Global Unknowns10.9.17

Agility Emerging Markets Mid-Year Review

Essa Al-Saleh, CEO & President Agility Global Integrated Logistics (GIL)

A detailed look at the implications of Brexit for emerging markets, plus analysis of reforms intended to accelerate modernization of India’s corporate sector.

Two of the biggest unknowns for global business in 2017 are economic reforms in India and the UK’s exit from the European Union. In the recently published 2017 Agility Emerging Markets Mid-Year Review Agility and its partner, Transport Intelligence, looked at both.

The Review examines the implications of the UK’s Brexit for emerging markets and offers analysis of two important reforms in India: one, a unified “GST” tax to replace its baffling array of business taxes, and second, the surprise withdrawal of 500-rupee and 1,000-rupee bank notes from circulation in what has traditionally been a cash-driven economy. The goal of the Review — and of our annual Agility Emerging Markets Logistics Index — is to give businesses information that will help inform their decisions.

Brexit: Game changer or breaker?

  • Brexit has already weakened the pound and is expected to slow UK economic growth, likely resulting in at least a modest decline in demand for imports from emerging markets. If Brexit acts as a drag on the larger EU economy, that, too, could dampen demand for goods from emerging markets.
  • The UK government has signaled that in the initial aftermath of Brexit, it will attempt to take a copy-and-paste approach that will see it try and mimic EU tariffs. This would provide welcome stability for the UK’s emerging markets trade partners. However, trade disputes may arise over tariffs on certain products (most likely agricultural goods) and tariff rate quota arrangements will also necessitate three-way negotiation between the UK, EU and third parties.
  • If the UK does not have any kind of customs union with the EU post-Brexit, the UK’s role as a gateway for emerging markets to the EU will be damaged. Even if the UK manages to negotiate tariff-free trade with the EU, trade will not be as ‘frictionless’ due to the requirement of rules of origin checks, which add to the cost of exports.
  • The UK represents roughly 14% of the total EU population and about 16% of the union’s total GDP.
  • Even a customs union between the UK and the EU would not guarantee frictionless trade in goods. For example, Turkey – which has a customs union with the EU but is not in the single market — faces documentation checks and product sample tests where it does not follow EU rules for the production, labeling, movement and storage of certain goods. The UK needs to establish an appropriate regulatory agreement with the EU or face border checks.
  • Some emerging markets, such as GCC countries, Commonwealth countries and Brazil (through South America’s trade bloc Mercosur) are likely to pursue new trade deals with the UK. A mid-size Commonwealth market, such as Malaysia or Sri Lanka, could be the first emerging market to sign a new trade deal with the UK. Heavyweights such as China and India have the muscle to press the UK for significant concessions. Smaller emerging economies lack the same leverage, though they may be able to punch above their weight if British politicians are desperate to sign deals to make Brexit appear a success.
  • The UK’s ability to strike new trade deals with emerging markets countries may be constrained by the EU, the largest, most important market for the UK and a number of emerging markets. The EU accounted for 47% of UK goods exports in 2016. So, for example, would the UK sweep away barriers to permit cheap North African citrus to the UK if the EU, which heavily protects its Mediterranean producers, might retaliate with duties on UK manufactured goods?


Emerging markets businesses and policy makers should keep a close eye on UK-EU Brexit negotiations. … The EU’s stance to date is that “frictionless trade” with the UK is not possible after Britain leaves if the UK maintains its negotiating “red lines.” … The UK’s appetite to strike new trade agreements with emerging markets countries is tied directly to its negotiations with the EU: the tougher the terms offered by the EU, the greater the incentive for the UK to look elsewhere for trading partners and to be bold. … A sharp break with the EU could prompt the UK to slash its corporate tax from 19% to 12% in addition to seeking bilateral deals that drop barriers and lower costs for emerging markets products entering the UK. … New deals with China and India would probably be top priorities (Asia currently buys 21% of UK exports) but negotiations with both countries could be difficult. … The UK government wants to maintain existing EU duty-free trade arrangements with emerging markets. For now though, British business’s top priority is negotiations with the EU, which buys nearly 47% of UK exports.

India: No gain without pain

  • The total impact of Goods and Services Tax (GST) reforms over the long run is expected to increase Indian internal and external trade by 29% and 32% respectively. These estimates should be seen as lower bounds.
  • GST will replace more than a dozen levies with a single tax regime. The organised logistics sector (larger logistics companies) may benefit more than any other economic sector as GST will substantially cut the cost of moving goods across Indian state borders.
  • Large companies will reshape their supply chain networks as the new tax regime will no longer incentivize setting up one major warehouse in each state. Inventory will be centralized; national warehouse networks will consist of fewer but larger interconnected warehouses.
  • Demonetization has proved to be a short, sharp shock on the economy, but its effects have largely died out. While jarring, this forced businesses and consumers to rapidly adopt modern cashless payment systems.
  • Demonetization severely negatively impacted the informal logistics sector (small, unorganized, often one-person operations) in the short run, but may prove to be a shot in the arm for the organised logistics sector in the long run, particularly if it dismantles corruption as some have suggested.
    Overall, GST and demonetization will provide the already surging Indian economy and logistics sector with increased momentum.


India finds itself simultaneously in the midst of its biggest-ever tax overhaul and one of the world’s most ambitious monetary experiments. Neither has been without pain. … Economic growth slowed following the surprise move to pull currency notes from circulation and the introduction of a unified national sales tax. … By moving from a blizzard of state and local levies to a single GST tax, India will spur companies to retool supply chains and distribution networks. Instead of keeping inventory in small warehouses across 29 states to minimize their tax burden, producers will store goods and manage distribution where it is most efficient for them to serve multiple states. … Logistics costs — warehousing, transportation and related services — could come down 20%, by some estimates. The sector will also benefit from changes that simplify investment rules and allow for foreign investment in ports and other infrastructure. The move to withdraw banknotes, aimed at cracking down on corruption and tax cheats, created chaos. … But both the GST and monetary reform will accelerate modernization in India’s corporate sector. … Companies will have to buy from GST-compliant suppliers or risk paying additional taxes on goods that have already been subject to taxation. They will need to adopt new systems and processes in order to come into compliance and lower their business costs. Businesses and consumers alike will need to transition to cashless payments, including credit cards, smartphone payments and other types of transactions. … Facing the roughest adjustment are the poor and small-time shopkeepers and business operators who make up India’s massive informal economy, which still employs an estimated three of every four workers.


To view the entire report please click here: Agility Emerging Markets Mid-Year Review 2017

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