That tailspin has ended almost as quickly as it started, and new inflation data today is making the Fed’s upcoming interest rate decision much more straightforward. But it’s worth revisiting what exactly happened in the markets over the past ten days and the lessons we should take heading into a consequential fall.

On August 5, markets in the United States fell 13 percent, in part thanks to Japan’s decision but also based on signals of a cooling US labor market. Global markets have experienced jolts in recent years; In 2023 Silicon Valley Bank (SVB) collapsed, marking one of the largest bank failures since 2008.

Below is a market reaction comparison for SVB and the recent “Summer Selloff.”
Click the arrow to see more.

While the recent shock differed in many ways from the one in March of last year, two key factors set the Summer Selloff apart: the state of the US economy and the situation with Iran.

One of the main reasons the VIX (the stock market’s expectation of volatility, sometimes called the fear gauge) spiked to historic highs last week was the risk of Iran’s retaliation and a wider war in the Middle East. As more serious talks of a ceasefire deal emerged during the week, markets started to recover quickly. But the situation is shifting day-to-day.

In the United States, markets were worried that the Fed was reacting too slowly to what was happening in the jobs market. In February 2023, right before SVB, the United States was adding 300,000 jobs a month, beating all expectations. But last month’s report was under 115,000 jobs. 

The Fed typically convenes eight times a year, but the summer schedule means there will be a notably long seven-week break before interest rates are revisited (absent a highly unlikely, and based on current conditions unnecessary, emergency meeting). This time gap could heighten market anxiety that the Fed is falling behind the curve and further erode confidence among businesses and consumers. While the Fed has signaled that it is preparing to cut rates in September, it is also aware that the meeting takes place six weeks before the presidential election, putting even more scrutiny than usual on its decision making. Federal Reserve Chair Jerome Powell has been clear that the election will in no way impact the Fed’s decision making. 

This morning, the Fed’s decision was made easier. The consumer price index increase data came in lower than expected, at 2.9 percent, which strengthens the argument for a rate cut when the Fed meets next month. In fact, some market participants think the Fed will cut by 50 basis points (bps), or half a percentage point, not its more standard 25 bps move. 

Compare the situation in the US economy now to the one during SVB’s collapse.

When SVB was unfolding, countries around the world knew they could rely on US growth to  stabilize the global economy. Forecasts for the economy were high and labor data was strong. Today, US growth is slowing (forecasted to be under 2 percent in 2025), China’s economy is stalling, and Europe remains stagnant. 

That explains why the market reacted the way it did last week—but what about the rapid recovery? All of last week’s losses have since been recoupled. In short, markets came to their senses. 

True, the Fed does not meet for another month, but Powell will be giving one of his biggest speeches of the year at the Jackson Hole Economic Symposium in a little over a week. The annual central banker retreat brings together financial leaders from across the world’s largest economies to discuss the ongoing economic issues and policy challenges. Powell’s speech is the perfect opportunity to signal the Fed’s intentions to cut rates and cool markets.

Meanwhile markets realized that while the United States is indeed slowing, it is still growing and far from a recession. Today’s inflation data confirms that the Fed—and the broader US economy—still have a very real chance of sticking the “‘soft landing” by hiking rates enough to tame inflation without causing a recession, an outcome that would be far outside the historical norm.

The bottom line is that between an election, the threat of conflict, and a slowing economy, there is likely to be more volatility in the months ahead. But volatility doesn’t necessarily equate to a downturn—it just means there’s more uncertainty than usual. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is an assistant director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Get ready for a volatile fall in the financial markets—but not necessarily a downturn appeared first on Atlantic Council.

Kenya is a prime example: In 2007, a local telecommunications provider launched a form of mobile money called M-PESA, which enabled peer-to-peer money transfers between mobile phones and became wildly successful. Within five years, it grew to fifteen million users, with a deposit value approaching almost one billion dollars. To address rising security concerns, in 2013, the Kenyan government implemented a law requiring every citizen to officially register the SIM card (for their cell phone) using a government identification (ID). The measure was enforced swiftly, leading to the freezing of millions of SIM cards. Over ten years later, SIM card ID registration laws have become common across Africa, with over fifty countries adopting such regulations. 

But that is not the end of the story. In parallel, a practice called third-party SIM registration has become rampant, in which cell phone users register their SIM cards using someone else’s ID, such as a friend’s or a family member’s. 

Our recent research at Carnegie Mellon University, based on in-depth user studies in Kenya and Tanzania, found that this phenomenon of third-party SIM registration has both unexpected origins and unintended consequences. Many individuals in those countries face systemic challenges in obtaining a government ID. Moreover, some participants in our study reported having privacy concerns. They felt uncomfortable sharing their ID information with mobile money agents, who could repurpose that information for scams, harassment, or other unintended uses. Other participants felt “frustrated” by a process that was “cumbersome.” As a result, many users prefer to register a SIM card with another person’s ID rather than use or obtain their own ID.

Third-party SIM registration plainly undermines the effectiveness of the public policy and has additional, downstream effects. Telecommunications companies end up collecting “know your customer” information that is not reliable, which can impede law enforcement investigations in the case of misconduct. For example, one of our study subjects shared the story of a friend lending their ID for third-party registration, and later being arrested for the alleged crimes of the actual user of the SIM card. 

A core implication of our research is that the Kenyan government’s goals did not fully take into account the realities of the target population—or the feasibility of the measures that Kenya and Tanzania proposed. In response, people invented their own workarounds, thus potentially introducing new vulnerabilities and avenues for fraud.

Good policy, bad consequences 

Several other case studies demonstrate how even well-intentioned regulations can have unintended consequences and practical problems if they do not appropriately consider security, privacy and usability together. 

• Uganda: Much like our findings in Kenya and Tanzania, a biometric digital identity program in Uganda has considerable unintended consequences. Specifically, it risks excluding fifteen million Ugandans “from accessing essential public services and entitlements” because they do not have access to a national digital identity card there. While the digitization of IDs promises to offer certain security features, it also has potential downsides for data privacy and risks further marginalizing vulnerable groups who are most in need of government services.
  
• Europe: Across the European Union (EU), a landmark privacy law called General Data Protection Regulation (GDPR) has been critical for advancing data protection and has become a benchmark for regulatory standards worldwide. But GDPR’s implementation has had unforeseen effects such as some websites blocking EU users. Recent studies have also highlighted various usability issues that may thwart the desired goals. For example, opting out of data collection through app permissions and setting cookie preferences is an option for users. But this option is often exclusionary and inconvenient, resulting in people categorically waiving their privacy for the sake of convenience.
  
• United States (health law): Within the United States, the marquee federal health privacy law passed in 1996 (the Health Insurance Portability and Accountability Act, known as HIPAA) was designed to protect the privacy and security of individuals’ medical information. But it also serves as an example of laws that can present usability challenges for patients and healthcare providers alike. For example, to comply with HIPAA, many providers still require the use of ink signatures and fax machines. Not only are technologies somewhat antiquated and cumbersome (thereby slowing information sharing)—they also pose risks arising from unsecured fax machines and misdialed phone numbers, among other factors.
  
• Jamaica: Both Jamaica and Kenya have had to halt national plans to launch a digital ID in light of privacy and security issues. Kenya already lost over $72 million from a prior project that was launched in 2019, which failed because of serious concerns related to privacy and security. In the meantime, fraud continues to be a considerable problem for everyday citizens: Jamaica has incurred losses of more than $620 million from fraud since 2018.
  
• United States [tax system]: The situation in Kenya and Jamaica mirrors the difficulties encountered by other digital ID programs. In the United States, the Internal Revenue Service (IRS) has had to hold off plans for facial recognition based on concerns about the inadequate privacy measures, as well as usability concerns—like long verification wait times, low accuracy for certain groups, and the lack of offline options. The stalled program has resulted in missed opportunities for other technologies that could have allowed citizens greater convenience in accessing tax-related services and public benefits. Even after investing close to $187 million towards biometric identification, the IRS has not made much progress.
  

Collectively, a key takeaway from these international experiences is that when policymakers fail to simultaneously balance (or even consider) usability, privacy, and security, the progress of major government initiatives and the use of digitization to achieve important policy goals is hampered. In addition to regulatory and legislative challenges, delaying or canceling initiatives due to privacy and usability concerns can lead to erosion in public trust, increased costs and delays, and missed opportunities for other innovations.

Policy as product design

Going forward, one pivotal way for government decision makers to avoid pitfalls like the ones laid out above is to start thinking like product designers. Focusing on the most immediate policy goals is rarely enough to understand the practical and technological dimensions of how that policy will interact with the real world.

That does not mean, of course, that policymakers must all become experts in creating software products or designing user interfaces. But it does mean that some of the ways that product designers tend to think about big projects could inform effective public policy.

First, policymakers should embrace user studies to better understand the preferences and needs of citizens as they interact digitally with governmental programs and services. While there are multiple ways user studies can be executed, the first often includes upfront qualitative and quantitative research to understand the core behavioral drivers and systemic barriers to access. These could be complemented with focus groups, particularly with marginalized communities and populations who are likely to be disproportionately affected by any unintended outcomes of tech policy. 

Second, like early-stage technology products that are initially rolled out to an early group of users (known as “beta-testing”), policymakers could benefit from pilot testing to encourage early-stage feedback. 

Third, regulators—just like effective product designers—should consider an iterative process whereby they solicit feedback, implement changes to a policy or platform, and then repeat the process. This allows for validation of the regulation and makes room for adjustments and continuous improvements as part of an agency’s rulemaking process.

Lastly, legislators and regulators alike should conduct more regular tabletop exercises to see how new policies might play out in times of crisis. The executive branch regularly does such “tabletops” in the context of national security emergencies. But the same principles could apply to understanding cybersecurity vulnerabilities or user responses before implementing public policies or programs at scale.

In the end, a product design mindset will not completely eliminate the sorts of problems we have highlighted in Kenya, the United States, and beyond. However, it can help to identify the most pressing usability, security, and privacy problems before governments spend time and treasure to implement regulations or programs that may not fit the real world.

Karen Sowon is a user experience researcher and post doctoral research associate at Carnegie Mellon University.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an assistant professor of electrical and computer engineering at Carnegie Mellon University.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Tech regulation requires balancing security, privacy, and usability  appeared first on Atlantic Council.

First, what is a strategic reserve? A strategic reserve is a stock of a systemically important input, which can be released to manage serious disruptions in supply. The most well known example—the strategic petroleum reserve (SPR)—was created as a response to the 1973-74 Arab oil embargo, as well as to meet the reserve obligations of the international energy program. Since the 1970s, the SPR has been tapped more than two dozen times for a range of reasons: from providing critical petroleum supply after natural disasters, to most recently reducing inflationary pressures on energy prices after Russia’s invasion of Ukraine. In addition, if managed well, drawdowns of the reserve can occur when the United States is able to sell the crude oil at high prices and buy it back when prices are low.

What purpose would a strategic bitcoin reserve serve? Proponents of the idea think of bitcoin as a national and economic security asset like oil or gold. However, in economic security terms,  bitcoin clearly does not serve the same function in the US economy as petroleum. Oil is one of the basic inputs that powers our economy and daily living—crypto is not. Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.

Moreover, as this week has made clear, bitcoin price is impacted by macroeconomic factors and recovers slower, even as markets are settling down this week. As the one-two punch of an unexpectedly weak jobs report and a surprising rate hike in Japan came in over the weekend, markets all over the world reacted strongly. A bigger, mirrored dip was seen in crypto prices after Friday. What we saw is a sell-off of crypto—an exchange of a liquid asset to pay off debts and higher borrowing costs—incurred by rising uncertainty in the markets as they begin to price in a possible conflict in the Middle East, in addition to the macroeconomic data. Compare this with gold—another reserve asset—which stayed relatively stable over this period. This volatility of crypto is persistent and makes it an ineffective hedge against inflation. 

Additionally, bitcoin is only one type of crypto asset. In the case of a strategic petroleum reserve, we don’t just use one provider of crude oil, regardless of its market share. Moreover, a large majority of the US government’s seized crypto assets are in the form of tether and other assets. It’s still an open question if they would become a part of the strategic reserve.  

Since it’s not about the resilience of bitcoin during a period of macroeconomic uncertainty, or its strategic importance in our economy—what is the idea of strategic bitcoin reserve actually about? Both critics and proponents have talked about how this proposal could make bitcoin and crypto more institutionalized and  enmeshed with traditional finance, raising its popularity and use for commercial purposes. For the last five years, the crypto industry has wanted to shed its outsider status and enter the mainstream of global finance. It has been somewhat successful with the introduction of BlackRock’s bitcoin ETF this year, in addition to increased interest in tokenization experiments. This sort of institutionalization has helped, largely because it has been realistic about crypto’s capabilities and importance in global markets. 

The biggest drawback of the strategic bitcoin reserve proposal is that it prescribes crypto values it does not have, at least for now. This proposal is at best, premature, and at worst, out of touch with the reality of markets and US national security objectives. Bringing bitcoin into mainstream use is not reason enough to create a strategic bitcoin reserve. 

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Data visualization created by Alisha Chhangani.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post What exactly is a strategic bitcoin reserve? appeared first on Atlantic Council.

Mere moments after the announcement, Macron declared that he would not name a prime minister until after the conclusion of the Olympic Games in August. Until then, a caretaker government under Prime Minister Gabriel Attal will remain in place. Still, the potential of an NFP prime minister spooked the markets, as the party’s economic policies would trigger even more deficit spending. The spread of France’s ten-year bond yield against Germany’s increased by five basis points, reflecting a loss in confidence in the French government’s finances. 

But even after the Olympics, Castets is unlikely to be tapped to form a government. Instead, the parties of the center, center right, and center left will have to endure a tedious drill from which France’s constitution has spared them for decades: negotiations. 

The moderate “Republican Right” (DR) appears ready to play ball and recently put forward a set of policy proposals complete with two red lines that will inform the negotiations. But a deal including the Republicans would not be enough: The centrists would need the more moderate forces from the NFP (read: excluding the far left) to support—or at least not oppose—a government for the time being.

The negotiations behind an arrangement that would bring Communists, Gaullist Republicans, Greens, and centrists under the same banner is likely to be every bit as complicated as one would imagine. But in the likely case that the NFP fails to clear the bar for government formation, this would become the only option. The question then becomes: What could this political hodgepodge compromise on? 

Synchronized steering

Despite having lost the legislative election, the Macron-supporting center block will not concede much on any of its policy laurels. Reversing the controversial and hard-won increase of the retirement age from sixty-two to sixty-four, for example, will be off the table. 

The center right has also set explicit red lines: that there be no tax increases and that fiscal reform not hurt pensioners. 

Taking into account these constraints and the need to manage France’s strained fiscal situation, there is not much negotiating flexibility left. Nevertheless, the centrist coalition must consider some concessions and secure certain inducements if they hope to bring the Republicans, Socialists, and Greens onside. 

1. Green reindustrialization

The adoption of the Inflation Reduction Act (IRA) in the United States prompted pushback from many European states. French Finance Minister Bruno Le Maire and his German counterpart Robert Habeck claimed the legislation was not compatible with World Trade Organization principles and called for the “defense” and green reindustrialization of the European Union (EU). 

In July 2023 the French National Assembly unanimously agreed on the creation of a “national strategy” for green industry, which lays out a plan for the 2023-2030 period. One week later, a Green Industry Law was approved at first reading and later adopted in October 2023. Like the IRA, France’s Green Industry Law seeks to meet environmental objectives (reducing forty-one million tons of CO2 by 2030, or 1 percent of France’s total footprint) and economic ones (positioning France as a leader in green and strategic technologies, while reindustrializing the country). As part of the law, the Green Industry Investment Tax Credit (C31V) was established to encourage companies to carry out industrial projects involving batteries, wind power, solar panels, and heat pumps. The C31V is expected to generate €23 billion in investment and directly create forty thousand jobs by 2030. 

While in opposition, the Socialists and Greens voted against the law and other left parties abstained. All cited the lack of specificity and actual green commitments in the industrialization-centered bill. However, if the centrist bloc offered to revisit the bill or introduce new, more targeted standards and legislation, it could serve as a powerful inducement to win the Greens and Socialists’ support. Given that this French counter to the IRA involves private-sector mobilization and promises reindustrialization, it has the added benefit of being (just about) fiscally feasible and acceptable to the right. 

2. Rewarding effort

The thirty-five-hour work week was first introduced into French law by Lionel Jospin’s Socialist-led government in 2000, and it has since become a cornerstone of the left’s platform. However, the fact that most employees still work above the legal thirty-five-hour limit has led to a system where they can take half days or full days off to compensate for extra hours. 

In August of 2022, Macron’s government successfully passed an amendment that allowed firms to buy these hours back from their employees, essentially transforming them into paid overtime. 

As part of the center right’s current proposal, the group is seeking additional flexibility in the thirty-five-hour work week by reducing taxation on overtime, on top of cutting overall social charges paid by employees. The center right has been fairly nonspecific about how much these would be cut, most likely to avoid alienating the left. However, the main way the Republicans propose to fund this—a cap on unemployment benefits at 70 percent of the minimum wage—would be a red flag for the parties which could otherwise be lured out of the NFP.

3. Balancing budgets

France’s large budget deficit, which in 2023 soared to 5.5 percent of gross domestic product (GDP), raises the stakes. In May, S&P Global Ratings downgraded the country’s long-term credit rating from “AA” to “AA-” and the European Commission reprimanded France for exceeding the EU’s deficit cap of 3 percent of GDP. Today, the Commission formally opened proceedings against France and six other violating countries, directing them to immediately take corrective measures to rectify their fiscal deficits or else face financial sanctions from Brussels. 

Both S&P and the Commission forecast positive economic growth, but emphasize the urgent need for France to address its public finances. Growth alone will not be enough to overcome the fiscal hurdles ahead. 

Reconciling the center right’s rejection of any tax hikes and the need to provide parties of the left with guarantees on social spending for them to abandon the NFP will be very challenging indeed. But there is some room for compromise. 

Shortly after Macron’s arrival at the Élysée Palace for his first mandate in 2017, he moved to slash France’s contentious wealth tax, replacing it with a real estate tax. A flat tax of 30 percent on capital gains was also introduced. The decision came as part of Macron’s pro-business platform in a bid to curb the flight of French millionaires from the country, and it drew sharp criticism from political opponents who labeled him “president of the rich.”

The centrist bloc could offer to reintroduce a progressive taxation scheme on capital gains. In the spirit of France’s goal of green reindustrialization, the centrists could move to keep the favorable 30 percent flat tax for green technologies to encourage investment, while introducing a progressive scheme in other sectors. If they do decide to favor green industrial investment, the tax benefit would have to apply to capital gains accrued throughout the EU—not only France—so as to not violate single market rules. 

Sticking the landing

Negotiations will be more of a marathon than a sprint. Macron is unable to call for new elections for at least the next twelve months, so until then, this parliament will have to find a way to work together. 

After the formation of a government—which Macron has indicated will not begin until after the Olympics—the next major challenge facing French policymakers is to pass the yearly budget by December. This grueling event will be made all the more difficult by today’s unprecedentedly divided National Assembly.

Whichever government emerges from current negotiations will risk having its spending plan voted down immediately. Fortunately for France, the constitution contains a proviso that would allow the state to carry on. Essentially, if the Assembly cannot agree on a new budget, the plan approved for the previous fiscal year will roll over. 

However, recycling this year’s budget would still create a projected deficit of 4.4 percent. This would again violate the EU’s 3 percent cap and fall well short of the deficit reduction the markets—the ultimate referees of how France is faring—are hoping to see. 

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center

Gustavo Romero is an intern with the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post What French economic policy may look like after the Olympics appeared first on Atlantic Council.

Innovation, according to the communiqué, will be driven by further development in education, science and technology, as well as talent cultivation. China has done well in adopting, refining, and rolling out existing technologies; the open question is whether it can foster endogenous breakthrough innovations to stimulate growth and become self-sufficient in high tech in the face of US controls.

China’s green energy sector has seen much progress in the manufacturing of electric vehicles (EVs), batteries, and solar and wind energy products. China has achieved global dominance in the supply chains of these products, which have increasingly contributed to its economic growth and posed a threat to Western competitors in world markets by creating overcapacity which has increased trade tensions. The communiqué doesn’t seem to take this overcapacity problem seriously.

