William Laraque, Managing Director at US-International Trade Services
04.04.2016 07:15 am
Saudi Arabia is organizing to create a $2 trillion Public Fund in order to diversify its economy from its oil dependency. At the same time, China has come to the realization through Jack Ma, that small business engagement in global trade via e-commerce, is the way to go. Alibaba dwarfs Amazon, PayPal and e-Bay in every dimension including sales and profitability.
In March 2016, Alibaba reached 3 trillion yuan or USD 464 billion in transaction volume, a 23% growth in GMV or gross merchandise volume from last year. GMV refers to the total value of third-party sellers' transactions on Alibaba's platforms and differs from Alibaba's revenue. GMV is an indication to investors and analysts of how fast an e-commerce company is growing compared to its competitors. The 3 trillion yuan figure represents a tripling of the e-commerce company's GMV since 2012 and a doubling since 2013. Alibaba hopes to hit 6 trillion yuan in transaction volume by 2020.
Alibaba has demonstrated logistical sophistication by using 200 Boeing transport aircraft to ship goods to China that resulted in $13.5 billion in sales on Singles Day, last Nov. 11th.
What Jack Ma has demonstrated conclusively is that e-commerce has come of age. It now represents a great hope for Chinese, Saudi, U.S. and European economic revival and job creation.
To Jack Ma's credit as a visionary, he has foreseen the need to revise WTO rules in order to facilitate, empower and finance engagement by small business in the global economy. WTO rules with regard to country of origin, as just one example, are hopelessly obsolete. I have pointed this out in detail in other articles. Ma is quite right that we need to encourage entrepreneurial and small business engagement in global trade. This will require a deconstruction of the current global trade regime and its reconstitution into a much more practical and workable structure.
The Triffin Dilemna
There are several problems in creating a new global trade structure and an e-WTP, an e-commerce World Trade Platform as suggested by Jack Ma. The first involves reserve currencies and the Triffin Dilemna. In the mid-20th Century, the economist Robert Triffin explained that the provider of the global reserve currency would need to run perpetual trade deficits to keep the world financial system operating smoothly; acting as a kind of WD-40 (lubricant) for the global financial system. This global reserve currency is the USD of course, which poses a dilemma for the U.S. in fueling booms and busts, according to Triffin. The requirement for other countries to create USD-denominated foreign currency reserves tends to appreciate the value of the USD, making USD-denominated goods relatively expensive and unattractive in global markets. Ever since Bretton Woods, the USD is the world's reserve currency. Merchandise balance of trade deficits are therefore a function of U.S. global financial leadership, not the silly role to which the wall-builders and trade-barrier erectors would relegate the USD, the U.S. and its global financial leadership. The Triffin Dilemna also affects China. How can China create a viable and sustainable e-WTP if the global reserve currency is the USD and not the yuan or renminbi?
The other problems are the continuing use of Alibaba's platforms by counterfeiters and the general lack of trust and confidence that counterfeiting and closely related cybercrimes are bound to create vis a vis Alibaba et alia.
Cybercrime and e-Platforms
The sine qua non of financial institutions and systems is a fundamental trust and confidence. If the Chinese PLA is suspected of conducting widespread industrial espionage, it is not likely that Alibaba will be entrusted with creating a secure platform whereby all parties to a trade transaction can buy and sell goods, make investments, etc. All the compliance, financial, logistical and legal services will have to be provided as well. The fairness and integrity of such a system must be sacrosanct and uncompromised.
There is a fundamental accounting issue involving GMV. The volume processed as Global Merchandise Volume is subject to payment and returns. The proceeds cannot therefore be recorded before taking payment and returns into consideration.