Weekly Market Summary
The week ended: Friday 7th August 2020
TikTok and WeChat Saga
All week there have been threats by the Trump administration to ban TikTok in the United States. This position softened to an ultimatum wherein the company had to be sold to a US company, presumably Microsoft, by September 15th, 2020 in order to avoid the ban. The threats have now materialized as President Donald Trump issued executive orders on Thursday that would ban TikTok and WeChat from operating in the US in 45 days if they are not sold by their Chinese-owned parent companies.
In the case of TikTok, such a ban would stymie the attempts of small businesses to take advantage of a new fad for low-cost marketing. This is especially relevant as small businesses are relatively cash-strapped as a result of the pandemic and any free source of advertising would be of enormous help. The ban on WeChat is also particularly relevant because it is an app that facilitates the transfer of funds between users. Although small businesses do not rely extensively on this mode of transfer of funds, it is still a low-cost option that would no longer be available, especially for Chinese-owned businesses in North America.
On the more macro level, these decisions by the Trump administration have understandably raised the ire of the Chinese government and they have threatened to retaliate. Given how powerful and important the Chinese economy is, any retaliatory measures might be even more significant than the inconveniences to small businesses noted above. Chinese retaliatory measures can considerably harm the supply chain of many small businesses and, in the event of a boycott of North American businesses, also hurt demand as well.
SME Impact
Overall, SME’s who sought to take advantage of the platform to market products and services in the United States would need to explore alternate options given the prevailing volatility.
War of Tariffs
U.S. President Donald Trump also announced on Thursday that his administration is restoring a 10% import tax on raw aluminium from Canada later this month. In response to this, Deputy Prime Minister Chrystia Freeland promised that Canada intends to “swiftly impose dollar-for-dollar countermeasures”. The decision by the White House is especially bizarre given the Canada-United States-Mexico Agreement that replaced NAFTA and went into effect on July 1st, 2020. A provision in the deal ensures that 70% of aluminium purchased by North American automakers must be produced in North America. This seems to signal that the US President’s motives might be political as opposed to economic or of legitimate concerns of legality.
The imposition of tariffs is never a good sign for any part of the economy because of its adverse effects on free trade. Small businesses in the US that rely on raw aluminium would be put in dire straits as their COGS would increase and they might have no choice but to pass this increase on to their customers. Faced with increased prices, as well as unemployment and low wages brought by the pandemic, demand from customers could be expected to drop precipitously and this would further exacerbate the problem for these small businesses in the US. A slowdown in business for these users of aluminium would also affect small producers of aluminium in Canada as they would also see a business slowdown. On the other hand, retaliatory tariffs imposed by Canada would mirror the same effects. COGS would increase for Canadian small businesses that rely on US imports for their production, and this would have a knock-on effect on Canadian consumers as well, decreasing demand and making small businesses to face a double whammy.
Job and Unemployment Statistics
Job and unemployment statistics for July were released on Friday and Canada’s economy added 418,500 jobs in the month. There have been gains in each of the last three months and these have recouped 55% of the job losses from the pandemic. The unemployment rate was lowered to 10.9% from 12.3% in the previous month. These figures slightly beat economists’ forecasts of 11% unemployment and 380,000 jobs added for July.
The positive job numbers for Canada is a good sign for small businesses as it means that the economy is slowly, but surely, getting back to normal. Increased employment, as well as 5.7% y-o-y increase in wages, also means that customers now have more cash to spend at small businesses.
The US job numbers were positive, but not as rosy. Just like in Canada, July was the third straight month of job gains as the US added 1.8 million jobs. However, the country is still down 12.9 million jobs. Although the job numbers also exceeded economists’ predictions, it is still far fewer than the 4.8 million jobs added in June which signals a slowdown in the rate of jobs added, presumably due to the recent resurgence of covid-19 in the country.
The 1.8 million jobs added does portend increasing demand from customers that now have jobs and income to spend. This is a positive development for small businesses in the US. However, the slowdown in job addition should be watched as it signals that the US economy still has a long way to go before fully recovering from the pandemic.