Promoting consumption will likely be implemented the “Chinese way”: strengthening social safety nets, such as insurance schemes and public provisions for unemployment, healthcare and retirement needs of an aging society. The intention of such measures is to induce households to save less and spend more, instead of raising Chinese citizens’ disposable income. After all, the share of China’s labor compensation to gross domestic product (GDP) is about 58.6 percent, just a touch less than 59.7 percent for the United States. Any increase in wages would risk worsening China’s competitive position against regional producers. Moreover, cutting personal taxes or subsidizing consumption would aggravate already stretched public finances: the International Monetary Fund expects China’s government debt-to-GDP ratio to rise from 83.6 percent in 2023 to 110.1 percent in 2029 under current policies.

The communiqué also highlights other important goals and approaches.

• Giving a bigger role to market mechanisms in the context of strengthening the CCP’s guidance and control of economic activities. This approach has been viewed as self-contradictory sloganeering by Western analysts, but China apparently regards it as the key to success in its decades-long reform efforts. One example of this strategy is the public support, including tax and regulatory preferment and favorable credit provisions, to the EV sector more than a decade ago as part of the “Made in China 2025” campaign. This support helped launch hundreds of startups in China. Since then, those companies have been subject to fierce competition to win customers in the marketplace. Steeply falling EV prices have caused profits to plummet and many companies to go out of business. The dozen or so remaining enterprises—BYD, Li Auto, Nio, and XPeng, among others—have become efficient, able to turn out good-quality products at reasonable prices and win international market shares. This has dismayed Western governments, which have resorted to tariffs to stem the flow of Chinese EV imports.
• Implementing fiscal and taxation reform to ensure sustainable funding for local governments. This is taking place against the backdrop of an ongoing recession in the real estate sector, which is reducing land sale revenues for local governments. Some local governments are reaching crisis levels of debt. The reform will try to better match the fiscal revenues and expenditures assigned to local governments, including widening their revenue bases and bigger fiscal transfers from the central government. The recent policy of issuing long-term central government bonds to gradually replace local government debt will continue.
• Persisting in gradually de-leveraging the (still) highly indebted real estate, local government financing vehicles, and small- and medium-sized financial institutions sectors in a way that minimizes the risk of a financial crisis. This will take time to accomplish. Keep in mind that Japan’s real estate bubble in the 1990’s took more than a decade to deflate.
• Unifying the national market by abolishing internal barriers to commerce. This can unlock potential for domestic production, distribution, and consumption. In the context of developing a domestic single market for labor, reforms of the strict hukou system (family registration system) can promote a rational allocation of labor nationally, improving labor productivity.
• Deepening land reform to give farmers more access to increased land values to promote urban-rural integration. This could help reduce the urban-rural income gap: As of 2023, the average annual per capita disposable income in rural areas is only 40 percent of that in urban areas, according to Statista.
• Continuing to open up to the outside world, but presumably more on Chinese terms and less on Western terms. For example, the share of the renminbi in overseas lending by Chinese banks has risen to more than 35 percent from around 10 percent ten years ago. More importantly, many Belt and Road Initiative loans have been concluded using Chinese laws and dispute settlement mechanisms instead of Western ones, such as British laws traditionally used in international bank lending.

A more in-depth document of the meeting is expected to be released soon. It remains to be seen if China’s leadership will follow up with concrete policy measures to implement those long-term goals. At the same time, Beijing still needs to address the present challenge of weakening growth due mainly to lackluster private consumption. Retail sales rose only 2 percent, pulling down China’s second quarter 2024 GDP growth to a lower-than-expected 4.7 percent.

The heady growth rates of well above 7 percent per year, common a decade ago, are over. China’s leaders face difficult and important decisions in the months and years ahead to execute concrete measures to turn the long-term goals re-affirmed at the Third Plenum into reality.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Key takeaways from China’s Third Plenum 2024 appeared first on Atlantic Council.

Since their inception in July 1944, they have played central roles in global finance and built the world’s economic architecture as the norm-setters, knowledge-producers, convenors, and actors in the international development and finance landscape.

In 2024, the BWIs are facing multi-faceted existential challenges, posing serious risks for their relevance and effectiveness. The rapidly changing nature of the global economy, commerce, and finance and the increasing challenges triggered by the emergence of new players, technologies, and crises—especially in the past two decades—are forcing these institutions to take a renewed look at their governance structure and mandates. This is not the first time they have had to do so.

A reformed Bretton Woods system already emerged nearly five decades ago in 1976 through the Jamaica Accords. In 1971, the Nixon administration created a shock when it canceled the direct convertibility of the US dollar to gold and rendered the old Bretton Woods system inoperative as currency exchange rates became more volatile. The new rules stabilized the international monetary system by permitting floating exchange rates and formally abolishing the gold standard, which the United States was already no longer underpinning.

This time, meaningful reform for the BWIs will require a genuine acknowledgment of the following developments in the global political economy:

1. Economies that are not part of the high-income club are playing an increasingly large role in global trade and finance. However, the BWIs’ voting, leadership, and governance structures do not reflect this shift in the global economy and the IMF and WBG remain US-, Group of Seven (G7)-, and European Union (EU)-centric institutions. Together, the EU and the United States still maintain about 40 percent of votes in the World Bank and the IMF even as their relative prominence in the global economy has eroded.
   
   
   
   
2. The global economy is facing a growing number of challenges that have stretched the resources of BWIs and tested their effectiveness in bringing together the right stakeholders. One can point to unsustainable levels of sovereign debt, weather-related extreme events, increasing risk of pandemics, and aging populations as only some of these multifaceted challenges. Moreover, tariffs, subsidies, currency wars, protectionism, industrial policies, sanctions, geoeconomic fragmentation, and decoupling have become commonplace hurdles to globalized trade. The emergence of heightened geopolitical tensions between some of the world’s largest economies has undermined global financial stability and has also introduced significant difficulties for the BWIs to adhere effectively to their mandates of effective global governance, shared prosperity, and international monetary cooperation. This is eroding gains made through globalization in the past few decades.
3. The emergence of state-led development finance institutions and the growing number and influence of regional multilateral development banks and financial institutions, sovereign wealth funds, and pension funds have drastically altered the global landscape of development finance, calling for a more active collaboration between BWIs and the following parallel institutions:
   • Nearly 160 countries are signatories to China’s Belt and Road Initiative (BRI) and/or the G7’s Partnership for Global Infrastructure and Investment.
   • More than forty multilateral development banks and financial institutions—such as the Asian Development Bank, the Inter-American Development Bank, the African Development Bank, the Islamic Development Bank, and the Asian Infrastructure Investment Bank—are active in the global development finance landscape.
   • More than fifty national development banks such as Qatar Development Bank, Korea Development Bank, and Development Bank of Nigeria are offering a wide range of financing products to international public and private entities.
   • More than 130 sovereign wealth funds boast around $12 trillion in assets globally.
   • Public and private pension funds have over $24 trillion and $42 trillion in global assets, respectively.
4. Several multinational corporations (MNCs) command economic and technological might larger than many countries and are increasingly shaping the future of global economy through innovation and by influencing policy debates. MNCs are estimated to account for nearly one-third of global gross domestic product (GDP) and a quarter of global employment, and the revenue of Walmart alone was larger than the GDP of more than 170 countries in 2023. Environmental, social, and governance standards have been put in place to create a framework where MNC activities are not detrimental to environmental and social objectives but are based on best governance practices. However, the BWIs have played too minor a role and influence in these conversations. 
5. The emergence of digital currencies and assets and the increasing role of technology (artificial intelligence, machine learning, and fintech) in economic and monetary policy offers challenges and opportunities for the efficiency and stability of the global economy. Alternative finance championed by non-state actors has moved faster than international and domestic supervisory and regulatory bodies, including the BWIs, which have not kept up with the rapid pace of change. For example, the IMF in collaboration with the Bank for International Settlements could play a significant role in coordinating the global efforts in standard-setting for central bank digital currencies and new cross-border payment systems.
6. New debates and policies are altering global economic, monetary, and trade policies. Modern monetary theory, universal basic income, quantitative easing and tightening, modern central banking, global minimum taxation, fair trade, and human rights considerations in global supply chains are some of the issues BWIs need to be more proactive about.

Acknowledging the gravity of the risks facing effectiveness and relevance of BWIs, our Bretton Woods 2.0 Project has conducted in-depth policy research on the rising challenges facing BWIs’ governance and operations and has put forth feasible policy recommendations for their consideration in their reform journey. Substantive reforms are never easy, especially for multilateral organizations with such long and complex histories and intractable geopolitical rifts between their members. Difficult decisions, especially regarding the governance and leadership structure of these institutions, must be made, however. As Axel van Trotsenburg, senior managing director at the WBG recently acknowledged, for the IMF and WBG to remain true to their mandates and still relevant at their one hundredth anniversary in twenty years, they must embark on reforms that heed the issues highlighted above.  

Amin Mohseni-Cheraghlou is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington, DC. Follow him on X (formerly known as Twitter) at @AMohseniC.

The post The Bretton Woods institutions need revitalizing. Luckily, they are no strangers to reform. appeared first on Atlantic Council.

This surge in defense spending follows Russia’s full-scale invasion of Ukraine in February 2022. The war in Ukraine has prompted an unprecedented 18 percent increase in defense spending this year among NATO allies across Europe and Canada. In total, NATO countries now meet the 2 percent target, together spending 2.71 percent of their GDP on defense. This creates positive momentum and success to build on for the Washington summit, which is expected to highlight the Alliance’s collective strength and focus on deeper integration with Ukraine. 

Poland stands out as the biggest spender, allocating 4.12 percent of its GDP to defense. Sweden has also increased its defense spending dramatically since the 2022 Russian invasion of Ukraine. The Washington summit will witness Sweden’s first participation in a NATO summit as an official NATO member, following its accession in March.  

As NATO celebrates its seventy-fifth anniversary, the large increase in defense spending can help renew the Alliance’s unity and strength to continue supporting Ukraine and be prepared for the future. 

Clara Falkenek is an intern with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Who’s at 2 percent? Look how NATO allies have increased their defense spending since Russia’s invasion of Ukraine. appeared first on Atlantic Council.

The high rate of dropouts ahead of the second round make the number of three-way races favoring National Rally much lower and a hung parliament more likely. An absolute majority for National Rally cannot be fully ruled out yet, but an absolute majority for the New Popular Front already can. This shift in probabilities has led to diverging reactions in bond yields, which have remained slightly higher than before the first round, and stock prices, which have rallied.  

Following Macron’s announcement of the snap election on June 9, French ten-year bond yields increased more than in any other week since 2011. In other words, it was the worst week for the rate at which France borrows from markets since the heart of the eurozone crisis. 

While he was admittedly in campaign mode, French Finance Minister Bruno Le Maire’s warning of a possible “Liz Truss-style” event if National Rally wins—referring to the 2022 bond market meltdown in the United Kingdom that forced the then-prime minister to reverse course on her fiscal plans—was more than a mere talking point. Increased yields arise from falling demand for government loans, reflecting a diminished faith in a government’s finances. The market could see both the extreme right and the extreme left promising to reverse cost-saving measures taken by the incumbent government (such as pensions reform) without offsetting these with new sources of income. 

This graph shows that the “spread” with German bonds has yet to fall significantly despite the greater likelihood of a hung parliament. Why? 

France’s finances are already fragile. Two weeks ago, the European Commission named France as one of seven countries in violation of its new fiscal rules due to high debt levels and no expected reduction in spending. With no tradition of broad coalitions in France, the assumption at this point is that no government will be able to conduct more cost-cutting or efficiency measures. 

Still, France’s bond yield increases thus far remain far less severe than the UK gilt crisis in 2022. 

On the other hand, the results of the first round prompted stock market prices to rally from their initial steep drop following the announcement of the snap election. France’s private sector seems to have taken comfort from the central scenario of a hung parliament and the elimination of a New Popular Front majority scenario. The likelihood of punitive taxes and other major economic changes businesses would need to contend with is now much lower, but not gone.

While France’s CAC 40 index noticeably increased on Monday and Tuesday, it hasn’t fully recovered the losses made following Macron’s decision to dissolve parliament. Clearly, investors are still waiting to see how the second round and its aftermath play out. In a hung parliament scenario, Macron’s party would have to negotiate with all parties that reject the far right. The strongest bloc among these will be the left. This is enough for investors to remain in wait-and-see mode for now.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center.

Clara Falkenek contributed research to this piece.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post How are markets reacting to the French snap election? appeared first on Atlantic Council.

In December 2023, Chinese leader Xi Jinping visited Vietnam and agreed on building “shared future” between the two countries, three months after US President Joe Biden announced the US-Vietnam Comprehensive Strategic Partnership. In addition to private companies expanding their manufacturing bases to Vietnam as a de-risking strategy, the two major powers are also doubling down on courting Vietnam on an official level.

Registered investment from China and Hong Kong combined exceeded $8.2 billion in 2023, accounting for 6,688 projects, in contrast with $500 million from the United States. China’s integration in trade with Vietnam has steadily grown over the past decade—reaching $171 billion in 2023, bolstered by the free trade agreement between China and the Association of Southeast Asian Nations (ASEAN) and the Regional Comprehensive Economic Partnership (RCEP) that reduced tariffs and harmonized rules of origin and intellectual property protection. Meanwhile, Biden’s pledges of more investments and easier trade have significant ground to cover. In the first ten months of 2023, the United States invested just $500 million in foreign direct investment (FDI), while exports from the United States plunged by 15 percent to $79.25 billion.

China is positioning itself to prioritize innovation and research and development (R&D), aiming to ascend the value chain and achieve self-reliance in alignment with Xi’s strategy for “high-quality development.” Against the backdrop of the changing economic priorities, the State Council of China published a policy document in December 2023 that supported “core firms in the supply chains” to expand overseas production and leverage global resources. Responding to the “unreasonable trade restrictions” imposed by foreign governments, China is initiating a friendshoring strategy of its own.

The key is electronics. The persistent dominance of China in the critical supply chains of the United States is most evident in the Information and Communication Technology (ICT) sector, supplying 30 percent of US imports by April 2023. Thus, as global scrutiny over China’s manufacturing overcapacity intensifies, electronics companies are figuring out coping strategies. Vietnam’s rules of origin stipulate that if a product includes at least 30 percent of local value content or change to a different Harmonised System (HS) classification, it qualifies as “Made in Vietnam,” which provides a workaround for the trade barriers erected by the US government since the 2017 trade war. As multinational technology firms like Apple diversify their supply chains as part of their “China plus one” strategies, its Chinese suppliers are following this trend. For instance, Apple’s contractor, Luxshare Precision Industry Co., has announced plans to double its investment in Bac Giang, Vietnam to $504 million, responding to a trend of “internationalization of industrial chains.” Goertek, another Apple supplier, is also investing up to $280 million to establish a new subsidiary in Vietnam to serve Apple’s demands.

Since as early as 2013, nine out of the top ten Chinese electronic component and assembly companies have been making greenfield investments in Vietnam, with the capital influx accelerating since 2018. These expansions not only cater to Apple’s appetites, but also aim to broaden their market reach within ASEAN. For instance, BYD plans to open a plant in Vietnam to produce car parts, with the aim to export components to its factory in Thailand that serves mainly the expanding Southeast Asian electric vehicle market.

China accounted for 39 percent of Vietnam’s electronics imports in 2022, with a below-average annual growth rate of 1.3 percent among all sources. Considering that 33.21 percent of Vietnam’s total imports come from China, the electronics sector is not an outlier of particular concern. Vietnam’s electronics supply chain, intermediary and finished combined, remains diversified, with substantial contributions from South Korea (27 percent), Taiwan (9 percent), and Japan (7 percent). Despite recent increases in Chinese FDI, there has not been a corresponding surge in demand for Chinese intermediary goods, challenging the “re-routing” argument that these enterprises mislabel Chinese goods as Vietnam-made to evade tariffs.

Although Vietnam’s sourcing of electronic goods is not overly reliant on China, China can still influence on how Chinese-based companies operate there. When then US President Donald Trump placed an executive order to force TikTok to sell or close in 2020, the Chinese Ministry of Commerce expanded the “Catalogue for Prohibited and Restricted Export Technologies” and prohibited tech transfers relating to big data software. Currently, the ICT section of the catalogue only includes integrated circuits and robotics. Should China decide to include core electronics technologies in this catalogue, plants in Vietnam might face challenges in maintaining production.

As China’s intensifies its strategy of friendshoring in the electronics sector, Vietnam’s industries could be more entangled with China. In response, Washington should proactively bolster its anti-dumping and anti-subsidy enforcement. In a 2019 case, the United States imposed duties of 456.23 percent on steel imports from Vietnam, attributing the decision to the mislabeling of products from South Korea and Taiwan to evade the levies. The United States also has the option of lifting overall duties for products from key industries. Although the Biden administration waived trade duties on solar modules from Vietnam until June 2024, the exemption depends on renewals every two years and companies’ compliance of related trade rules.

The United States remains well-positioned to provide Vietnam with the right incentives to reduce its dependence on China and maintain it as a dependable supply chain partner. Under the CHIPS Act, the United States can allocate a portion of the $500 million of International Technology Security and Innovation Fund to enhance Vietnam’s semiconductor ecosystem. The United States has a strength in mobilizing private investments: it has initiated workforce development initiatives in Vietnam with two million dollars in “seed funding” to incentive the private sector to join. In contrast to Chinese firms, which primarily focus on manufacturing, US companies, including Qualcomm, NVIDIA, and fifteen other companies are planning to establish R&D centers and nurture local talent in technology, aligning with Vietnam’s goal to ascend the value chain and fostering a balanced approach amidst US-China tensions. By portraying itself as a good partner, the United States offers a prospect that Vietnam has every reason to embrace.

Stanley Zhengxi Wu is a former young global professional with the Atlantic Council GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post China and the US both want to ‘friendshore’ in Vietnam appeared first on Atlantic Council.

As countries from the BRICS group and regions including the Middle East and Asia increase the use of local currencies for cross-border payments, there is a growing perception that the dollar’s importance in international finance is ebbing, particularly in global oil markets and the use of the petrodollar.  

What exactly is the petrodollar? In short, it’s a commitment by Saudi Arabia to use dollar revenues from oil sales to the United States to buy US Treasuries. But the history is more complicated.  

America and Saudi Arabia in 1974

Let’s take a look back to the Nixon administration. The United States was beset by high inflation and large current-account deficits amid an ongoing war in Vietnam, putting downward pressure on the dollar and threatening a run on US gold reserves. In 1971, the United States ended the dollar’s convertibility to gold which had been the lynchpin of the Bretton Woods international monetary system of fixed exchange rates. Major currencies began to float against each other in 1973. Then came the oil shock that fall, when the Organization of Petroleum Exporting Countries (OPEC) cut oil production and embargoed shipments to the United States during the Yom Kippur war. 

Against a backdrop of great economic and political uncertainty, as the Watergate hearings pushed toward their close, the Nixon administration embarked on a diplomatic mission that would cement an economic partnership with Saudi Arabia that has been central to the global energy trade. To encourage Riyadh’s use of the dollar as the medium of exchange for its oil sales,(and thereby funnel those dollars back into Treasury bond markets to help finance US fiscal deficits), Washington promised to supply military equipment to Saudi Arabia and protect its national security. Despite the tumult and instability in the United States at that time, the deal showed that it retained the power to set the international agenda. In addition to keeping demand for the dollar stable, the agreement promoted its use in oil and commodities trading, while creating a steady source of demand for US Treasuries. This helped to strengthen the dollar’s position as the world’s key reserve, financing and transactional currency. 

A brave new world

Fast-forward fifty years, and the dominant global position once enjoyed by the United States has comparatively weakened. Its share of world gross domestic product has declined from 40 percent in 1960 to 25 percent. China’s economy has surpassed the United States in purchasing power parity terms. It now has to vie for influence with an increasingly assertive Beijing, while facing pushes even by allies such as Europe and elsewhere that want to become more autonomous from Washington in financial and foreign policy matters. Specifically, many countries have tried to develop alternative cross-border payment arrangements to the dollar to reduce their vulnerability to Washington’s increasing use of economic and financial sanctions. 

At the same time, the United States has become far less dependent on Saudi oil. Thanks to the shale revolution, in fact, the United States is now the largest oil producer in the world and a net exporter. It still imports oil from Saudi Arabia but at a significantly lower volume. By contrast, China has become Saudi Arabia’s largest oil customer, accounting for more than 20 percent of the kingdom’s oil exports. Beijing has established close, trade-driven relationships throughout the Middle East, where US influence has waned. 

