sellers are required to pay both customs clearance and customs duties at their designated destination.
- The seller should deliver the goods to the buyer's area or warehouse. While EXW is the seller's minimum obligation, DDP is the seller's maximum obligation.

< RULES FOR SEA AND INLAND WATERWAY TRANSPORT>

8. FAS FREE ALONGSIDE SHIP
- Seller's cost: inland freight to the port + wharf freight alongside ship
- The buyer is responsible for shipping costs loaded from the ship to the ship. In other words, the divergence of risk and cost for the seller is terminated by simply placing the contracted product on the side of the ship. It is mainly used for bulk cargo [ex) grain, coal, log, etc.]. When the product is in a container, it is better to use FCA than FAS.

9. FOB FREE ON BOARD
- FOB is the most commonly used condition with CIF in practice. 
- The divergence of risk and cost ends when the seller puts the goods on board of the buyer's nominated ship. Subsequent risks and additional costs are all up to the buyer.
-The buyer has the right to sign the nomination of vessel (frieght forwarder) and the contract of carriage, and at the same time bear all costs such as freight and insurance to the destination (port).

10. CFR COST AND FREIGHT INCLUDING FREIGHT
- Seller's Cost: FOB + seller bears the freight to the designated port of destination.
- When placing goods on the deck of the ship, the seller's junction of risk is terminated, but the seller must bear the export customs clearance and shipping costs (friehgt) to the port of destination. The end points of the divergence of risk and cost are different.- If CFR is changed to a combined transport method, it becomes CPT.

11. CIF COST INSURANCE AND FREIGHT Fare.Including Insurance Charges
- Seller's Cost: CFR + Sea Insurance Fee
- Under the CIF terms, if there is no agreement for insurance between each other. The seller must pay for insurance. When signing an insurance contract, the policyholder and the insured are the sellers, but after the transaction begins and the goods are shipped, the insured becomes the buyer.
- The rules dealing with the rights and obligations of the parties under the CIF are the Warsaw-Oxford Rule-Waluso-Oxford Rules.
- If CIF is changed to a combined transport method, it becomes CIP.
I have been doing trading business for more than 3 years. Incoterms rule gives exporters and importers the standard point of whom bearing the risk and the cost. As an exporter, I frequently use FOB or CIF when transportation through ocean, and EXW or DDP through air transportation. Normally it Incoterms differ according to the weight and the volume of the amount of contract. Small amount can be shipped by air, whereas bulk trade is proceeded by ocean.  When the buyer is more eager to buy the specific product and has their own transportation method, then EXW is used. However, most buyers do not have their shipping systems, so I tend to nominate the vessel and freight forwarder, which leads to the incoterms of FOB and DDP.
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2020/08/24

GATT / WTO / FTA and pursuing of free trade.

Background
Every all the countries have propensity to increase their exports and reduce imports.
If imports are greater than exports, then it will lead to the trade deficit. The expenditure of dollar will increase than the dollar earned. Later there will be currency outflow which will lead to reduction of foreign reserves. Therefore, the country will face the risk of losing purchasing power in external necessities such as oil, iron ore, etc. Eventually, the nation's fundamentals will be weakened. There will be tremendous inflation (stagflation) and the nation's economy will crash.

Of course, it's not that bad news for resource-rich countries, but it's very lethal for resource-poor countries like Korea, Japan, and China. Because they have to buy essential resources or food in order to foster their economy.

But there is a geopolitical problem. The action to raise trade barriers to protect domestic industries such as raising tariffs is seen from old days to the modern times. Tariffs are taxes on imported goods meaning it will increase the price of imported products.
As a result, consumers will lose the reason to purchase foreign product and find domestic products. If each country creates such tariff barriers, it will cause a great fight later on. World War II also was big example from this.

These factors lead to establishment in institutional policies or organizations like GATT, WTO, and FTA.