Saudi Arabia’s willingness to diversify the currencies used in selling its oil aligns with a larger strategy that requires the county to increase its international relations beyond the United States and Europe. The Kingdom’s willingness to join the BRICS club of emerging nations and partner with China and other countries in the mBridge project to explore the use of their respective central bank digital currencies (CBDCs) for cross-border payments should not be surprising.  

The dollar’s global dilemma

Saudi Arabia’s interest in currency diversification marks a small but symbolic step down the road toward de-dollarization. Increasingly, countries are using their own currencies in cross-border trade and investment transactions. The arrangements necessary to do so exist entirely outside the influence of any major power. These include currency-swap lines agreed between participating central banks and the linking of national payment and settlement systems. Using local/national currencies for cross-border payments currently entails an efficiency cost, as it relies on less liquid local foreign exchange, money, and hedging markets to directly exchange pairs of local currencies without the dollar as a vehicle. Many countries mentioned above appear to have accepted this cost as necessary to reduce their reliance on the dollar. Advances in digital payment technology, such as tokenization, would greatly reduce such costs. 

Over the past few years, the digital payment ecosystem has progressed significantly toward what is known as “tokenization” units of exchange such as CBDCs or stablecoins pegged to the dollar or any major currencies, a cryptocurrency designed to be fixed to a reference asset, etc. These tokenized units can be exchanged instantaneously and directly without having to be processed through the accounts of intermediaries such as commercial banks. Tokenized currencies are still a long way off from widespread adoption, but such an ecosystem would significantly reduce the need for participants to hold reserves to ensure adequate liquidity, weakening the role of the deep and liquid US Treasury securities market as a key pillar of support for the dollar’s dominant position in international finance. In fact, the share of the dollar in global reserves has already fallen from 71 percent in 1999 to 58.4 percent at present—in favor of several secondary currencies. 

In the foreseeable future, the dollar’s dominance will remain. But a gradual democratization of the global financial landscape may be underway, giving way to a world in which more local currencies can be used for international transactions. In such a world, the dollar would remain prominent but without its outsized clout, complemented by currencies such as the Chinese renminbi, the euro, and the Japanese yen in a way that’s commensurate with the international footprint of their economies. In this context, how Saudi Arabia approaches the petrodollar remains an important harbinger of the financial future to come as its creation was fifty years prior. 

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Dollar Dominance Monitor

The Dollar Dominance Monitor analyzes the strength of the dollar relative to other major currencies across the world. The project presents interactive indicators to track China’s progress in developing an alternative financial infrastructure.

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What’s driving the decision? The RBI has been consistently increasing its gold reserves since December 2017 to diversify its foreign currency assets and mitigate inflation pressures. However, this recent, heightened pace of gold accumulation suggests a strategic shift in response to geopolitics. 

Indeed, that is exactly what RBI Governor Shaktikanta Das alluded to in his recent press conference in April; when he was asked about the volatility in reserves, he pointed directly to the war in Ukraine and the uncertainty that followed. That same day, the chief economist of one of India’s largest public banks, Madan Sabnavis, said, “While the US dollar has historically been a stable currency, its reliability has diminished following the Ukraine conflict.”

Countries such as India have looked at the West’s response to Russia’s invasion and have reconsidered the reliability of holding reserves in traditional currencies, since these assets could be blocked or immobilized by other governments and banks. 

What about the rest of the G20? Since 2021, most countries have kept their gold reserves stable. The fluctuation in the chart above is mostly driven by Turkey, which has bought and sold its own gold to manage local market dynamics and address economic challenges such as high inflation and trade deficits.

It’s not only in pace of purchases where India is leading. The RBI is also leading in gold as a percentage of its reserves among the G20 Asian countries. In 2024, India now holds twice as much gold as a percentage when compared to China.

However, it is important to note that, like China and most other economies, India still holds only a small percentage of its reserves in gold. According to our Dollar Dominance Monitor approximately 59 percent of all foreign exchange reserves are still held in dollars.

Nonetheless, when an important partner of the United States such as India begins seeking alternatives to the world’s reserve currency, it warrants careful attention.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is a program assistant with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

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How today’s policymakers decide to balance freedom and security in the digital landscape will have massive consequences for the future. US digital policy must be aimed at improving national security, defending human freedom, dignity, and economic growth while ensuring necessary accountability for the integrity of the technological bedrock.

Digital economy building blocks and the need for strategic alignment

Digital policymakers face a host of complex issues, such as regulating and securing artificial intelligence, banning or transitioning ownership of TikTok, combating pervasive fraud, addressing malign influence and interference in democratic processes, considering updates to Section 230 and impacts on tech platforms, and implementing zero-trust security architectures. When addressing these issues, policymakers must keep these core building blocks of the digital economy front and center:

• Infrastructure: How to provide the structure, rails, processes, standards, and technologies for critical societal functions;
  
• Data: How to protect, manage, own, use, share, and destroy open and sensitive data; and
  
• Identity: How to represent and facilitate trust and interactions across people, entities, data, and devices.

How to approach accountability—who is responsible for what—in each of these pillars sets the stage for how future digital systems will or will not be secure, competitive, and equitable.

Achieving the right balance between openness and security is not easy, and the stakes for both personal liberty and national security amid geostrategic competition are high. The open accessibility of information, infrastructure, and markets enabled by the internet all bring knowledge diffusion, data flows, and higher order economic developments, which are critical for international trade and investment.

However, vulnerabilities in existing digital ecosystems contribute significantly to economic losses, such as the estimated $600 billion per year lost to intellectual property theft and the $8 trillion in global costs last year from cybercrime. Apart from direct economic costs, growing digital authoritarianism threatens undesirable censorship, surveillance, and manipulation of foreign and domestic societies that could not only undermine democracy but also reverse the economic benefits wrought from democratization.

As the United States pursues its commitment with partner nations toward an open, free, secure internet, Washington must operationalize that commitment into specific policy and technological implementations coordinated across the digital economy building blocks. It is critical to shape them to strengthen their integrity while preventing undesired fragmentation, which could hinder objectives for openness and innovation.

Infrastructure

The underlying infrastructure and technologies that define how consumers and businesses get access to and can use information are featured in ongoing debates and policymaking, which has led to heightened bipartisan calls for accountability across platform operators. Further complicating the landscape of accountability in infrastructure are the growing decentralization and aggregation of historically siloed functions and systems. As demonstrated by calls for decentralizing the banking system or blockchain-based decentralized networks underlying cryptocurrencies, there is an increasing interest from policymakers and industry leaders to drive away from concentration risks and inequity that can be at risk in overly centralized systems.

However, increasing decentralization can lead to a lack of clear lines of responsibility and accountability in the system. Accountability and neutrality policy are also impacted by increasing digital interconnectedness and the commingling of functions. The Bank of the International Settlement recently coined a term, “finternet,” to describe the vision of an exciting but complexly interconnected digital financial system that must navigate international authorities, sovereignty, and regulatory applicability in systems that operate around the world.

With this tech and policy landscape in mind, infrastructure policy should focus on two aspects:

• Ensuring infrastructure security, integrity, and openness. Policymakers and civil society need to articulate and test a clear vision for stakeholders to coordinate on what openness and security across digital infrastructure for cross-economic purposes should look like based on impacts to national security, economic security, and democratic objectives. This would outline elements such as infrastructure ecosystem participants, the degree of openness, and where points for responsibility of controls should be, whether through voluntary or enforceable means. This vision would build on ongoing Biden administration efforts and provide a north star for strategic coordination with legislators, regulators, industry, civil society, and international partners to move in a common direction.
  
• Addressing decentralization and the commingling of infrastructure. Technologists must come together with policymakers to ensure that features for governance and security are fit for purpose and integrated early in decentralized systems, as well as able to oversee and ensure compliance for any regulated, high-risk activity.

Data

Data has been called the new oil, the new gold, and the new oxygen. Perhaps overstated, each description nonetheless captures what is already the case: Data is incredibly valuable in digital economies. US policymakers should focus on how to surround how to address the privacy, control, and integrity of data, the fundamental assets of value in information economies.

Privacy is a critical area to get right in the collection and management of information. The US privacy framework is fragmented and generally use-specific, framed for high risk sectors like finance and healthcare. In the absence of a federal-government-wide consumer data privacy law, some states are implementing their own approaches. In light of existing international data privacy laws, US policy also has to account for issues surrounding harmonization and potential economic hindrances brought by data localization.

Beyond just control of privacy and disclosure, many tech entrepreneurs, legislators, and federal agencies are aimed at placing greater ownership of data and subsequent use in the hands of consumers. Other efforts supporting privacy and other national and economic security concerns are geared toward protecting against the control and ownership of sensitive data by adversarial nations or anti-competitive actors, including regulations on data brokers and the recent divest-or-ban legislation targeted at TikTok.

There is also significant policy interest surrounding the integrity of information and the systems reliant on it, such as in combating the manipulation of data underlying AI systems and protecting electoral processes that could be vulnerable to disinformation. Standards and research are rising, focused on data provenance and integrity techniques. But there remain barriers to getting the issue of data integrity right in the digital age.

While there is some momentum for combating data integrity compromise, doing so is rife with challenges of implementation and preserving freedom of expression that have to be addressed to achieve the needed balance of security and freedom:

• Balancing data security, discoverability, and privacy. Stakeholders across various key functions of law enforcement, regulation, civil society, and industry must together define what type of information should be discoverable by whom and under what conditions, guided by democratic principles, privacy frameworks, the rule of law, and consumer and national security interests. This would shape the technical standards and requirements for privacy tech and governance models that government and industry can put into effect.
  
• Preserving consumer and democratic control and ownership of data. Placing greater control and localization protections around consumer data could bring great benefits to user privacy but must also be done in consideration of the economic impacts and higher order innovations enabled from the free flow and aggregation of data. Policy efforts could pursue research and experimentation for assessing the value of data
  
• Combating manipulation and protecting information integrity. Governments must work hand in hand with civil society and, where appropriate, media organizations to pursue policies and technical developments that could contribute to promoting trust in democratic public institutions and help identify misinformation across platforms, especially in high-risk areas to societies and democracies such as election messaging, financial services and markets, and healthcare.

Identity

Talk about “identity” can trigger concerns of social credit scores and Black Mirror episodes. It may, for example, evoke a sense of state surveillance, criminal anonymity, fraud, voter and political dissident suppression, disenfranchisement of marginalized populations, or even the mundane experience of waiting in line at a department of motor vehicles. As a force for good, identity enables critical access to goods and services for consumers, helps provide recourse for victims of fraud and those seeking public benefits, and protects sensitive information while providing necessary insights to authorities and regulated institutions to hold bad actors accountable. With increasing reliance on digital infrastructure, government and industry will have to partner to create the technical and policy fabric for secure, trustworthy, and interoperable digital identity.

Digital identity is a critical element of digital public infrastructure (DPI). The United States joined the Group of Twenty (G20) leaders in committing to pursue work on secure, interoperable digital identity tools and emphasized its importance in international fora to combat illicit finance. However, while many international efforts have taken root to establish digital identity systems abroad, progress by the United States on holistic domestic or cross-border digital identity frameworks has been limited. Identity security is crucial to establish trust in US systems, including the US financial sector and US public institutions. While the Biden administration has been driving some efforts to strengthen identity, the democratized access to sophisticatedAI tools increased the threat environment significantly by making it easy to create fraudulent credentials and deepfakes that circumvent many current counter-fraud measures.

The government is well-positioned to be the key driver of investments in identity that would create the underlying fabric for trust in digital communications and commerce:

• Investing in identity as digital public infrastructure. Digital identity development and expansion can unlock massive societal and economic benefits, including driving value up to 13 percent of a nation’s gross domestic product and providing access to critical goods and services, as well as the ability to vote, engage in the financial sector, and own land. Identity itself can serve as infrastructure for higher-order e-commerce applications that rely on trust. The United States should invest in secure, interoperable digital identity infrastructure domestically and overseas, to include the provision of secure verifiable credentials and privacy-preserving attribute validation services.
  
• Managing security, privacy, and equity in Identity. Policymakers must work with industry to ensure that identity systems, processes, and regulatory requirements implement appropriate controls in full view of all desired outcomes across security, privacy, and equity, consistent with National Institute of Science and Technology standards. Policies should ensure that saving resources by implementing digital identity systems also help to improve services for those not able to use them.

Technology by itself is not inherently good or evil—its benefits and risks are specific to the technological, operational, and governance implementations driven by people and businesses. This outline of emerging policy efforts affecting digital economy building blocks may help policymakers and industry leaders consider efforts needed to drive alignment to preserve the benefits of a global, interoperable, secure and free internet while addressing the key shortfalls present in the current digital landscape.

Carole House is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and the Executive in Residence at Terranet Ventures, Inc. She formerly served as the director for cybersecurity and secure digital innovation for the White House National Security Council, where Carole will soon be returning as the Special Advisor for Cybersecurity and Critical Infrastructure Policy. This article reflects views expressed by the author in her personal capacity.

The post Designing a blueprint for open, free and trustworthy digital economies appeared first on Atlantic Council.

Since Modi became prime minister in 2014, the Indian economy has grown by an average annual real rate of 6 percent to the latest fiscal year ending in March 2024—quite impressive against the backdrop of a slowing down of many major economies, especially China’s, since the COVID-19 pandemic. With annual GDP at around four trillion dollars, the Indian economy has become the fifth largest in the world, poised to overtake Japan and Germany in the foreseeable future to rank third after the United States and China. That growth has been attributed to the Modi economic model—heavy promotion of the information and communications technology (ICT) sector, in particular IT services and other service exports, and the “Make in India” campaign to encourage more manufacturing activity by streamlining administrative tasks, building up infrastructure, and improving banking and payment services.

However, it is important to keep in mind that the 2014-2024 period experienced a slowdown from the previous decade under Prime Minister Manmohan Singh, which had enjoyed an average annual real growth rate of almost 7 percent. The slight slowdown under Modi has preserved the basic features but exacerbated the fundamental weaknesses of the Indian economy. For several decades, the ICT industry has been the most dynamic. But although this sector represents 13 percent of India’s GDP, it relies on a very small number of highly skilled workers—accounting for less than 1 percent of India’s labor force of 594 million (according to the World Bank). And even within this privileged group, slow salary increases have been a cause of frustration for more junior workers.

Under the “Make in India” plan and its recent $24 billion of subsidies to chosen sectors, manufacturing employs 35.6 million workers, or about 6 percent of the labor force—even less than the United States. More importantly, the ratio of foreign direct investment to GDP has fallen to the lowest level in sixteen years. Private sector investment has also declined from more than 25 percent of GDP in the mid-2000s to less than 20 percent. Those declines have contributed to the fact that the share of manufacturing value added in Indian GDP has decreased from 17 percent in 2010 to 13 percent in 2022.

Essentially, even including the impact of consumption spending by workers in the ICT and manufacturing sectors on consumer-related businesses, the contribution of these two sectors to overall employment is relatively small. This could become even smaller if the declining trend in the manufacturing-to-GDP ratio cannot be reversed soon.

The Modi economic model has clearly spurred GDP growth. But its fruits have tended to accrue to a small percentage of the population, raising the number of billionaires to 271 in the process. Income inequality is considered worse than under British colonial rule, according to a new report from the World Inequality Lab. The pace of non-farm job creation has fallen from an average of 7.5 million new jobs a year in the decade prior to Modi’s premiership to about half of that during his time in office. Perversely, employment in the agricultural sector has risen by 56 million workers in the past five years—driven by COVID-related distress. This poor employment performance has thus failed to absorb nearly 12 million new entrants to the labor market each year. As a result, the unemployment rate remains high at more than 8 percent—and much higher at 17.8 percent for young workers compared with the world average of 14.3 percent. The economic and social ramifications for India are even worse than those unfavorable numbers appear to suggest.

India faces a double-edged sword of being the most populous country on earth with more than 1.4 billion inhabitants—75 percent of whom are of working age (15 to 64 years)— but with a labor force participation rate at 51 percent. The Asian average is 63 percent and China’s is 76 percent. Furthermore, only 23 percent of the workforce are salaried workers. The rest work in agricultural and informal sectors. This has made the goal of strong and inclusive growth intractable and difficult to achieve.

India’s huge working-age population can fuel strong growth if adequately and properly employed. However, if job creation cannot keep pace with labor force growth, what could have been a tremendous demographic dividend will turn into an economic and social crisis. The challenge to Modi in the next five years is to carry out a balancing act between maintaining the recent growth momentum and making it more inclusive by providing regular employment, especially for the millions of young entrants to the labor force. This probably means switching government priorities from supporting a few conglomerate national champions to helping the multitude of micro-, small-, and medium-sized enterprises, which provide the bulk of employment in India. Furthermore, government attention should be widened from a focus on advanced technological areas such as semiconductors and artificial intelligence to basic manufacturing and processing, which can create many jobs. Policy announcements in the weeks ahead will tell us how Modi intends to deal with this challenge.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Low employment: The Achilles’ heel of Modi’s economic model appeared first on Atlantic Council.

In 2017, the Trump administration imposed sanctions on Gertler, accusing him of “opaque and corrupt mining and oil deals” that cost the DRC more than $1.36 billion in revenues from 2010 to 2012 alone. Gertler has repeatedly denied any wrongdoing and, through a representative, said that he would abide by sanctions. The news that the Biden administration may ease these sanctions should be viewed positively, as an indication that US sanctions can achieve both economic and geopolitical goals.

Eased sanctions, whether a formal delisting or the issuing of a general license to Gertler, would allow for the sale of currently sanctioned entities. Following the easing of sanctions in this case, US firms could gain access to new investment opportunities by investing in mining projects that currently have links to Gertler, leading to economic growth in the United States and the DRC. In addition, the DRC has an opportunity to showcase the improvements that the country is making in the fight against money laundering and terrorist financing. While some senior officials, human-rights defenders, and anticorruption fighters have valid concerns about easing sanctions on Gertler, the decision could be a win for the DRC and the United States.

The choice—and the history behind it

Both the Trump and Biden administrations have gone back and forth over the tightening and easing of sanctions on Gertler. That has drawn much attention, but what hasn’t is the fact that the United States has quietly used sanctions effectively in this case to get its way.

In 2019, The Sentry—an investigative organization that aims to hold to account predatory networks that benefit from violent conflict, repression, and kleptocracy—conducted a six-month-long study on the effectiveness of sanctions in Africa in the twenty-first century. The study found that better strategies for achieving identified goals in each sanctions program must be developed if sanctions effectiveness was to improve. The Sentry study set the stage for the Treasury 2021 Sanctions Review, which drew conclusions on how to modernize US sanctions and make them more effective. Treasury recommended a “structured policy framework” that “links sanctions to a clear policy objective.” The Biden administration has made no secret of its desire to improve access to critical minerals, diversify its supply chains, and work with US partners to achieve those goals. Since 80 percent of the DRC’s cobalt output is owned by Chinese companies, US policymakers should be seeking ways to reduce barriers to entry in the DRC’s mining sector and to actively promote investment there. 

As the United States seeks to gain greater access to critical minerals and diversify its supply chains away from Chinese influence, Biden administration officials hope that granting Gertler a general license to sell his holdings in the DRC would increase US or Western firms’ willingness to invest in the country. That’s because those firms have been largely boxed out as Gertler, according to the US Treasury, used his closeness with government officials to secure below-market rates for mining concessions for his companies. Beyond Gertler, the business environment of the DRC ranks 183 out of 190 on the World Bank’s Doing Business indicators. Easing sanctions, through a coordinated US government effort that seeks to maximize this move, could send an important signal to Western investors that the DRC is open for business. Western firms could lift their bottom lines while stimulating the DRC economy by paying market rates.

The potential delisting of Gertler and his companies is a good example of an instance in which sanctions—or, in this case, the easing of sanctions—are being used in support of a specific policy objective.

Delisting would be good—but more must be done

Building on a potential delisting, the Biden administration should work with Congress to expeditiously pass the bipartisan BRIDGE to DRC Act—which helps the United States secure access to critical-mineral supply chains and sets human-rights and democracy benchmarks for strengthening the US-DRC relationship. These moves could be further timed or calculated to magnify the impact of ongoing foreign assistance programs led by the United States Agency for International Development or other US government agencies.

The United States should coordinate additional moves to support the DRC. In October 2022, the Financial Action Task Force, the standard-setting international organization that seeks to strengthen the global financial system, placed the DRC on its list of jurisdictions under increased monitoring—also known as the “grey list”—for the country’s dismal record in fighting money laundering and terrorist financing. While many African countries are on the grey list, the impact is considerable, as it limits capital inflows, makes investors wary of doing business, and leads to reputational damage and a reduction of correspondent banking relationships, among other consequences. The US Treasury should look to bolster the DRC government’s approach to anti-money laundering and combating the financing of terrorism (AML/CFT) by equipping the country with the knowledge, know-how, and capacity that it needs.  

Regardless of whether the delisting happens or whether the BRIDGE Act becomes law, the DRC must do more to help itself. News of a failed coup attempt in Kinshasa on May 19 certainly does not help, especially since—according to local reports—the assailants were linked to exiled DRC politician and US citizen Christian Malanga, who was killed by the country’s security forces in a firefight. Three US nationals were allegedly also involved in the attempt to overthrow the government of President Felix Tshisekedi.

The DRC must continue to take concrete steps to improve the business environment and reduce its political and economic risk factors. Since 2022, the DRC built on its high-level political commitments to improve its AML/CFT regime, finalize its three-year national AML/CFT strategy, and improve its macroeconomic performance—boosting its credit rating. The DRC has an opportunity to continue to make progress in its fight against corruption, money laundering, and terrorist financing that threaten the stability of the country from Matadi on the Atlantic seaboard to Goma in the Great Rift Valley.

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A win in the heart of Africa

Delisting Gertler would not only help the United States get its way, but it would show that its sanctions policy in Africa can be effective; its industrial and national security policies can be successfully implemented; and that all of this can be done in a manner that can help an African partner generate greater economic growth, jobs, and the foreign investment it seeks.

The United States can’t do it alone. It must also partner with the DRC in a serious manner to help strengthen the DRC’s framework to combat money laundering and terrorist financing, improve Kinshasa’s image, and reduce barriers to investment such as perceived political and economic risk.

The DRC occupies a central role on the African continent and with its economic potential could serve as a future hub for transportation, logistics, mineral processing, and more. If the DRC wins, all of Africa benefits—as do the United States and the West.

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. He previously served in the US Treasury Department and US State Department with a focus on Africa policy.

The post In a Congolese mining case, Biden can secure a win for US sanctions policy in Africa appeared first on Atlantic Council.

According to the administration, there are two major motivations behind these tariff increases: 1) Protect and stimulate US clean energy industries and supply chains, and 2) Counter a flood of Chinese goods, as Beijing turns to exports to compensate for weak internal demand.

The challenge with the second objective is that, as was evident in the 2018 trade war, tariffs are not likely to change Chinese behavior. The question with this new wave of tariffs is if there will be a more united strategy with G7 allies, as Secretary Yellen called for in her speech yesterday in Frankfurt en route to the G7 finance ministers meeting.

A shared strategy among allies would not only communicate shared concern, but may also make China’s export-driven growth strategy less viable if important markets use tariffs and other barriers to reduce imports on rapidly growing industries like EVs. 

This is easier said than done. The United States can impose high electric vehicle tariffs because China only represents 1-2 percent of the US EV imports. By contrast, EVs from China already comprise over 20 percent of Europe’s EV imports, making tariffs more likely to raise costs for consumers. Then there’s European exports to China. Over the last seven years, the EU’s share of China’s auto imports has been more than double the US’ share, at 45.5 percent compared to 20.2 percent.

The Biden Administration’s decision also means that Chinese manufacturers may further ramp up their exports to non-US destinations. That could put enormous pressure on US partners, especially Brussels. As G7 leaders meet this weekend in Stresa, Italy, from May 24 to 25, they’ll discuss the potential for a shared strategy on Chinese overcapacity.

Europe’s year-long anti-dumping investigation is wrapping up this month, and a decision is due by July 4. Will the EU impose anything close to the US policy on Chinese EVs? Unlikely. The potential retaliatory strike on European auto exports to China is just too costly to stomach. 

The highest the EU may go is 30 percent, but as Rhodium Group has pointed out, a move like that would still not have a major impact on European demand given China’s subsidies and competitive pricing. 

Then there’s Japan. Japan has no auto tariffs, but maintains many non-tariff barriers to auto imports to help ensure the success of its car companies. Last year, however, the top electric vehicle in Japan wasn’t made by Toyota or Honda—it was BYD’s Dolphin. 

Still, Japan’s import market for electric vehicles is small, importing only 22,848 electric vehicles in 2023. Fully electric vehicles made up only 1.8 percent of total auto sales last year, as Japanese car manufacturers have gravitated towards hybrid models like the Toyota Prius. Japan’s primary concern is not China dominating its domestic import market—but rather holding on to its place as the top global exporter of vehicles. 

In fact, China exported more cars than Japan for the first time last year, many of which went to Japan’s neighbors. In response, Japan and its ASEAN neighbors announced on May 20 that they will develop a joint strategy on auto production by September this year to compete with China, especially on electric vehicles. 

The bottom line? In this sector, tariffs, working in isolation, can’t fully achieve all the objectives—no matter how high they go. It’s only when tariffs are relatively aligned across countries and then matched with positive inducements, new trade arrangements, and, ultimately, a better product, that the trajectory could change. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center where she supports the center’s work on trade.

Ryan Murphy contributed research to this piece.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Biden’s electric vehicle tariff strategy needs a united front appeared first on Atlantic Council.

The reality is that Beijing’s measures are a mere drop in an ocean of empty or unfinished apartment buildings, moribund developers who have defaulted on at least $124.5 billion of dollar debt, and hundreds of millions of homeowners who once bet on a now-collapsed property bubble. It also is bad news for an economy that over the past two decades came to rely on the property sector—and the industries like construction that it turbocharged—to provide between 20 and 30 percent of the growth that fueled China’s economic “miracle.”

Even if the Chinese government eventually comes to grips with the current crisis, it is extremely unlikely that the property engine will end up firing on more than a few cylinders. The combination of a declining population, slowing urbanization, and market changes that have made new homes less attractive than existing housing stock means that frothy property development will be a thing of the past.

None of this is good news for the global economy. The downsizing of China’s housing demand will be felt by natural resource suppliers across the developing world. But of far greater concern will be the implications of China’s growing reliance on low-priced exports to fuel growth—a surge that already is sparking trade tensions with the United States, Europe, and emerging market countries. This dependence on factory output will be a constant now that the property bubble has collapsed, taking with it a big chunk of Chinese domestic demand.

The impact of the real estate downturn has been reflected for months in China’s economic indicators. Sales of new and existing homes fell at a record pace in April, and property investment plummeted nearly 10 percent year on year. Home prices posted their sharpest decline in nearly ten years. The impact on employment in the property sector has been severe: an estimated half million real estate jobs have disappeared since 2020.

The carryover to the larger economy has been severe. Consumer spending has been hit especially hard, with many small businesses failing to recover from China’s strict Covid-19 shutdowns. Automobile sales posted their largest one-month drop in nearly two years in April, and overall retail sales rose at an anemic pace. Youth unemployment is a lingering problem, although the government’s recent recalculation of that number after it rose to an embarrassing 21 percent has masked the true extent of the problem.

The damage from the property collapse is virtually everywhere in China, with the possible exception of mega-cities like Shanghai and Beijing. Unoccupied and uncompleted buildings are ubiquitous, especially in smaller provincial cities that hosted the final stages of the building boom. Housing statistics compiled by Bloomberg and Chinese researchers estimate that the current stock of unsold housing in 100 major cities totaled 511.8 million square meters at the end of February, down from a peak of 530.6 million at the end of 2022. That is roughly ten times the total office space in Manhattan.

Goldman Sachs estimated last month that it will cost 7.7 trillion yuan to buy up enough apartments to return China’s inventory of empty homes to 2018 levels—and that assumes a 50 percent discount on current market prices. That figure is roughly 25 times the amount in the central bank’s bailout plan. The same study calculates that Chinese developers need $553 billion to complete housing that they pre-sold to buyers, and then failed to finish, in what amounted to a nationwide Ponzi scheme. Even that is far more than the $42 billion allocated in the new plan.

The core problem that China faces in dealing with the remains of its property bubble is the sector’s interlocking financial obligations of private and government developers, financial institutions ranging from state banks to shadow institutions, and local governments (many of which set up financing vehicles to buy land that the governments themselves put up for sale). With the market’s collapse, that foundation now has become profoundly unstable.

While developers have defaulted on their dollar-denominated bonds issued overseas—leaving foreign investors with little recourse but to file suit in Hong Kong courts—Beijing so far has tried to forestall defaults and restructuring of yuan debts. To mishandle the situation could have destabilizing consequences that would further damage the economy and undermine the legitimacy of Xi Jinping’s government. The result so far has been incremental steps: funding for some developers to complete pre-sold apartments, interest rate cuts to encourage buyers, and the release of funding like last week’s central bank initiative.

But buyers remain cautious, in part because prices so far are not coming down significantly. More importantly, banks are very hesitant to lend the cheaper money that’s been made available. For example, when the central bank last year made available $27 billion of interest-free funding developers to complete apartments, banks lent only a tiny proportion. They worry that they will be left holding the bag when defaulters eventually default.

On the other hand, history suggests that a bailout delayed only becomes an ever-larger bailout. The IMF, which has considerable experience helping countries address property crises has recommended that China pursue “more market-based adjustment in home prices and quickly restructur[e] insolvent developers to clear the overhang of inventories and ease fears that prices will continue to gradually decline.”

But it is not clear whether Beijing is willing to commit the trillions of yuan—and the political capital—that will be required to do this. The government has begun issuing what is slated to amount to $138 billion of ultra-long-term bonds this year and has announced plans for $539 billion of local government bonds. But it remains to be seen how much will go to relieve the property crisis. With local governments and their financing vehicles overloaded with more than 100 trillion yuan of debt, Beijing is facing many difficult decisions.

It may just end up trying to muddle through while repeating its declaration of the need “to urgently build a new model of real estate development,” as the Politburo stated on April 30. In that case, it will continue to widen the divide between weak domestic demand and expanding exports—with all the international political tensions that inevitably will result.

Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

The post There’s less to China’s housing bailout than meets the eye appeared first on Atlantic Council.

While the SWIFT report confirms the preeminent position of the dollar in the global payment system, it has over-reported the relative share of the Euro and under-estimated that of the RMB—basically due to the design (measuring trades between nations regardless of whether some belong to a monetary union) and coverage (only counting transactions within SWIFT) of its reporting system.

Over-reporting the Euro’s share

Regarding the use of the Euro in international payments, a recent analysis by the European Central Bank (ECB) shows that most Euro transactions (57 percent of the total) take place between banks situated within the Euro Area (EA)—where the Euro should be considered a domestic currency by virtue of the European Monetary Union. Truly international transactions using the Euro—where at least one initiating or receiving bank is located outside of the EA—account for only 43 percent of total Euro transactions. Consequently, excluding Euro transactions within the EA, the share of the Euro in truly international transactions is only 9.4 percent (equal to 43 percent of the 21.93 percent share reported by SWIFT). This puts the Euro on top of a group of secondary currencies including the GBP, RMB, the yen, CAD, SFR etc., but not as a peer in a position to compete against the dollar.

The relative shares of Euro transactions within and without the EA are not quite in line with those of intra- and extra-EA trades—accounting for 47 percent and 53 percent, respectively, of the combined trades of EA countries. However, as the EA trades a lot with the rest of the European Union (EU) thanks to the Single Market, intra-EU trade accounts for about 60 percent of total EU trade. As a measure of the EA and EU trade with the rest of the world, instead of the ratio of trade/GDP of 103 percent (for the EA) and 106 percent (for the EU), the true ratio of extra-EA trade/GDP is around 55 percent, and extra-EU trade/GDP around 42 percent—still ahead of the United States at 27 percent and China at 38 percent. However, the gap is less pronounced than thought.

The relatively modest position of the Euro in international payments, after a quarter century in operation and backed by the EA economy accounting for 12 percent of the global economy relative to the United States at 15.5 percent (both on a PPP basis) as well as an open capital account and pretty sophisticated financial markets with well-developed regulations reflects the unique strength of the dollar.

Underestimating the international use of the RMB

Against this backdrop, China appears to have embarked on a different path in promoting the international use of the RMB, taking advantage of the desire of many countries to reduce their reliance on the dollar which has been increasingly used by the United States in financial sanctions to promote its strategic goals. The challenges facing the Euro would be even more formidable in the case of the RMB. For various reasons, China wants to keep control of capital account transactions, making it difficult for the RMB to be freely transferable. Its financial markets are still not well developed and regulated in a transparent and predictable way.

Instead of trying to tackle these problems, China has leveraged its strength as the top partner to most countries in the world in trade and investment transactions, to promote the use of local currencies in settling those transactions, mostly on a bilateral basis. China has fostered this payment mechanism by signing bilateral currency swap lines with forty-four countries worth more than $500 billion to help provide each other’s currencies to importers, exporters as well as investors in both countries. It has developed a modern RTGS for high-value domestic payments using the China National Advanced Payment System (CNAPS), and for international payments using China Cross-border Interbank Payment System (CIPS)—using both to facilitate the clearing and settlement of RMB transactions outside of China. It has also made much progress in developing its Central Bank Digital Currency (CBDC)—called eCNY—for domestic and cross-border payments.

As a result of those efforts, China has been able to settle about 53 percent of its cross-border trade and investment transactions in RMB, while the dollar’s share has dropped to 43 percent from 83 percent in 2010. More generally, in a recent study, the IMF found that in a sample of 125 countries, the median usage of RMB in cross-border payments with China has increased from 0 percent in 2014 to 20 percent in 2021. In a recent update, the IMF reported that the yuan’s share of all cross-border transactions between Chinese non-banks with foreign counterparts has risen from close to zero fifteen years ago to 50 percent in late 2023, while the dollar has fallen from around 80 percent to 50 percent. In particular, during his recent visit to China, Russian President Vladimir Putin again confirmed that 90 percent of Russia-China trade (reaching a record $240 billion in 2023) has been settled in ruble and RMB. Uses of the RMB in cross-border payment, mainly in a bilateral setting, will likely grow in the future, reflecting the huge footprint of China in world trade and investment flows. These transactions are outside the SWIFT framework—by design, so as to avoid vulnerability to Western financial sanctions—so SWIFT data will under-estimate the true international use of the RMB in cross-border payments. And the under-estimation will get worse as uses of local currencies—of which the RMB usually takes one side of bilateral transactions—grow in future.

Furthermore, a portion of international RMB payments has gone through CIPS directly instead of using SWIFT messaging—CIPS can accommodate both forms of communication. According to a 2022 Bank of France report, about 80 percent of RMB payments use SWIFT messaging as many non-Chinese institutions have yet to install translators for CIPS messaging. Presumably, as CIPS has grown in membership and volume of transactions (having increased by 24 percent in 2023 over the previous year to an average daily volume of 482 billion yuan or $67 billion), it seems reasonable to expect that more institutions would have installed translators to participate fully in the CIPS network as they handle more RMB transactions. In any event, the portion of RMB payments going directly through CIPS will not be captured in SWIFT data, giving rise to another instance of under-estimation of the RMB share in international payments.

Conclusions

The global payment landscape is fragmenting. On a multilateral basis, the dollar is entrenched as the premier currency in payment transactions. However, several secondary currencies, of which the Euro is in the lead, and including the RMB, are being used for up to half of total international payments. Besides that, a growing number of cross-border payment arrangements using local currencies mostly on a bilateral basis has further fragmented the global payment system. Given China’s huge footprint in world trade and investment activities, the RMB will feature prominently in these bilateral cross-border payments. Such a fragmented payment system, especially growing uses of local currencies, entails a loss of efficiency compared to the use of a common means of payment in international transactions. However, the revealed preference of many countries seems to be an acceptance of efficiency loss in search for less vulnerability to US and Western financial sanctions in times of heightened geopolitical tension.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post The Euro’s share of international transactions is likely smaller than it looks  appeared first on Atlantic Council.

The ransomware problem is multi-dimensional. Ransomware is both a cyber and a financial crime, exploiting vulnerabilities not only in the security of digital infrastructure but also in the financial system that have enabled the rise of sophisticated Ransomware-as-a-Service (RaaS) economies.  It is also inherently international, involving transnational crime groups operating in highly distributed networks that are targeting victims, leveraging infrastructure, and laundering proceeds without regard for borders.  As with other asymmetric threats, non-state actors can achieve state-level consequences in disruption of critical infrastructure.

With at least $1 billion reported in ransomware payments in 2021 and with incidents targeting critical infrastructure like hospitals, it is not surprising that the debate on ransomware payments is rising again. Ransomware payments themselves are problematic—they are the primary motive for these criminal acts, serving to fuel and incentivize this ecosystem.  Many are also inherently already banned in that payments to sanctioned actors are prohibited. However, taking a hardline position on ransomware payments is also challenging because of its potential impact on victims, visibility and cooperation, and limited resources.

Cryptocurrency’s role in enabling ransomware’s rise

While ransomware has existed in some form since 1989, the emergence of cryptocurrencies as an easy means for nearly-instantaneous, peer-to-peer, cross-border value transfer contributed to the rise of sophisticated RaaS economies. Cryptocurrencies use largely public, traceable ledgers which can certainly benefit investigations and disruption efforts. However, in practice those disruption efforts are hindered by weaknesses in cryptocurrency ecosystems like lagging international and industry compliance with anti-money laundering and countering financing of terrorism (AML/CFT) standards; growth of increasingly sophisticated methods of obfuscation leveraging mixers, anonymity-enhanced cryptocurrencies, chain-hopping, and intermixing with off-chain and traditional finance methods; and insufficient steps taken to enable real-time, scaled detection and timely interdictionof illicit cryptocurrency proceeds.

Despite remarks by some industry and policymaker advocates, RaaS economies would not work at the same level of scale and success without cryptocurrency, at least in its current state of compliance and exploitable features. Massively scaled ransomware campaigns targeting thousands of devices could not work by asking victims to pay using wire transfers and gift cards pointing to common accounts at regulated banks or widely publishing a physical address. Reliance on traditional finance methods would require major, and likely significantly less profitable, evolution in ransomware models.

The attraction of banning ransomware payments

Any strategy to deal with ransomware needs to have multiple elements, and one key aspect is the approach to ransomware payments. The Biden Administration’s multi-pronged counter-ransomware efforts have driven unprecedented coordination of actions combating ransomware, seen in actions like disrupting the ransomware variant infrastructure and actors, OFAC and FinCEN designations of actors and financial institutions facilitating ransomware, pre-ransomware notifications to affected companies by CISA, and a fifty-member International Counter-Ransomware Initiative.

However, ransomware remains a significant threat and is still affecting critical infrastructure. As policymakers in the administration and in Congress consider every tool available, they will have to consider the effectiveness of the existing policy approach to ransomware payments. Some view payment bans as a necessary action to address the risks ransomware presents to Americans and to critical infrastructure. Set against the backdrop of the moral, national security, and economic imperatives to end this destabilizing activity, bans could be the quickest way to diminish incentives for targeting Americans and the significant amounts of money making it into the hands of criminals.

Additionally, banning ransomware payments promotes other Administration policy objectives like driving a greater focus on cybersecurity and resilience. Poor cyber hygiene, and especially often poor identity and access management, are frequently exploited in ransomware. Removing payments as a potential “escape hatch” is seen by some as a way to leverage market forces to incentivize better cyber hygiene, especially in a space where the government has limited and fragmented regulatory authority.

Those who promote bans typically do not come to that position lightly but instead see them as a last resort to try to deter ransomware.  The reality is that we have not yet been able to sufficiently scale disruption to the extent needed to diminish this threat below a national security concern—driven by insufficient resourcing, limits on information sharing and collaboration, timeliness issues for use of certain authorities, and insufficient international capacity and coordination on combating cyber and crypto crime. When policymakers are in search of high-impact initiatives to reduce the high-impact threat of ransomware, many understandably view bans as attractive.

Challenges with banning ransomware payments

However, taking a hardline position on ransomware payments can also present practical and political challenges:

• Messaging and optics of punishing victims:A ban inherently places the focus of the policy burden and messaging on the victims, potentially not stopping them from using this tool but instead raising the costs for them to do so. Blaming victims that decide to pay in order to keep their company intact presents moral and political challenges.

• Limited resources that need to be prioritized against the Bad Guys:  For a ban to be meaningful, it would have to be enforced. Spending enforcement resources against victims to enforce a ban—resources which could have been spent on scaling disruption of the actual perpetrators—could divert critically limited resources from efforts against the ransomware actors.

• Likelihood that payments will still happen as companies weigh the costs against the benefits:  Many feel that companies, if faced between certain demise and the costs of likely discovery and legal or regulatory action by the government, will still end up making ransomware payments.