GATT
When the global economy was having difficult time during the Great Depression(1929), U.S (they had the strongest economy at that time) implemented protectionism to revive the economy by levying 60 percent tariff on imported goods on Canada and Europe, which lead to tariff retaliation back to U.S. World trade plunged, exports were blocked by country, production declined, industry halted, unemployment increased, and the global recession intensified. As the protection trade overheated, Japan, Germany, and Italy, trying to be one of the countries which have economic powers, faced economic difficulties, and eventually tried to resolve them with force. In the end, the protection trade in the United States caused World War II.

In 1947, after World War II, the GATT was established as a precautionary measure to prevent the war. The purpose of the establishment is to expand free trade so that the world can engage in economic cooperation. Consequently, the trade barrier was eased and the international trade system was established in the right order. South Korea joined the GATT in 1967 as the 71st country which became a foothold to be an export-driven country. 

WTO
In the 1970s, major industrial countries shifted to protectionism due to the first and second oil shocks. As trade pressure between countries rises, GATT was unable to stop the dispute. It was not an international organization but just a simple agreement. Dispute settlement system and the legal binding force were not very effective to stop the trade tension.

In addition, facing the limitations monetary system due to Bretton Woods system, President Nixon announced the New Economy Policy and adopted fiat money by abolishing the gold standard system. Fiat-money is not based on anything (maybe based on treasury bond), but to put the meaning of the currency itself. So, the volume of money increased rapidly and it played a role in mitigating barriers to the trade. The Uruguay Round negotiations were held and WTO was established. It is to prevent concerns over the spread of protectionism in the previous era as the dependence of the global economy deepened. Here is the rule of it:

- Pursue nondiscriminatory trade
- Concessionary tariff allowed
- Predictable and always accessible to the market.
- Stability in its free trade.
- Encourage fair competition.
- Aid the smooth economic development of frontier and emerging countries.

FTA
Multilateral trade negotiations to support for economic development have begun to feel limited in establishing new order. There was no settlement due to differences between developed countries and emerging markets. It is wiser to have trade negotiations between the countries as an alternative.

Increased free trade agreement (FTA) with bilateral trade negotiations was faster and more efficient than multilateral trade negotiations. FTA eases tariff and non-tariff barriers to promote mutual trade. However, it violates the principle of WTO including multilateral exception clause. However WTO also admits FTA for its value of “laissez-faire trade” or trade liberalization and contribute on prosperity on global economy.

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2020/08/23

[Marketing] Online advertising cost models [CPC, CPI, CPM, CPA, CPV, CPS, CPP]

In common, CP means cost per and the meaning varies depending on which word is used. If a marketer achieves the same goal through advertising, then he or she should choose to make the advertising method more efficiently by choosing the cheapest way. When advertising online, the unit price of the advertisement may be fixed, and sometimes can be calculated as bidding method. Therefore, it is important to set an upper limit on the unit price of the advertisement so that it does not exceed the available budget and goals before executing.

CPA (Cost Per Action)
It is advertisement payment method depending on a visitors' action after clicking the link. Most actions depends on purchasing, but also varies on even participation, downloads, application for more information etc. CPA puts more value on inducing visitor's actions.

CPC (Cost Per Click)
It is priced whenever a click in online ad occurs, regardless of exposure. The amount set counting on media, advertising products, and bidding prices. [Keyword or banners] 

CPV (Cost Per Views)
It is priced whenever the visitors view the video, mostly in YouTube or other streaming platform.

CPI (Cost Per Install)
It is a term derived from app marketing, referring to an advertisement in the form of billing based on the number of users installed. It is considered as a sub-concept of CPA as app marketing becomes more active.

CPM (Cost Per Mile)
The cost is estimated by exposing 1,000 times each time. It means unit price per 1000 exposures. Sometimes it is called as cost per thousand. CPM is used when increasing of exposure is a top priority.

CPP (Cost Per Period)
It is an advertising method that sets a certain period of time and exposes advertisements at a fixed amount of money. Generally, the exposure period is fixed for one month and the amount is provided accordingly.

CPS (Cost Per Sale)
The fee is valued when the visitors purchase the product. Mostly it is used for sales commission fee.

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