• Disincentivizing reporting and visibility:  A ban would also make companies less likely to report that they have been hit with ransomware, as they will aim to keep all options open as they decide how to proceed. This disincentivizes transparency and cooperation from companies needed to drive effective implementation of the cyber incident and ransomware payment reporting requirements under the Cybersecurity Incident Reporting for Critical Infrastructure Act (CIRCIA) regulations to the Cybersecurity and Infrastructure Security Agency (CISA). Diminished cooperation and transparency could have a devastating effect on investigations and disruption efforts that rely on timely visibility.

• Asking for permission means the government deciding which companies survive:  Some advocates for bans propose exceptions, such as supplementing a presumptive ban with a licensing or waiver authority, where the government is the arbiter of deciding which companies get to pay or not.  This could enable certain entities like hospitals to use the payment “escape hatch.” However, placing the government in a position to decide which companies live and die is extremely complicated and presents uncomfortable questions.  It is unclear what government body could be capable, or should be endowed with the authority of making that call at all, especially in as timely a fashion as would be required.  Granting approval could also place the government in the uncomfortable position of essentially approving payments to criminals.

Additional policy options that can strike a balance for practical implementation

In light of the large-scale, disruptive threat to critical infrastructure from ransomware, policymakers will have to consider other initiatives along with its ransomware payment approach to strike a balance on enhancing disruption and incentivizing security measures:

• Resource agencies and prioritize counter-ransomware efforts: Government leadership must properly resource through appropriations and prioritize disruption efforts domestically and internationally as part of a sustained pressure campaign against prioritized ransomware networks.

• International cyber and cryptocurrency capacity building and pressure campaign: Agencies should prioritize targeted international engagement, such as capacity building where capability lags and diplomatic pressure where political will lags, toward defined priority jurisdictions.  Capacity building and pressure should drive both cybersecurity and cryptocurrency capacity, such as critical infrastructure controls, regulatory, and law enforcement capabilities. Jurisdictional prioritization could account for elements like top nations where RaaS actors and infrastructure operate and where funds are primarily laundered and cashed out.

• Enhance targeting authorities for use against ransomware actors: Congress should address limitations in existing authorities to enable greater disruptive action against the cyber and financial elements of ransomware networks. For example, Congress could consider fixes to AML/CFT authorities (e.g., 311 and 9714 Bank Secrecy Act designations) for better use against ransomware financial enablers, as well as potential fixes that the defense, national security, and law enforcement communities may need.

• Ensure government and industry visibility for timely interdiction and disruption of ransomware flows: Congressional, law enforcement, and regulatory agencies should work with industry to ensure critical visibility across key ecosystem participants to enable disruption efforts, such as through: Enforcing reporting requirements of ransomware payments under CIRCIA and US Treasury suspicious activity reporting (SAR) requirements; Mandating through law that entities (such as digital forensic and incident response [DFIR] firms) that negotiate or make payments to ransomware criminals on behalf of victims, including in providing decryption services for victims, must be regulated as financial institutions with SAR reporting requirements; Driving the evolution of standards, like those for cyber indicators, to enable real-time information sharing and ingestion of cryptocurrency illicit finance indicators for responsible ecosystem participants to disrupt illicit finance flows.

• Prioritize and scale outcome-driven public-private partnerships (PPPs): Policymakers should prioritize, fund, and scale timely efforts for PPPs across key infrastructure and threat analysis actors (e.g., internet service providers [ISPs], managed service providers [MSPs], cyber threat firms, digital forensic and incident response [DFIR] and negotiation firms, cryptocurrency threat firms, cryptocurrency exchanges, and major crypto administrators and network-layer players [e.g., mining pools and validators]) focused on disruption of key ransomware activities and networks.

• Incentivize and promote better security while making it less attractive to pay ransoms: Policymakers could leverage market and regulatory incentives to drive better security measures adoption to deter ransomware and make it less attractive to pay.  For example, legislation could prohibit cyber insurance reimbursement of ransomware payments. Regulatory action and legislative authority expansion could also drive implementation of high-impact defensive measures against ransomware across critical infrastructure and coordination of international standards on cyber defense.

While attractive for many reasons, banning ransomware payments presents challenges for limiting attacks that demand a broader strategy to address. Only this kind of multi-pronged, whole-of-nation approach will be sufficient to reduce the systemic threats presented by disruptive cybercrime that often targets our most vulnerable.

Carole House is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and the Executive in Residence at Terranet Ventures, Inc. She formerly served as the director for cybersecurity and secure digital innovation for the White House National Security Council.

The post What to do about ransomware payments appeared first on Atlantic Council.

The deep-seated reservations held by large European Union (EU) member states and institutions like the ECB about seizing the reserves are well publicized. Irrespective of whether we think these are justified, they are a key constraint to how the funds might be utilized in the short term to help Ukraine win the war. To win, it is necessary to restore the defense capabilities of Ukraine and the EU, including their ability to produce weapons and ammunition jointly. As we fight, Europe is a deep rear that can provide us Ukrainians with uninterrupted supplies of weapons for a joint victory.

The problem is that the EU27’s current proposals on using the interest income from the blocked assets cannot provide enough funds to meet our needs. Their estimate is $3.6bn per year, which in no way solves the problem. Even more so now that it seems clear they won’t apply this retroactively to profits accumulated in 2022 and 2023.
The EU is now facing a serious challenge to increase defense spending to at least 2 percent of GDP, if not more. We Ukrainians also need them to keep supporting us to have any chance of winning a war which is existential for them too. There are only two ways to do this quickly and efficiently: cut social spending or borrow the missing resources. Both make it challenging for the European leaders which have supported Ukraine to win re-election, and are therefore against our interest too. It remains challenging to sell the idea of “belt-tightening” to a fed-up European electorate, which has grown accustomed to a comfortable life over the past thirty years since the threat from the Soviet Union disappeared. So we need to get creative.

This is where $280 billion of Russian reserves can be used more intelligently—and more lucratively in the short term—without crossing red lines which our European partners are afraid of. To boost macrofinancial support and military assistance to Ukraine, the European Commission needs to start working on a “confiscation without confiscation” project.

In order to implement this, the EU27 should decide that a significant share of the blocked assets of the Russian Federation be reinvested in a safe financial instrument, long-term EU defense bonds maturing in thirty years. The raised funds, as part of the agreed strategy to reform the European military-industrial complex, can be distributed on a grant basis among the countries that agree to participate in this program. Weapons producers in France, Germany, Poland, other EU Member States, and even Ukrainian regions further from the front can all receive money to ramp up capacity and production of the weapons we need to defeat the common enemy.

With such a model, everyone wins. EU leaders restore the defense industry of their countries without having to divert funds from social spending. Moreover, they increase the number of jobs in their economies. Ukraine receives the necessary funds for waging war and strengthening its own military-industrial complex, laying the foundation for victory against our aggressor.

You may ask what will happen once the money is spent. Indeed, won’t the EU owe this money to Russia thirty years from now? Giving Ukraine the chance to push back the aggressor now makes it much more likely that, in the meantime, the EU can negotiate the lifting of sanctions with a weakened Russia. One of its demands can be that Russia relinquish its claim on this money given the damage it has wrought in Ukraine. The scheme does involve risk, but I believe it is manageable and worth taking to prevent Russia’s invasion from succeeding.

I hope that the June G7 summit in Italy will set the stage for a solution to the Russian asset question that works for everyone while rising to the challenge. Besides the EU, our other allies—the United States, Great Britain, Australia and Japan—could implement similar schemes of for the smaller amounts of Russian Central Bank assets blocked on their shores.

Oleg Dunda is a Member of Parliament of Ukraine.

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The EU’s economic weight in the world has declined substantially in the past few decades and its strategic position has weakened seriously as the geopolitical rivalry between the United States and China intensifies. Against that backdrop, one of the report’s main recommendations is to transcend the Capital Market Union to promoting a Savings and Investments Union instead. The aim is to mobilize savings and investments in EU countries, and the report proposes launching a variety of investment vehicles to facilitate retail and institutional investments in the EU economy and especially its green energy transition efforts. These include an EU-wide auto-enrollment Long Term Savings Product leveraging tax incentives by member states; enhancing the Pan-European Personal Pension Product; a European Long-Term Fund; as well as a European Green Guarantee facility to support bank lending to green energy projects. Unfortunately, this well-meaning proposal fails to tackle the underlying causes of the EU’s fragmented capital markets.

While the proposed funds and products may be worthwhile, it is difficult to assess their contributions to reviving EU economic growth until more operational details are forthcoming. Meanwhile, by emphasizing the use of tax incentives and guarantees, the report has downplayed the unglamorous but crucial tasks of harmonizing laws, regulations, market structures, and practices in twenty-seven member countries to forge a seamless European capital market where savings can flow to the best opportunities without internal barriers. The harmonization job is far more complicated than it sounds—involving the development of common rules or at least common and consistent standards for corporate laws. That includes bankruptcy and reorganization provisions, creditors’ ease in seizing and liquidating loan collaterals, tax procedures, supervision of markets and entities, accounting standards, trading rules including for shorting, investment rules for institutional investors such as pension funds, insurance companies and mutual funds, listing requirements including the languages used for prospectuses, etc. Turning all these national rules and regulations into a common EU rules book has run into strong resistance from vested interests in various countries, explaining the slow progress to date in advancing the Capital Market Union. However, without making much more headway in these nuts-and-bolts issues, the proposed European Savings and Investments Union will likely be slow in taking shape as well.

The report also singles out practices which hinder the channeling of savings to investments in the EU but does not get to the root causes of the problems or suggest ways to overcome the impediments.

Firstly, the report bemoans the fact that while the EU is home to €33 trillion ($35.4 trillion) of private savings, annually €300 billion ($321 billion) are being diverted to overseas financial markets, primarily to the United States, due to internal fragmentation. However, it does not recognize, and does not suggest ways to rectify, the fundamental factor attracting European savings to the much larger US stock market, which accounts for 54.5 percent of world market capitalization compared to large European markets at 15.7 percent. Investment flows to the United States primarily because of superior returns on American equity markets compared to those of the EU. Specifically, for the period 1900-2020, the average annual nominal return on US equities was 9.6 percent compared to 7.2 percent for Europe. So long as this remains the case, savings from the EU and the rest of the world will continue to be attracted to the United States, where foreign investors own 40 percent of the stock market. So the EU need both reforms and investment: structural reforms to make the EU economy more productive and its corporations more profitable will create more investment opportunities to deploy European savings at home—while more investment now could help improve EU productivity and growth prospects. Thus, while it is wise to find ways to increase investment in the EU, the problem is more fundamental than just the efficiency of capital markets.

The Letta report also points out the fact that EU households keep 34.1 percent of their savings in bank deposits, not investing those in stock and bond markets. It is important to realize that this behavior of European households reflects their cultural and traditional preference for loss avoidance over capital gains with risk.  As such, a more developed Capital Market Union may encourage somewhat more allocation from bank deposits to portfolio or direct investments, but that would not substantially change the loss-avoiding investment behavior in the near term. Instead, it is more useful for policy makers in the EU to find ways to create a business environment for EU banks which receive an important part of its funding from retail depositors to invest the proceeds more productively.

Relative to US peers, EU banks have posted very low returns on assets (ROA) (of 0.4 percent vs. 1.4 percent for the United States) as well as low returns on equity (ROE) (fluctuating between 2-6 percent, about half of the US level). Consequently, market valuation of EU banks has been much lower than that of US banks: the price to book ratio of EU banks in 2014-2021 averaged 0.79x compared to 1.53x for US banks. In short, helping EU banks become more efficient and profitable—for example by launching the European Deposit Insurance Scheme (EDIS) to complete the Banking Union—would probably do more to support EU economic growth than trying to get EU households to change their investment behavior from bank deposits to market investments.

In conclusion, in highlighting the inefficiency of EU capital markets and proposing several products and policies for improvement, the Letta report has focused attention to the need to complete and upgrade the Capital Market Union, and the Single Market in general, to help the EU improve its economic performance in an era of geopolitical rivalry. However, much of the work requires attention to the detailed harmonization of economic and financial rules and regulations across the membership to promote a seamless market for savings and investments. These are unglamorous and painstaking tasks, but they need to be done.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post The Enrico Letta Report and the state of the EU’s Capital Market Union appeared first on Atlantic Council.

The European Union (EU) has made some progress on its conservative plan to tap into the interest income but its own estimates say this will provide about $3.5 billion a year. However, Ukraine’s needs are much greater. The first tranches of the Ukraine Facility Platform agreed by the EU—the $7.9 billion direct financial aid planned in the supplemental and aid from other supporters—all combine to provide enough for 2024. But Kyiv cannot afford to again face cash flow issues similar to what it endured earlier this year.

As Ukraine continues to fight for its survival now, bringing the value of the staggered interest income into the present would at least provide much-needed visibility for funding in 2025. In late March, reports surfaced that the United States was pushing the G7 to consider a sovereign loan of $50 billion to Ukraine which would be repaid using the interest income.

Where does this $50 billion figure come from? Given that we know many of the parameters the White House is working with—from interest rates to the regular income stream they create—our team dusted off our corporate finance textbooks and tried to retrace their steps.

Scenario 1 is the current EU workstream. If we use today’s interest rates and the amount Russia’s reserves are gaining in overnight lending, Ukraine could expect to receive around $3.6 billion in 2025 as part of “windfall profits.” Of course, as interest rates fall in the Eurozone, future earnings may shrink.

Scenario 2 is what the United States is pushing for ahead of the June G7 Leaders’ Summit in Italy. Daleep Singh, Deputy National Security Advisor, has asked: Why only give Ukraine this year’s profits when you could, in fact, pull forward future interest earnings? How much money would that mean for Ukraine in 2025? We think it would look something like this:

You can quibble with our annuity formula, but the bottom line is that $50 billion dollars is an incredible influx of cash that would guarantee payments to the entire military and civil service, help with recruiting efforts, ensure financial stability, and catalyze private investment. Plus, as far as Ukraine is concerned, it would be given as a grant, not a loan.

Like everything with these assets, the idea is controversial. It requires believing that the reserves will continue to be blocked for twenty years or given over to Ukraine. Otherwise, the G7 is on the hook for repayment. Remember, the block on the assets has to be unanimously renewed every six months by the 27 member states of the EU.

That’s all the more reason this approach may be the best option to get Ukraine a significant amount of money in 2025. It’s not seizing all of the $280 billion, which the Europeans and Japanese remain opposed to, but it’s almost fifteen times more than what’s on the table from the current EU proposal, which is still far from operational. Expect to hear more on this debate as the June G7 Summit in Apulia, Italy, draws closer.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center

Mrugank Bhusari is assistant director at the Atlantic Council’s GeoEconomics Center

Sophia Busch contributed to this piece

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org

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Without proactive changes to how we invest in and develop our current staff and attract new talent, we are undercutting our country’s ability to cultivate the innovation that drives our economy and defends our national security. We cannot expect to compete on the world stage without equipping the US civil service with the skills and experience needed to understand and harness the technological trends that will define the future.

The first problem is we do not create enough opportunities for current national security officials to become more proficient in novel technologies. Rotations and educational opportunities away from headquarters—while broadening and essential experiences for well-rounded officers—often delay promotions. As a result, the incentive structure dissuades current government officials from taking time off to learn. But there are steps that can shift this dynamic:

• Institutionalize knowledge exchange between the US government and the private sector in critical industries. Create career-enhancing formal externships, rotational opportunities, and other short-term learning experiences that give civil servants the ability to work directly in private industry and develop practical experience with innovative technologies like blockchain, artificial intelligence, and quantum computing. The national security community’s venture and innovation arms, like In-Q-Tel, DIU, and AFWERX, can play a key role in this effort, identifying promising US companies in which to embed government employees. These opportunities could also help fight attrition within the civil service by allowing more fluidity between the public and private sectors, rather than forcing people to “go private” if they want outside experience.
• Establish advisory councils and encourage working-level staff to consult with these councils regularly on policy matters. Give agencies and departments the ability to convene advisory councils made up of industry stakeholders and empower both senior officials and career staff to engage with these councils to inform and develop policy on new technologies.
• Create more connectivity between agencies and departments centered around defense and national security on the one hand (the intelligence community and Department of Defense), and economics and trade (the Department of Commerce, the Department of the Treasury, etc.) on the other. Although the Office of the National Cyber Director advises the President specifically on US cybersecurity policy and strategy, expertise on a broader set of emerging technology issues is distributed across a constellation of federal departments and agencies in different disciplines. Standing up informal and formal channels, such as working groups or even a centralized umbrella organization, would encourage more cross-pollination among interagency players. The last thing the government needs is more bureaucracy, but other countries, including Israel, Singapore, Ukraine, and the United Arab Emirates, have created dedicated entities to coordinate policy on specific emerging technology trends—a strategy that has paid dividends in different ways.

The second impediment is that we are not proactive enough in attracting the right talent to government service. The problem set is complex. In some instances, there aren’t enough open spots. In other cases, it takes far too long to select and onboard the best candidates. Yet a series of targeted recruitment and hiring measures—some of which Congress could incorporate into legislation—would have a profound impact on human capital development in the civil service:

• Require a minimum level of technical expertise on staff. Obligate entities with examination, rulemaking, and supervisory authorities to ensure that at least 10 percent of full-time staff have a background in a relevant technical field, such as engineering, computer science, or software development.
• Expedite the hiring process. Allow US government agencies and departments to use excepted service hiring authority—which allows them to bypass traditional hiring processes—to accelerate hiring of individuals with technical skills and backgrounds.
• Modernize ethics restrictions. Existing ethics rules prevent civil servants from directly engaging with some innovative technologies. For example, current ethics guidance at many regulatory agencies categorically prohibits employees who own cryptocurrency from working on issues related to digital assets. Just as career staff with bank accounts and stock market investments are not precluded from working on financial policy and regulation, nor should individuals who own cryptocurrency be restricted from working in this space.
• Expand short-term opportunities for tech talent. Develop new fellowship programs and enhance existing ones, like those that came out of the Biden Administration’s National Cyber Workforce and Education Strategy, to give experts at big tech companies, startups, and academia the ability to work in the US government for a limited period—six to 24 months. This approach would institutionalize a pipeline of tech talent to send into government to gain first-hand exposure to the policymaking process and bring their experience in-house to drive product development. The CIA in 2022 announced a program that does just this: it allows those in the tech sector to take on short-term roles in public service. And if the CIA can make this program work, there’s no reason the rest of the US government can’t follow suit.

Our final point is philosophical. The mission of government is a powerful pull. But that alone is not always enough. As many of us have seen, there are ways to serve the public interest that don’t require a .gov email address. If we want our best and brightest—our most ambitious and innovative—women and men to pursue federal service, we have to do a better job of proactively making the case why. And one way is showing that the US government is a place where creativity and dynamism can thrive, and where cutting-edge talent isn’t just sought after, it’s celebrated.

Lesley Chavkin is a Nonresident Senior Fellow with the Atlantic Council’s GeoEconomics Center. She is currently Global Head of Public Policy at Paxos, and previously served in senior roles within the US Department of the Treasury, including financial attaché to Qatar and Kuwait

Eitan Danon is Manager of International Investigations and Special Programs, and previously served as Senior Policy Advisor in the US Department of the Treasury

Sigal Mandelker is Co-Chair of the CNAS Task Force on FinTech, Crypto, and National Security, and joined Ribbit Capital in 2020. She previously served as Under Secretary for Terrorism and Financial Intelligence and as Acting Deputy Secretary at the US Department of the Treasury

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The saga illustrates the global ramifications of US interest rates and a strong dollar. Basically, pro-dollar fundamental factors include resilient economic activity and sticky inflation data in the United States keeping interest rates high for long—pushing the expected first rate cut by the Fed to later this year. In this context, statement by Fed Chairman Powell after the Federal Open Market Committee (FOMC) meeting on May 1 will be scrutinized for clues of the Fed’s intentions. This will keep FX markets on tender hooks until then. By contrast, the BOJ has been reluctant to raise rates much, even though it has brought Japan out of the long period of negative interest rates. This was due to the fact that the BOJ has revised downward its estimate for Japan’s GDP growth for fiscal 2024 to 0.8 percent from 1.3 percent in fiscal 2023. It was therefore not willing to tighten monetary policy in response to FX movements. As a consequence, government bond yield differentials in favor of the United States have hovered near 400 basis points—the widest spread since 2000—and the yen has kept weakening.

Moreover, in an unusual reversal of historical relationship, the dollar’s strength has been associated with elevated oil prices, imposing a double whammy on many countries, especially those having to import oil. The firming trends in both the dollar and oil prices are likely to have benefited from heightened geopolitical tension, including military conflicts in Ukraine and the Middle East.

As a consequence, besides the yen most of the world’s currencies have been under pressure from the dollar, which has been on a rising trend, having appreciated by 30 percent over the past decade. The dollar’s strength is also likely to be sustained as many other countries, including the Euro Area, have been looking for opportunities to cut interest rates to support their economic recoveries since their inflation performances have been better than that of the United States. That would help to keep interest rate differentials in favor of the US dollar.

In Asia, the Korean won (-7 percent against the dollar year-to-date) and China’s RMB (-2 percent) have also been burdened by domestic problems. Specifically, Korea has been hurt by elevated oil prices, the unresolved real estate project financing defaults and uncertainties over government policies after the April general elections. Meanwhile, China has a struggling economy trying to cope with an unfolding property crisis and a host of other structural impediments including high debt levels, an aging population, and slowing productivity growth.

Going forward, the dollar strength will be checked only when fundamentals change. Most importantly, this means upcoming US economic data, starting with the April non-farm payrolls report on May 3. Those numbers will be scrutinized to see if the lower-than-expected 1.6 percent GDP growth for the first quarter of 2024 implies a softening of economic activity and inflation rates in the foreseeable future. If so, expectations of Fed easing can be brought forward again.

In addition, signs of policy coordination among G20 countries could help prevent disorderly fluctuations in foreign exchange markets. In this context, the G20 and the International Monetary and Financial Committee (IMFC) might have missed a good opportunity during the IMF-World Bank Spring Meetings two weeks ago to show that they can rise to the occasion to reassure financial markets. Realistically, the G20 may not be able to reach any agreement on policy coordination given the increase in the level of mutual distrust among members as a result of geopolitical rivalry. If the G20’s inability to cooperate persists, leaving many countries in the world struggling to cope with the dollar’s strength on their own, that will be adding to the growing economic costs of geopolitical rivalry.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post The yen’s travails in an era of geopolitical rivalry appeared first on Atlantic Council.

Times are changing and the IMF’s Fiscal Monitor released earlier this month documented this in detail. Policymakers are increasingly turning to subsidies to achieve a variety of objectives. The Fiscal Monitor documented the proliferation of industrial policy and, notably, offered a partial endorsement. The report also illustrates how economists’ views of industrial policy are evolving and where there is still disagreement.

What’s the IMF-approved version of industrial policy? In short, the IMF cautiously endorsed sector-specific interventions as a way to promote innovation, but remains skeptical of measures that get in the way of free trade.

The IMF’s case for industrial policy starts with the acknowledgement that innovation doesn’t happen under ideal market conditions. New ideas and inventions have positive spillovers (externalities) which means that the market, left to its own devices, won’t provide sufficient innovation.

That opens the door to policies like research grants or R&D tax credits that subsidize new research and inventions. Those economy-wide measures are known as “sector neutral” or “horizontal” industrial policy, and they tend to have more buy-in from economists. But the IMF’s Fiscal Monitor went further, outlining when and why “vertical” or sector-specific industrial policies can be worthwhile, too. The key, according to the IMF’s researchers, is to target sectors that either have especially high spillovers—where a breakthrough would improve productivity in lots of other arenas—or where there are other unresolved market failures at work. They cite clean energy and health care as examples.

“This Fiscal Monitor shows that well-designed fiscal policies to stimulate innovation and the diffusion of technology can deliver faster productivity and economic growth across countries,” the report concludes.

The IMF’s endorsement comes with a lot of caveats, which the researchers summarize:

They also note that larger, less open economies like the United States benefit more from such policies—because they capture more of the benefits of innovation subsidies.

The IMF is not the only international organization recognizing the case for industrial policy. The OECD’s researchers published an extensive and largely positive evaluation in 2022.

However, the IMF’s version of industrial policy isn’t necessarily the one most in vogue. Most notably, the Fiscal Monitor warns that “policies discriminating against foreign firms can prove self-defeating and trigger costly retaliation.” In a paper published in January, IMF researchers found that two-thirds of industrial policies enacted in 2023 distorted trade. So while the IMF may be warming to industrial policy in theory, it remains skeptical in practice.

Walter Frick is chief editor of the Atlantic Council’s GeoEconomics Center

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What is a CBDC?

CBDC is a digital form of a country’s fiat currency that is a liability of the central bank. A country’s central bank issues a CBDC. 

Is CBDC the same as cryptocurrency?

CBDC is different from cryptocurrency. Unlike CBDC, cryptocurrency is not issued and backed by a central bank, they are usually issued by private companies. Cryptocurrencies, such as Bitcoin or Ethereum, are decentralized. This means that control and decision-making in a transaction are transferred to many different entities, instead of relying on intermediaries.

Both cryptocurrencies and CBDCs can run on distributed ledger technology, meaning that hundreds of devices all over the world are responsible for carrying out and verifying transactions. One form of cryptocurrency, a stablecoin, can be pegged to a fiat currency.

How is this different from other forms of digital money?

CBDC is also different from digital money held in bank accounts or payment apps. Digital forms of money held in these apps or accounts are a liability of the commercial bank; CBDC is a liability of the central bank. CBDC is usually intermediated, meaning that it is distributed through banks, payment service providers, and digital wallets. Even in this case, CBDC is still a liability of the central bank. 

Are there different types of CBDC?

There are two types of CBDC: retail CBDC (rCBDC) and wholesale CBDC (wCBDC). rCBDC is used by the general public for commercial and peer-to-peer transactions. rCBDC would be used to buy a cup of coffee, for example. wCBDC is used by financial institutions to settle interbank and securities transactions. Its use is comparable to that of interbank transactions with central bank reserves. 

Why are countries exploring CBDC? 

There are many motivations for researching and developing CBDC, and each country’s motivation will determine whether they explore rCBDC or wCBDC. The motivations for rCBDC include promoting financial inclusion, increasing payment efficiency, lowering transaction costs, and improving safety. The primary motivation for wCBDC is reducing cross-border friction in interbank and securities transactions. 

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Will CBDC replace cash?

CBDC will complement existing payment methods, not replace them. In its 2023 report, A stocktake on the digital euro, the European Central Bank clarified that a digital euro would “provide an additional payment option to complement cash and current
private digital payment solutions (rather than replace them).” The Federal Reserve and the Bank of England have also stated that CBDC will not replace cash.  

Are there any risks in pursuing CBDCs?

As countries explore the benefits and development of CBDC, there are several challenges that arise. If citizens pull too much money too quickly out of commercial banks to purchase CBDC, it could result in a bank run–creating instability in the financial market. This is a challenge in volatile economic conditions. 

Another challenge is creating a secure and resilient infrastructure for holding and using a CBDC. Cyber attacks, internet connectivity issues, and interoperability with existing payment systems are challenges for the efficiency of CBDC. 

Finally, central banks must also ensure the privacy and safety of a CBDC, which are necessary for gaining public trust and protecting citizen’s rights.

What are the national security implications of CBDC?

The introduction of new payment systems could impact the daily lives of citizens but also potentially compromise a country’s national security objectives. For instance, CBDC can allow countries to build linkages and networks outside of the dollar, which can create opportunities to evade sanctions. Therefore, cross-border collaboration is necessary on issues of CBDC governance, privacy, and security. Private and public entities have already begun to work together to set standards and ensure interoperability. Yet more can be done to ensure that the issuance of CBDC does not jeopardize the national security objectives of a country.

Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center. Follow her at @alisha_chh

Leila Hamilton is a young global professional at the Atlantic Council’s GeoEconomics Center. Follow her at @leilathamilton

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Despite the headwinds, Brazil’s non-aligned, cooperative, and practical approach holds out the promise of a constructive outcome for this year’s G20 meetings—especially if progress is not being measured by joint communiques (which have become irrelevant) but by agreements on concrete global initiatives. Under the overarching theme “Building a Just World and a Sustainable Planet”, Brazil has worked with countries in the Global South as well as developed countries to build consensus in launching a variety of global initiatives by the time of the G20 Summit. These initiatives reflect the key concerns of the Global South but have built on previous international agreements and include practical proposals for implementation.

Brazil’s proposed initiatives

First is the push to reform the United Nations system and the Bretton Woods institutions like the IMF, World Bank, and World Trade Organization. Reforms to the UN Security Council—where five permanent members (P5) have veto power—have been on the international agenda for a long time. While widely acknowledged in principle, no specific proposal has gained any traction. Brazil has put forward the idea that a P5 member should not be allowed to use its veto power in cases directly relating to itself—somewhat similar to the Western judiciary practice of reclusion of judges in cases of conflicts of interest. This would have meant that Russia would not have been able to use its veto power when the Security Council discussed the war in Ukraine. Such a proposal will not get the backing of the P5, especially amid the current geopolitical rivalry. But it could gather support from many countries, and not only within the Global South—keeping pressure on P5 members to respond with counter-proposals.

Calls for reform of the IMF and World Bank have been widely shared by the Global South, reiterated most recently by China demanding a redistribution of quota and voting shares to “better reflect the weight a country carries.” The G24, representing developing countries at the IMF and World Bank, has circulated a paper proposing specific reforms. These and other ideas about quota reform are scheduled be discussed by the IMF in the year ahead.

Second, another of Brazil’s linchpins for this year is launching a Global Alliance Against Hunger and Poverty as a tool for reaching the UN Sustainable Development Goals by 2030. That initiative leverages Brazil’s position as the second biggest food-exporting country. Specifically, the alliance will not be about initiating new funds or programs but finding ways to coordinate numerous existing funds and programs to make them more useful to recipient countries and easier to solicit contributions from developed countries. It also will compile a basket of best practices in anti-hunger and anti-poverty policies to help other countries develop their own programs. In this context, Brazil will showcase its acclaimed Bolsa Familia family welfare program, which has helped significantly reduce the country’s poverty rate and has been adapted in almost twenty other nations.

Third, Brazil will launch a Task Force for the Global Mobilization Against Climate Change to spur the G20 to help create a conducive political environment for a new and robust goal on climate finance to be agreed at this year’s COP 29 in Azerbaijan as well as for countries to present their renewed and more ambitious Nationally Determined Commitments (NDCs) to reach net zero emissions at the 2025 COP30 under Brazil’s chairmanship. Brazil will also advance its proposed Global Bioeconomy Initiative to bring together science, technology, and innovation on the use of biodiversity to promote sustainable development. This initiative will also try to expand developing countries’ access to various fragmented climate funds including the Green Climate Fund, the Climate Investment Fund, the Adaptation Fund, and the Global Environment Facility.

Fourth, leveraging the momentum of the global corporate minimum tax (effective at the beginning of this year), Brazil wants to propose a global initiative to impose a minimum tax on the super-rich which France has endorsed. This will help Brazil rally support from Global South countries as well as others to advance the proposal.

Last but not least, in September 2023 Brazil and the United States signed an MOU for a Partnership for Workers’ Rights (in particular in the gig economy). They pledged to pass necessary national legislation to achieve that goal and hope to use it as an example to get other countries to join.

The themes across these initiatives are practicality, leading by example, and a willingness to bypass time-consuming, top-down international negotiations.

While Brazil’s proposals will not all be adopted at the G20 Summit, especially in their original versions, most probably will be with some modifications. This outcome, with or without a joint communique, would represent a serious contribution by a key member of the Global South to the global reform agenda. And it comes after the achievements of India in its Presidency of last year’s G20. If South Africa keeps up this track record when assuming the G20 Presidency in 2025 (when Brazil will chair the BRICS-10 and COP30), an important step forward will be made in establishing the leadership roles of the major countries in the Global South. They are showing the ability to rally their members and to reach out to developed countries to shape global reform efforts. And if those countries, working with their partners, can sustain the implementation of the initiatives they sponsored, that would begin to make meaningful changes in the current international political and economic system. The main risk, of course, is that geopolitical rivalry will derail cooperative efforts to address pressing global problems. It remains to be seen to what extent that will happen.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Brazil’s approach to the G20: Leading by example appeared first on Atlantic Council.

The issues Yellen raised reflect real concerns in the United States and Europe—in particular about hi-tech and clean energy sectors like electric vehicles (EVs), lithium batteries, and solar panels. However, it is not a straightforward matter pushing back against China on grounds of overcapacity. The EU has initiated anti-dumping investigation of Chinese EVs—imports of which have surged in many European countries threatening domestic producers—but evidence of overcapacity in that sector is weaker than in solar panels and batteries. Measures to restrict import of these products would simply raise their prices, as Western companies are not in a position to replace Chinese products.

More importantly, the West needs to recognize that overcapacity is intrinsic to China’s economic model—and therefore that calls to end it amount to wishful thinking. In other words, while the complaints about overcapacity are justified  from a Western perspective, they will not change the situation any time soon—despite platitudes about US-China relationship being on a “more stable footing” expressed at Yellen’s meeting with China’s Premier Li Qiang.

Chinese EVs pose different challenges than batteries and solar panels

China does have overcapacity problems. Overcapacity is typically measured using utilization rates, the rate of industrial capacity in a sector that is being used for production—low rates imply surplus capacity. Companies with a lot of surplus capacity tend to lower prices to generate demand, hurting the profitability of the whole sector. China has low utilization rates—which have fluctuated around 75 percent, well below the 80 percent considered to be normal. At the end of 2023, China’s capacity utilization rate has recovered to almost 76 percent—a few percentage points higher than the pre-Covid low in 2016 and a few percentage points lower than those of other major countries including the United States (whose utilization rate fell below 80 percent in 2023).

However, behind the aggregate low utilization rate of 76 percent is a very wide dispersion among different sectors. EVs have a high utilization rate, whereas China has very low-capacity utilization rates in low tech sectors such as cement and glass—which are being pulled down by the property construction slump—as well as in lithium batteries and solar panels.

In automobiles, producers of internal combustion engine (ICE) vehicles have suffered from very low capacity utilization rates—in many cases well below 50 percent—as consumers have been shifting from ICE vehicles to EVs. By contrast, EV producers, especially large ones like BYD, SAIC and Li Auto, have high utilization rates, exceeding 80 percent. These companies have increased their production and export of EVs significantly in recent years, arguably because they are quite efficient in terms of prices and quality. Even Elon Musk admitted that Chinese EV companies “are extremely good…and the most competitive in the world.” The smaller and less efficient EV producers have been weeded out relentlessly from the more than 400 companies launched more than a decade ago to about fifty having some degree of recognized name brands. This consolidation process has accelerated after China ended its subsidy program for EVs at the end of 2022—putting huge pressure on less efficient producers. (While past subsidies supported Chinese EV companies, the fact that this subsidy has been ended could be used by China in its defense against the EU investigation.)

Furthermore, China is not as dependent on the export of automobiles including EVs as some other major car manufacturing countries. Specifically, its export rate is quite low, at 15 percent compared with 48 percent in Japan, 72 percent in South Korea, and 79 percent in Germany. As a result, possible EU and US tariffs may blunt China’s EV export growth in those regions but can hardly be expected to alter the overall growth trajectory of the country’s EV sector.

In the first two months of 2024, China experienced an 8 percent increase in total EV export in volume terms, having been able to shift EV sales in the EU (which has declined by 20 percent) to Asia (export to RCEP countries has increased by 36 percent). These two regions account for 30 percent each of China’s EV export. Furthermore, China can boost domestic demand by raising the target for the share of EVs in new car sales from 45 percent by 2027 (rather low relative to the target of 65 percent by 2030 in the EU). Such a move would be helped by the fact that China has rolled out 2.7 million charging stations across the country at the end of 2023–compared with only 64,187 in the United States.

In contrast to the EV sector, lithium battery and solar panel producers have suffered from very low capacity utilization rates—in many cases below 50 percent. In particular, China’s annual production of solar panels is more than twice the global demand. This huge overcapacity has significantly driven down the prices of these products, benefiting all importing countries in their green transition efforts. Raising tariffs on these products will increase their prices to users and delay many countries’ green transition targets, especially as Western companies are not in a position to replace Chinese products. It is instructive to note that President Biden has vetoed a Congressional resolution to reinstate tariffs on cheap solar panel imports from South East Asian countries—for fear of delaying the pace of solar installations necessary to meet his administration’s target of 100 percent clean electricity by 2035.

Overcapacity is intrinsic to China’s economic system

The West should focus its complaints on the sectors where Chinese overcapacity is most egregious—for example in wind power turbines on which the European Commission has just launched an anti-subsidy probe. As it does so, it must also recognize that the long cycle of overcapacity build-up and correction is generic to China’s economic system of state capitalism. Strategic decisions by leaders the Communist Party of China (CCP) will mobilize resources to invest in chosen sectors. That leads to overcapacity, which comes with unfavorable side effects, which eventually cause the leadership to undertake corrections. This process usually takes far longer than the prompt market-driven resolution of inefficient and unprofitable companies in the West. In China, grossly inefficient companies have been liquidated or absorbed by more efficient units, but in a managed and gradual consolidation process to minimize undesirable social impacts such as rising unemployment or hollowing out manufacturing communities.

A clear example of China’s overcapacity cycle can be found in the huge stimulus program unleashed by Beijing in response to the 2008 Global Financial Crisis—offering abundant and cheap credit to spur construction in infrastructure and housing. The resulting overcapacity in coal, steel, and other construction materials was quite severe, depressing producer price inflation, keeping it in negative territory for more than fifty consecutive months. In addition, overcapacity in the steel industry caused bitter complaints by other steel producing countries. By 2015, China launched a wide-ranging Supply Side Structural Reform to reduce overcapacity  by encouraging a consolidation process in those sectors, cushioned by measures to boost demand. China’s Belt and Road Initiative (BRI), launched in 2013, could have been designed partly with the goal of exporting the country’s surplus capacity in construction in mind. These measures were able to bring the overcapacity problem under some degree of control.

In another example, China has had significant overcapacity in the shipbuilding sector, which is 232 times greater than that of the United States, posing a threat to competitors like South Korea and Japan. China has addressed that problem in a strategic way by using its abundant capacity to build modern warships to catch up with the US Navy.

At present, CCP leadership seems to be aware of the industrial overcapacity problem which has caused producer price inflation to be negative continuously since late 2022. In presenting the government work program at the National People’s Congress meeting last month, Premier Li Qiang said that “China wanted to reduce industrial overcapacity” but flagged more resources for tech innovation and advanced manufacturing to develop “new productive forces.” It appears that, like in the 2015 episode, China will spur the consolidation of the sectors having significant surplus capacity. However, the result could be more efficient and competitive enterprises, continuing to pose a challenge to producers in the West and a few developing countries aspiring to develop their manufacturing industry.

A realistic path forward

The United States and EU, together with other manufacturing nations, have wrestled for some time with the overcapacity problem in various industries, caused by China’s economic system of state support to its enterprises. So far, the major remedy to this challenge has been countervailing duties on China, either sanctioned by the World Trade Organization (WTO) after a lengthy and difficult process or imposed unilaterally by former President Trump and maintained by President Biden. However, raising tariffs has not been a totally satisfactory solution. It has given some protection to impacted sectors in importing countries at the cost of higher prices to consumers. But it has not been a game changer in terms of ensuring a level playing field for all countries.

Based on historical experience, it’s safe to say the current phase of China’s overcapacity in hi-tech and green industries like lithium batteries and solar panels will be impacting the rest of the world for some time to come. It is reasonable to criticize and complain to China, but policymakers should remember that an end to overcapacity would mean a major shift in China’s economic model, which is exceedingly unlikely. They must therefore be prepared for a sustained period of heightened trade tension during which Beijing will eventually take some measures to reduce industrial overcapacity when its domestic impact becomes unacceptably negative—but in China’s own way and on its own timeline.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post Breaking down Janet Yellen’s comments on Chinese overcapacity appeared first on Atlantic Council.

Moscow is trying to increase Africa’s dependence on its imports further by blocking the exports of Ukrainian grain. Russia pulled out of the Grain Deal that allowed Ukraine to export its grain despite Russia’s war. The Kremlin then offered Africa free grain transport to increase its sales and Africa’s reliance on Russian grain. Additionally, Russian propaganda has gained huge traction in Africa claiming that Western sanctions are to blame for the increases in grain prices and not Russia’s war against Ukraine.

By helping Ukraine sell its grain, the West can offer the African continent an alternative to Russia’s grain and decrease Russia’s profits.

New solutions are needed for Ukrainian grain exports

Ukrainian grain is key to global food security, which is why the West should protect and invest in Ukraine’s agriculture sector. Before the war, about 90 percent of Ukraine’s agricultural products were exported by sea. By blocking the Black Sea ports at the beginning of the war, Russia brought exports to a standstill, raising global food prices. Moreover, Ukraine’s grain production dropped by 29 percent in 2022-2023. The US and EU should help Ukraine modernize its infrastructure and create alternative shipping routes both through land and sea.

Since exiting the Grain Deal in July 2023, Russia has damaged about 200 facilities in Ukrainian ports. While the current grain arrangement allows Ukraine to export about 22 million tons of grain, Russia constantly attacks the ports and shipments, damaging infrastructure, destroying and stealing shipments, and taking human lives. Despite the risks, Ukrainians are trying to quickly rebuild and modernize the ports. And, even with the current arrangement, Ukraine can further increase sea exports of grain. The West should invest in the rebuilding and modernization of existing Ukrainian ports and connecting infrastructure, such as roads and railways, which could allow an increase of exports by a quarter, at least. This positive economic statecraft measure will also attract private investors to the Ukrainian agricultural and infrastructure sectors, helping Ukraine to make up for lost production and build new capacity.

To make up for sea export losses, Ukraine, with the European Union’s help, also developed land routes that allowed the shipping of grain. This solution, however, was temporary, since Polish farmers blocked the border and destroyed around 160 tons of Ukrainian grain. These protests are undermining Polish support for Ukraine and further damaging global food security. The EU needs to intervene and negotiate a deal for Ukraine to continue shipping grain through Poland. While this is in the works, the EU should help increase the capacity of other EU routes for Ukrainian grain to Africa, such as through Romania and Slovakia.

Positive economic statecraft can help Africa ensure food security

Multilateral organizations, including the World Bank and the Group of Seven (G7), have been trying to mitigate the effects of the food crisis in Africa. Among other projects in Africa, the World Bank provided $2.75 billion to the Food Systems Resilience Program for Eastern and Southern Africa which helps countries in Eastern and Southern Africa tackle growing food insecurity. The G7 also committed billions to mitigate food insecurity. These actions, however, are not enough, as nearly 50 million people are expected to go hungry in West and Central Africa this year. Moreover, millions in southern Africa are threatened with hunger due to extreme drought.

The West should employ positive economic statecraft tools to deal with war-caused food security issues. That should include working with its allies and partners in the African Continental Free Trade Area (AfCFTA) which can help increase food security, by increasing the availability of affordable fertilizer. Positive measures can also help African countries to develop their own agriculture sectors. Africa has over 65 percent of the world’s uncultivated land, which shows the continent can sustain its food needs if the infrastructure is in place. Supporting existing organizations, such as the Alliance for Green Revolution in Africa (AGRA), can allow applying local expertise to build government and private capacity to expand agricultural sectors on the continent.

Positive economic statecraft, such as increasing Ukraine’s exports to the continent and supporting African initiatives like AfCFTA and AGRA will help Africa increase food security. These measures will also help Ukraine make up for export losses from Russia’s war and allow African countries to decrease reliance on Russian grain exports.

Yulia Bychkovska is a former young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @YuliaB.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The Governors left unresolved the more challenging problem of changes in the relative distribution of quotas, and thus voting shares, in favor of emerging market and developing countries (EMDCs). Instead, Governors requested the Fund to develop and propose a new quota formula by June 2025.

Starting with the Spring 2024 meetings, the debate will focus on quota reform to better reflect the changing weights and roles of member countries in the global economy and financial system. There are two related issues to be addressed: changing the quota formula used to produce the so-called Calculated Quota Shares (CQS); and the political negotiations to determine the Actual Quota Shares (AQS). The current AQSs were set at the end of the 14th Quota Review in 2010 and are not aligned with the CQSs as last updated in 2021 by the IMF staff.

Changing the quota formula: More complicated than it looks

The IMF quota formula has been specified as follows.

CQS = (0.50 GDP + 0.30 Openness + 0.15 Variability + 0.05 Reserves)*k

GDP is a blend of 60 percent GDP at market rates and 40 percent at PPP exchange rates. Openness is the sum of annual current payments and current receipts on goods, services, income, and transfers. Variability is the standard deviation of current receipts and net capital flows. Reserves are twelve-month running averages of FX and gold reserves.

And k is a compression factor set to be 0.95 to reduce the dispersion of the results.

Quota is the basis to calculate members’ capital contributions to the Fund; to specify their access to Fund resources (borrowing up to 200 percent of a member’s quota annually, 600 percent cumulatively, and more in exceptional cases); and to help determine their voting shares. Specifically, each member has 250 basic votes (all together set at 5.502 percent of total votes). The rest of the voting shares are determined based on the actual quota shares (AQSs) and denominated in the IMF’s Special Drawing Rights (SDR): one vote per SDR 100,000 of quota. This arrangement with basic votes leads to a mathematical adjustment whereby big members’ voting shares are adjusted to be slightly less than their AQSs while the opposite is true for small members.

As mentioned above, the current AQSs are mis-aligned with the 2021 CQSs for important countries—basically China’s AQSs are significantly less than its CQSs, the US CQSs are substantially under-represented relative to its GDP, while Europe’s AQSs are way over-represented compared to its GDP.  But a simple reform changing members’ AQSs to match their CQSs would lead to outcomes not necessarily welcomed by many countries.

Specifically, China is quite under-represented with AQS of only 6.389 percent compared with its CQS of 13.715 percent. However, boosting China’s AQS to its CQS means reducing the AQSs of many other countries towards their CQSs. For example, the United States would have to go from 17.395 to 14.942 percent (thus losing its veto power over important decisions requiring 85 percent support); the EU from 25.3 to 23.4 percent (its over-representation is more pronounced when compared to its blended GDP ranking of 17.29); Japan from 6.46 to 4.91 percent; Latin America from 8.1 to 6.55 percent and Africa from 5.25 to 3.93 percent. Except for China, this outcome is hardly what many EMDCs have in mind. Moreover, many in the United States could object to the fact that both its CQS and AQS significantly underweight its share of the global economy—at 21 percent on a blended basis and even more at 24.4 percent at market rates.

As a consequence, there will be intense debate on changing the quota formula itself to produce CQSs more favorable to different groups of members.

First of all, emerging market and developing countries, represented by the G24, have been pushing for only using purchase power parity (PPP) exchange rates in calculating GDP shares. This would increase their weight in the global economy from 42.7 percent at current market rates to 58.9 percent on a PPP basis—helping to boost their IMF quota shares. However, since the PPP methodology is designed to compare the purchasing power of people living in different countries, favoring those with low levels of prices of non-tradable goods and services, it is questionable if that is the right metric to compare the relative weight of countries in international economic interactions which are conducted at market rates.

Secondly, the importance given to the openness of the current account reflects the 1950-1970 era when trade dominated international economic interactions. Since the 1980s, capital flows— and with them, the size, liquidity, and sophistication of capital markets and the currencies most used in denominating international assets and liabilities—are becoming much more important in affecting global financial stability. Taking these developments into consideration would rank the United States higher than focusing only on current account transactions. By contrast, China would rank lower in such a comprehensive approach.

Finally, the emphasis on reserves is overstating their usefulness in contributing to global financial stability. Under the current dollar-based financial system, it is the US Federal Reserve (Fed) that can act as a lender of last resort to supply dollars to stabilize global financial crises—like in 2008 and subsequent dollar funding crises. To give the United States very low ranking on this variable (1.164 versus China’s 28.125) because it hardly needs to hold FX reserves—being the country issuing the reserve currency—doesn’t make a lot of sense.

What else should be included in quota calculations? Addressing efforts to deal with climate change, the Center for Economic and Policy Research (CEPR) has proposed adding a new variable in the formula to reflect members’ shares of cumulative CO2 emission since 1944. This approach would significantly reduce the voting shares of large CO2 emitters and increase those of low emitters. Consequently, the US voting share would fall from 16.5 percent to 5.65 percent, China from 6.08 percent to 5.26 percent, while the share of the Global South collectively would rise from 37 percent to 56.4 percent at the expense of advanced countries. The problem with this idea is that countries’ contributions to CO2 emission do not correspond to their relative capacity to support the IMF mandate of maintaining global economic and financial stability.

Further fragmentation is the path of least resistance

At the end of the day, the direction of any changes in the quota formula and relative distribution depends on political negotiation among members. Basically, there exists a gap between aspirations in the Global South for a “fairer and more just” distribution of voting power at the IMF and the reality of countries’ contributions to helping the Fund carry out its mandate. Africa vividly illustrates this gap: many have complained of the fact that the continent accounts for almost 18 percent of the world population but commands only 6.5 percent of the voting share at the IMF—however, its share of the global economy is only 2.7 percent.

But any aspiration for reform needs to account for the reality of political negotiation. In an international negotiation, positive outcomes depend on a sufficient degree of mutual trust among negotiating partners. Given the current geopolitical rivalry, trust has been replaced by mutual distrust and antagonism, making it extremely difficult to reach agreement among major countries to change the quota formula and relative distribution.

As a result, the path of least resistance for the international community is to continue the recent trend of fragmentation, particularly in global financial safety net arrangements. Countries have strengthened self-insurance by accumulating FX reserves—worth almost $12 trillion at last count, more than $7.5 trillion of which held by EMDCs. More efforts have been made to develop regional rescue facilities. These include the European Stability Mechanism (with maximum lending capacity of €500 billion or $540 billion), the Chiang Mai Initiative Multinationalization (with $240 billion of pooled reserves) and the BRICS Contingent Reserves Arrangements (worth $100 billion now but will be increased by contributions from new members such as Saudi Arabia and the UAE). More important has been the growth of major central banks’ currency swap and liquidity provision arrangements—such as the Fed’s unlimited swap lines with five major Western central banks, made permanent in 2013; and its standing repurchase agreement (repo) facility with foreign and international monetary authorities (FIMA repo facility) launched in 2021. China’s PBOC has concluded currency swap agreements with more than forty counterparties totaling more than $550 billion.

Naturally such a fragmented global financial safety net would be cumbersome and difficult to coordinate to reach a forceful and timely response to crises—let alone coping with the possibility of some of these facilities working at cross purposes—thus imposing a cost on the global economy in terms of lost efficiency. But as Walter Cronkite used to say: “That’s the way it is!”.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post Understanding the debate over IMF quota reform appeared first on Atlantic Council.

California, New York, and other states should move heaven and earth to authorize and construct new housing rapidly, especially in dense urban areas. If these states and others prioritize building houses, emissions and interest rates could fall substantially, providing a major economic and climatological boost to the United States.

The US housing shortage

Like all prices, elevated housing costs are a symptom of supply and demand.

Housing demand surged amid the pandemic and shifting office routines. With Covid-19 constraining mobility, individuals working from home upsized into larger dwellings suitable for full-time remote work.

The housing problem is on the supply side: the United States is not building enough housing.

From 2012 and 2022, the gap between household formations exceeded national home constructions by 2.3 million homes.

While many places have underbuilt housing, it’s worth highlighting the abject failure of two large and important states: California and New York. The nation’s largest and fourth largest states by population have failed to match the housing construction pace of Texas and Florida, the nation’s second-largest and third-largest states, respectively. In 2023, Florida and Texas together authorized three times more housing than California and New York combined.

The situation is even more stark after normalizing for population. California and New York’s per capita homebuilding rate actually declined from 2019, while Florida and Texas’ rose slightly despite a much less favorable interest rate environment.

Why have California and New York failed to build housing? As John Burn-Murdoch identified in a trenchant analysis for the Financial Times, these states’ planning systems place artificial restrictions on supply.

California and New York’s permitting processes are in shambles, largely due to state and local dysfunction. In San Francisco’s infamously restrictive housebuilding environment, it usually takes two years to fully approve a housing development, without even taking construction time into account. New York state legislators, meanwhile, blocked tax and zoning changes that would have allowed for more new large apartment buildings.

Due to insufficient housing supply, California and New York are, unsurprisingly, deeply unaffordable compared to other markets that are constructing housing. The burden of these failed policies disproportionately affects the young and individuals of color.

Housing accounts for about one-third of a median household’s budget. But costs are even higher for younger individuals: in 2022, half of all householders aged 15-24 spent 35 percent or more of their annual household income on rental costs.

Similarly, individuals of color are particularly impacted by higher rental prices. Black and Hispanic Americans have home ownership rates of 44 percent and 51 percent, respectively, while white Americans have home ownership rates of 72.7 percent.

How housing prices affect inflation—and the cost of clean energy

Rental prices rose 22 percent from December 2019 to December 2023, higher than the 18.4 percent rate of inflation if shelter is excluded. Consequently, renters have experienced higher rates of inflation. Expanding housing supply could therefore have a positive impact on renters.

US inflation today is largely a housing phenomenon, as shelter now accounts for over two thirds of the rise in the US core consumer price index (CPI), which excludes volatile food and energy prices and is a useful proxy for tracking consumers’ out-of-pocket spending and inflation-adjusted wages. Moreover, real-time measures of shelter costs, such as Zillow’s Home Value Index, show that prices rose 3.6 percent year-over-year in February 2024. (Housing represents a smaller share of the Fed’s preferred inflation measure, the Personal Consumption Expenditures Index, but even there it’s a major chunk of the total.)

With housing shortages contributing to inflation, the Federal Reserve has been forced to impose higher interest rates. High interest rates are disastrous for US climate goals, as capital-intensive clean energy projects benefit from lower financing costs and are penalized by higher rates. If interest rates rise to 7 percent from 3 percent, the cost of offshore wind and solar farms rises by about one-third, nuclear energy costs grow by even more, but natural gas plant prices barely budge. Unsurprisingly several US clean energy projects, from nuclear to renewables, have faced cancellations due to higher-than-expected interest rates.

As inflation abates, central banks will be freer to lower interest rates, reducing financing costs for clean energy projects. Expanding housing would therefore not only provide a sizable economic boon to the United States, producing a virtuous cycle of lower interest rates for longer, but also deliver progress on climate.

Dense housing is good for climate mitigation

Insufficient housing, especially dense urban housing sited near transit, also carries huge climate consequences. Per-capita greenhouse emissions are much lower in urban neighborhoods than other areas.

New York and California are not only failing to build a sufficient quantity of housing stock, but also to build sufficiently dense units. In California, dense housing stock is facing an array of challenges, especially at the local level. Although New York’s home building is very dense, owing to the prominence of New York City, the share of dense housing structures as a percentage of all units has fallen sharply since 2019.

In sum, greater housing—especially in urban areas—would provide reduce inflation and interest rates while lowering emissions. Expanding dense, urban housing options should be a top policy priority.

There are several ways to accelerate housing construction.

The most important step is to identify the problem and mobilize actors across all levels of government—national, state, and local—to build housing as quickly as possible.

Legalizing apartment units, including same-lot units, and eliminating parking requirements are also important steps for cities. Additionally, lowering or eliminating tariffs for some housing inputs, such as softwood lumber imports from Canada, would incentivize housing construction. Incredibly, the US Commerce Department is considering raising duties on Canadian lumber imports. This action would raise consumer prices and disincentivize new housing. It would constitute a profound error with grave inflationary and climate consequences. Instead of raising tariffs on what is arguably the United States’ closest ally, Washington should vigorously pursue policies that decrease shelter costs as quickly as possible.

Reducing shelter costs should be considered a primary priority for US policymakers. While apartment rental price increases have recently abated, and even begun to decline in some markets, these benefits have often yet to pass through to consumers on year-long leases. Rental prices may decline further if action is taken at all levels of government. If housing prices continue to lift inflation, however, the consequences could be profound.

Joseph Webster is a senior fellow at the Atlantic Council. This article represents his personal opinion.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Housing costs are slowing down the US climate transition appeared first on Atlantic Council.

Africa’s growth potential

Over the past four decades, extreme poverty rates in the world, measured as share of population living with less than $2.15 a day (2017 PPP), declined from around 44 percent to less than 10 percent. However, as of 2019, the share in Sub-Saharan Africa was around 35 percent—and is expected to have risen to 45-50 percent in the past five years because of the back-to-back shocks of the pandemic, debt and inflation crises, and increasing food and energy prices caused in part by the Russia-Ukraine war. Clearly, Sub-Saharan Africa has missed the benefits of globalization in the past four decades which lifted billions out of poverty around the world through trade and an integrated global supply chain.

At the same time, Africa has tremendous potential which, if unleashed, can lead to rapid growth in the continent and higher aggregate demand for globally produced goods and services. Africa’s growth could revitalize global growth, which has been decelerating for various structural reasons over the past two decades. With deeper engagement of BWIs and other Multilateral Development Banks (MDBs) and International Financial Institutions (IFIs), African economies can seize the moment and become the engine of global growth.

Promoting public-private partnerships

As the World Bank’s and other MDBs’ financial and technical resources are becoming increasingly limited, they need to shift their focus from merely providing loans and various forms of financial assistance to actively catalyzing the flow of other quasi-public and private resources into the development of Africa’s human capital and social and physical infrastructure. Therefore, BWIs and other MDBs should prioritize strengthening financial governance and legal structures of African economies which would encourage private investment in the continent. The establishment of the Global Infrastructure Facility (GIF) by the World Bank marks a significant stride in this direction. However, much more needs to be done to establish infrastructure as a new asset class in global capital markets and the BWIs, engaging with more than forty other MDBs and IFIs, have a unique position to lead the global discussion on this front. The case of quasi-state institutional investors is of particular importance. With more than $70 trillion of assets under management (AuM) and long-term investment horizons, SWFs, public and private pension funds, and various retirement saving vehicles are uniquely positioned to bridge Africa’s growing infrastructure financing gap.

Accelerating Africa’s regional integration

BWIs including the World Trade Organization (WTO) can play crucial roles in promoting regional integration in Africa through various mechanisms and initiatives. First and foremost, the MDBs, with the World Bank leading the efforts, can provide financial support for regional infrastructure projects, such as transportation networks, energy grids, and communication systems. These projects can facilitate the movement of goods, services, and workers between countries in the region, promoting economic cooperation and development. Trans-Saharan Highway and Trans-African Railway are two examples of such projects that could facilitate intra-continental trade in Africa. Second, the IMF can help countries in the region manage their monetary and exchange rate policies to facilitate cross-border financial flows and reduce currency volatility. This can enhance economic stability and create a conducive and fairer environment for regional trade and investment. Third, the MDBs with WTO leading the efforts, can support the negotiation and implementation of regional trade agreements or customs unions, which aim to reduce trade barriers and increase market access among participating countries. Efforts such as African Continental Free Trade Area (AfCFTA) must be enhanced and supported with relevant regulatory and infrastructure development project.

Prioritizing Africa’s integration into global supply chains

Given its triple advantages—vast natural resources, growing and young population, and its geo-strategic location and access to open seas—Africa can play a central role in the global economy and supply chain. However, Africa is currently responsible for only about 5 percent of global trade. BWIs, and other MDBs and IFIs should therefore prioritize programs and projects that would leverage Africa’s triple advantages in the global economy, making Africa an essential and indispensable part of the global supply chains, energy, and labor and consumer markets for decades to come.

Programs that could speed Africa’s inclusion in global supply chains include:

• Vocational training programs would provide African youth with the skills in highest demand in today’s globalized economy.
• Construction of ports and linking them via railways and roads would reduce the cost of trade with and inside Africa and help accelerate Africa’s integration.
• Development of solar, wind, and green hydrogen energy production could make Africa the global hub of renewable energy with massive export potential, especially to Europe and Middle East.
• Agricultural development would help Africa benefit from its massive agricultural potential and potentially allow it to become the world’s major supplier of food and agricultural products.
• Developing Africa’s tourism industry should be a priority since Africa is home to some of the world’s magnificent natural and historical attractions. Given that tourism industry makes up more than 10 percent of global GDP, MDBs should prioritize developing Africa’s tourism industry, which can contribute significantly to the continent’s development and long-term employment.

Multilateralism is the key

Africa’s needs go beyond debt restructuring. The continent has tremendous potential and a “big push” from BWIs, other MDBs and IFIs, and global private sector and institutional investors, mixed with meaningful steps by Africa’s leaders to improve their governance structure, can unleash an economic renaissance in Africa. The revival of multilateralism, with Africa having more voice and representation in BWIs and other institutions of global economic governance, is a necessary first step.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington DC. Follow him on X at @AMohseniC.

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This past October, the US Treasury sanctioned a network of financial facilitators managing a complex global investment portfolio for Hamas, with assets estimated to be worth hundreds of millions of dollars. These designations and subsequent actions likely disrupted Hamas’ finances and investments, but more importantly shed light on a persistent challenge: A heavily sanctioned entity, designated as a terrorist organization across multiple jurisdictions, was able to take advantage of the international financial system to raise, use, and move significant amounts of funds for its terrorist operations.

In this edition of the Global Sanctions Dashboard, we explore Hamas as a case study to illustrate how designated terrorist groups abuse the global financial system. We will walk you through:

• How Hamas raises, uses, and moves money;
• How sanctions are used to counter Hamas and combat the financing of terrorism; and
• Where governments align and diverge in their approaches to combat this activity.

How Hamas raises and moves money despite sanctions

Hamas has been designated as a foreign terrorist organization by the United States since 1997 and the group is now sanctioned by the European Union (EU) and Group of Seven (G7) allies to varying degrees. Governments have further sanctioned hundreds of individuals and entities associated with Hamas, and thousands more with ties to Iran, Hamas’ primary benefactor. Nevertheless, the group has been able to access the global financial system to amass a diverse stream of income from multiple sources.

In addition to extorting money from the civilian population of Gaza and receiving varying amounts of annual financial support from Iran, estimated to be as much as $100 million, Hamas has created a global investment portfolio valued between $500 million and $1 billion. This portfolio is invested in companies in countries including the United Arab Emirates (UAE), Turkey, and Qatar. Hamas has also effectively exploited the charitable sector and solicited donations from witting and unwitting donors using crowdfunding websites. The US Treasury recently noted that while Hamas and other terrorist groups prefer fiat currencies, there is a risk that they will turn to virtual assets as they lose access to traditional financial services.

Terrorist groups, such as Hamas, and other illicit actors use increasingly sophisticated money laundering techniques including smuggling cash and using shell companies to avoid detection and hide their involvement in financial transactions.

Who has sanctioned Hamas

Terrorist designation gaps across jurisdictions create vulnerabilities for the global financial system and may be one explanation as to how Hamas and its financial facilitators were able to operate within the system and with impunity.

Hamas is not designated as a terrorist group by the United Nations (UN). . . UN member states follow and implement UN designations of terrorist groups, including entities like al-Qaeda and the Islamic State of Iraq and al-Sham (ISIS or ISIL), among several others. However, the UN has not designated Hamas as a terrorist organization. Most countries do not have an autonomous terrorism sanction regime and rely on the UN terrorist designations to inform and justify their counterterrorism efforts.

. . .or sanctioned by the West’s partners. Treasury’s October tranche of designations included individuals and entities in Turkey, Sudan, and Qatar—jurisdictions that have not sanctioned Hamas and thus do not have legal restrictions that would prevent Hamas and its facilitators from accessing their financial systems.

There are gaps in sanctions designations among Western jurisdictions. Over the past thirty years, Hamas, in part or in its entirety, has been designated as a terrorist group by various countries in response to its terrorist activity and efforts to destabilize peace operations in the Middle East. Several governments originally only designated Hamas’ “military wing,” the Izz al-Din al-Qassam Brigades, and later began designating the entirety of the organization as a terrorist group.

The lack of a common narrative of what constitutes terrorism and the lack of a coordinated and unified multilateral effort on terrorist designations provide Hamas and other terrorist groups more freedom to operate and abuse sanction loopholes between jurisdictions.

Closing sanctions gaps

Following the October attacks and subsequent war between Israel and Hamas, international partners have come together to close gaps and improve multilateral coordination and enforcement of their sanctions regimes related to Hamas and other groups undermining peace and security in the region.

Engagement with partners in the Middle East. Treasury’s outreach to countries in the Middle East included convening an emergency meeting of the Terrorist Financing Targeting Center (TFTC), which was created in 2017 to enhance information sharing and collaboration on efforts to counter the financing of terrorism. TFTC is focused on the Middle East and includes the United States and the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, and the UAE). Engagement with partners in the Middle East is critical to effectively disrupt and address terrorist financing by Hamas and other groups in the region, while working together to prevent further escalation of the Israel-Hamas conflict. It is important to note, however, that these countries have not explicitly designated Hamas as a terrorist organization, and based on recent sanctions, we know Hamas has used their financial systems to raise and move funds. The GCC countries need to take action to secure their financial systems, and thereby the global financial system from abuse by Hamas. There are political challenges at play, but the GCC should consider a Council-wide terrorist designation of Hamas, similar to the action it took against Lebanese Hezbollah in 2016.

Information sharing with the private sector. The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert for financial institutions providing guidance and red flags to help identify and subsequently report suspicious activities related to Hamas financing. Such suspicious activities include but are not limited to a customer that is:

• Transacting with an Office of Foreign Assets Control-designated counterparty,
• Transacting with a Money Services Business or other financial institutions located in high-risk jurisdictions of Hamas activity, or
• A charitable or nonprofit organization soliciting donations but not seeming to be providing any charitable services.

Alerts often help financial institutions understand what types of information FinCEN and other countries’ financial intelligence units (FIUs) are most interested in. This information is used to inform law enforcement investigations or national security actions, including financial sanctions. It is reasonable to estimate that the Hamas alert generated additional suspicious activity reporting from financial institutions within the US jurisdiction, which can help FinCEN and its partners identify potential terrorism financing activity related to Hamas.

Information sharing with foreign partners. Information sharing and coordination among FIUs is critical for disrupting terrorist financing. FIUs are national centers responsible for receiving and analyzing suspicious activity reports from financial institutions and publishing red flags and alerts to help them identify suspicious activity and protect their systems. The need to share information and develop a common understanding of the terrorist financing threat was acknowledged after the October 7 attack, when FIUs from Australia, Canada, Estonia, France, Germany, the United Kingdom, the United States, and other like-minded states created the Counter Terrorist Financing Task Force–Israel. In a public statement, this task force committed to expediting and increasing the sharing of financial intelligence in terrorist financing-related issues.

Designation of the Hamas network. In response to Hamas’ October attack, the United States and United Kingdom took coordinated action to designate individuals and entities involved in financing Hamas. The EU and other partners took action to shore up their existing sanctions regimes targeting the group and its facilitators. This is a needed step to counter Hamas and deny the group access to funds to finance its terrorist operations. However, allies need to go beyond Hamas and these specific designations. The terrorism threat is on the rise as a result of escalating tensions in the region. Lebanese Hezbollah is increasing rocket attacks in northern Israel, the Houthis continue to attack shipping vessels in the Red Sea, and other Iranian-backed groups have attacked US forces in Iraq, Jordan, and Syria, killing US soldiers. Allied nations must consistently prioritize counterterrorism and countering the financing of terrorism by aligning their sanctions, sharing information, and coordinating designations. Multilateral coordinated action will prevent terrorist groups from taking advantage of jurisdictional gaps between sanction regimes and will create clarity that helps financial institutions identify and report suspicious terrorist financing activity, which in turn can help governments take appropriate action.

Consider secondary sanctions. When partners do not align on terrorist financing risks, the United States should consider leveraging its secondary sanctions authority (pursuant to Executive Order 13224 as amended) to target the foreign financial institutions that continue to facilitate terrorist financing within the global financial system. The use of secondary sanctions sends a strong message that may deter third parties from providing material or financial support to US-designated terrorist groups and will unilaterally shore up gaps in international sanctions regimes that pose a threat to the US financial system.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a program assistant at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Alessandra Magazzino is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @alesmagaz.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

Explore Here

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The post Global Sanctions Dashboard: How Hamas raises, uses, and moves money appeared first on Atlantic Council.

Central banks and international financial institutions are realizing that uneven and dispersed technological advancements in digital currencies could actually create further fragmentation of the financial system, deepen digital divides, and create systemic risks. This would undercut the premise of digital currencies, which are supposed to create more efficiency in the existing system. Fortunately, there are some new models of interoperability across borders. A range of policymakers are trying to solve this looming problem, here are the current options:

IMF’s XC Model 

The International Monetary Fund (IMF) interoperability model, known as the XC platform, proposes a global centralized ledger to simplify and streamline cross-border payments. It was released in November 2022 as a theoretical project which extends the concept of wholesale CBDCs by integrating commercial banks, payment providers, and central banks into a unified, streamlined platform. The model’s goal is to reduce transaction costs and settlement times.

The platform proposes a three-layer architecture: a settlement layer that acts as the primary ledger, a programming layer for executing smart contracts, and an information layer designed to protect personal data while ensuring compliance and facilitating currency controls as needed. Instead of adopting CBDCs, central banks can issue Certificates of Escrow (CE) for use exclusively on the XC platform. These certificates share characteristics with CBDCs and can later be converted into central bank reserves by financial institutions. According to the IMF, a key advantage of using CEs is that it allows countries to prioritize domestic use cases for their CBDC projects.
Importantly, the XC model is built to be broadly compatible with legacy systems, demanding relatively minimal technological adjustments from central banks. The XC model is a policy and regulatory framework, not a technical solution. It encourages countries to adopt consistent and supportive regulations for cross-border payments, potentially incorporating tokens and distributed ledger technologies (DLTs). However, in order for the model to work, it will need compatible legal and regulatory frameworks to effectively manage risks and ensure compliance across various jurisdictions. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, further explained this point at our conference in November 2023.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

BIS Unified Ledger

The BIS Universal Ledger interoperability model advocates for a shared global ledger that supports the issuance and transaction of both CBDCs and tokenized assets. Released just a day after the IMF updated its single ledger XC model, the BIS also aims to address the inefficiencies and silos present in the financial system by enabling safer transactions and atomic settlements within a transparent framework. In the report, the BIS emphasizes the role of trust in central bank digital currency projects in overcoming the limitations and fragmentation observed in current tokenization efforts.

Unlike the XC model which builds on blockchain solutions, the BIS’s unified ledger approach uses APIs (application programming interfaces) creating a more centralized system where transactions have to be processed and validated by authorized entities, such as central banks or designated financial institutions. Within this system, central bank money can circulate on a platform that is not owned and operated by the central bank, which can present risks. It also raises questions about the security, control, and integrity of central bank money when it is managed outside the traditional central banking systems.

The unified ledger model is already being piloted. In October 2023, South Korea launched a wholesale CBDC pilot project exploring BIS’ unified ledger concept. With technical support from the BIS, commercial banks in South Korea utilize a wholesale CBDC for interbank funds transfers and final settlements. These banks will then issue tokenized deposits as payment instruments accessible to the general public within the CBDC network, which is jointly managed by the Bank of Korea (BOK) and other financial institutions in the country. BOK has also joined forces with the BIS Innovation Hub’s Singapore center on “Project Mandala”, which aims to integrate jurisdiction-specific policies and regulatory requirements into a universal protocol for international transactions like foreign investments and payments. This initiative seeks to develop a compliance-by-design architecture for more efficient cross-border transfers for CBDCs and tokenized deposits.

SWIFT’s New Cross-Border Project

Building on its central role in global financial messaging, SWIFT’s innovation hub has introduced a model to enhance its existing infrastructure for cross-border payments, making them faster, more transparent, and cost-effective. Currently in beta testing, this model facilitates the connection of disparate domestic CBDC networks, enabling them to communicate and transact with one another while leveraging SWIFT’s existing infrastructure and security protocols. The current project is running out of the innovation hub and would require a big operational shift to be expanded to the whole SWIFT ecosystem. 

In September 2023, SWIFT announced the participation of three central banks—including the Hong Kong Monetary Authority, the Central Bank of Kazakhstan, and one anonymous central bank—in the next beta phase of its CBDC interoperability project. The project, which initially began in March 2023 with over eighteen participants including MAS and the Banque de France, has now expanded to include more than thirty entities and has already processed over 5,000 transactions in a twelve-week period. This solution leverages SWIFT’s global reach and the existing network effects among financial institutions. It also offers flexibility for countries to maintain their own domestic CBDC infrastructure, while ensuring global connectivity. The model is best thought of as a hub-and-spoke arrangement between various central banks with SWIFT at the center. 

Comparing the models 

The IMF’s XC Model, BIS Unified Ledger, and SWIFT’s New Cross-Border Project each propose innovative approaches to enhancing cross-border payments, especially focused on addressing fragmentation in the payments system. The models themselves are in various stages of development and reflect a spectrum of solutions which envision varied new architectures, novel tokens, and different roles for the private sector and the public sector. These models do not exist in a vacuum, and are accompanied by parallel efforts by central banks (such as Project CedarX Ubin + and Project Mariana) and private companies (such as the Regulated Liabilities Network) to address similar issues of cross-border fragmentation.

The XC Model and BIS Unified Ledger emphasize centralized architectures that focus on integrating existing financial structures with new technology. In contrast, SWIFT’s initiative seeks to adapt its role in traditional messaging infrastructure to connect CBDC networks, prioritizing interoperability and the reliability of established systems. All three frameworks are being designed to support both CBDCs and tokenized assets—creating one platform to exchange them all rather than separate networks. This “token agnosticism” reveals that these projects do not want to be overly prescriptive of the future financial system, and are in the early stages of development and testing. 

Each of these initiatives reflects a different aspect of the evolving landscape of global finance, geared towards a push towards greater efficiency, reduced costs, and enhanced security in cross-border transactions. A central question across these models is that of governance, as each of the proposed models envisions an operator of an inherently global system, a concept that is as blue-sky as it gets. This is going to prove difficult due to geopolitical disagreements, since the countries exploring CBDCs are neither aligned on the role of the existing global institutions at the center of the project, nor do they agree on a specific technological model. While these three models seem unified in their ultimate objective, these projects will have to get more specific about who governs, enforces, and creates the rules of the future of cross-border payments. The alternative is a replication of the existing frictions in our system—leading to less efficiency, higher cost, and a loss in trust in money. 

Despite differences, these models reflect a clear realization in the public and private sector that as CBDCs become a part of the financial landscape, there needs to be a mechanism to interchange them across borders. As our research shows, the solution set is varied, and leaves observers with looming questions related to the required standards of governance, regulatory frameworks, and consumer protection. There are no compelling answers yet, but as the cross-border models evolve to include proofs of concept and testing, they will have to find the balance between what is technologically feasible while being practically applicable across the globe.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the Center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

Alisha Chhangani is a program assistant for the Atlantic Council GeoEconomics Center where she supports the center’s future of money work.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post CBDCs will need to work across borders. Here are the models exploring how to do it appeared first on Atlantic Council.

In the sixty-four years since, those three major economies have never all faced a recession at the same time (outside of the Global Financial Crisis). But as of last week all three were in technical recessions—until updated GDP numbers on Monday showed Japan very narrowly avoiding one.

What’s particularly concerning is that nearly half of the G7 experienced stalled growth at the end of 2023 and none of these slowdowns are alike. In Germany, the manufacturing sector is going through a painful transition as weak demand, competition on electric vehicles, and the aftershocks of Putin’s invasion have slowed growth to a standstill.

In the UK, the post-Brexit labor shortage and sluggish productivity growth have created an economic cycle that still hasn’t curbed high prices. In fact, the government has signaled that this recession might be the only way to break the back of inflation. 

Then there’s the most interesting case, Japan, where an aging population is consuming less and less. In fact, Japan is on pace for a 15 percent contraction in its population between now and 2050. With an average age of forty-nine, Japan has one of the highest proportions of elderly citizens in the world. When the disappointing GDP data came out last month, Japan lost its spot as the third-largest economy in the world.

The good news is that each of these recessions is expected to be short-lived. The latest data out of Japan on Monday shows 0.4 percent GDP growth in Q4, (meaning it avoided two straight negative quarters of growth). Even before the new data, the Nikkei has been surging due to expectations that the Bank of Japan (BOJ) may finally be ending the era of negative interest rates. In the UK, Bank of England Governor Andrew Bailey may finally be able to start cutting rates this summer. And in Germany, new manufacturing orders unexpectedly jumped 10 percent at the end of year—prompting hope that the spring will truly be a season of revival.

But here’s the key difference between now and then. When the United States turned the corner in 1961, the import demands from its booming middle class helped pull up countries around the world. But in 2023, the United States was already the fastest growing G7 country. In 2024, US GDP growth will likely slow, not surge.

Combine the US situation with China’s deepening economic problems and the picture becomes clear. The world’s two largest economies won’t be able to generate enough growth for the UK, Germany, and Japan—it is going to have to happen from within.  

And that’s a scenario unlike 2008, unlike the 1960s, and in some ways, different from nearly any time since World War II. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is a program assistant for the Atlantic Council GeoEconomics Center where she supports the center’s future of money work

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Stalled growth in the UK, Germany, and Japan darken global economic outlook appeared first on Atlantic Council.

In July, the United States formally released its proposal on how to implement the final elements of an international regulatory framework for banks. The proposal immediately generated criticism and has created a semblance of bipartisanship in the House Financial Services Committee. Republicans unanimously called for the proposal to be scrapped as Fed Chair Powell testified this week, while Democrats worried about a lending squeeze. But the effect the rules might have on US banks’ central role in the global financial system also deserves scrutiny. 

Since the Global Financial Crisis (GFC), the Basel Committee on Banking Supervision has been working to establish a newly agreed set of measures to strengthen the regulation, supervision, and risk management of banks globally. Built on two previous accords, many of the “Basel III” additions to the Basel Framework are already in effect. The recent controversy concerns the final set of rules, known as the “Basel III Endgame” (or B3E), which focuses on the capital and leverage ratios banks will need to implement to cover the risk that their assets lose value in another market downturn.

Why are they needed in the first place? The B3E framework is a response to the large government bailouts of “too big to fail” banks during the GFC. It expects clear domestic rules on how banks calculate the capital they are meant to hold. Capital is what is left over when a bank subtracts its liabilities from its assets. In case too many of a bank’s assets lose value, its capital—and therefore future profits and shareholders—is meant to take the hit before depositors do. But during the GFC, low capital ratios meant governments had to step in to protect deposits.

The new proposed rules, released in July by the Fed, Office of The Comptroller of The Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have been heavily criticized by the financial industry. The argument is that this is a classic example of “gold plating,” whereby the US rules as currently proposed would create regulatory burdens beyond what the international framework requires and put eight Global Systemically Important Banks (G-SIBs) based in the United States and over thirty-five banks with assets worth over $100 billion at a competitive disadvantage.

It’s true the new rules venture into new territory. The risk-weighted approach brought in by previous Basel Frameworks focused on assets like loans and mortgages. However, the new rules expand the range of items on a bank’s balance sheet that factor into capital adequacy ratios.  Now, derivatives covering interest rate risk and counterparty credit risk (among others) will be included. B3E also introduces leverage ratios preventing banks from borrowing more than a certain ratio to their earnings.

So, what’s the problem? The rules could prevent US banks from using their own internal models to work out how much capital they need to hold against their loan books. Instead, banks will have to rely on standardized measurements of risk using credit ratings from agencies, even if derivatives carry little to no risk to a bank acting in an agent capacity. They also lay on additional capital requirements to account for the complexity and interconnectedness of G-SIBs, in addition to their size.

By the Fed’s own estimation, the overall capital increase required by the new rules is 16 percent but it readily acknowledges this will be higher for the largest and most complex banks as a larger share of their assets will become risk-weighted assets requiring capital buffers. Contrary to what Europe-watchers may expect, the EU’s interpretation of B3E is less stringent. Its version is estimated to increase RWA by less than the Fed’s 16 percent estimation, because the EU will allow for the use of internal models and include other opt-outs from assets being included in capital ratio calculations when the risks to banks are small to non-existent.

Yes, the technical side is daunting, but B3E matters for everyone in the United States. The foreign policy community should care whether these rules improve or hinder the GeoEconomic position of the United States by potentially creating a combination of higher lending rates and due to banks exiting markets associated with higher risk weighting. That could be a problem if it leaves these markets open to rivals and adversaries.

US regulators including US Federal Reserve Vice Chair Michael Barr argue the rules are appropriate given that government has had to shoulder risks taken by banks in the past. Moreover, supporters argue better-capitalized banks tend to lend more in downturns—providing a much-needed stimulus—and avoid lending irresponsibly when times are good. This domestic reasoning needs to be squared with the geopolitical challenges the United States faces at the moment.

If US banks do exit certain derivatives markets, to be unevenly replaced by Non-Bank Financial Institutions (NBFIs) and foreign, mainly European, competitors, will the US financial system remain as central to providing dollar liquidity to corporations? Currently, the depth and reach of US capital markets is connected to the world by globally active US banks. This is one of the factors which has kept the dollar as the pre-eminent currency for trade invoicing but alternatives like the Euro and the Yuan have been rising. A retreat by US banks from their global role could also make it more challenging for the US government to implement sanctions and other economic statecraft policies against adversaries. Washington should consider if the new rules could eventually hamper the implementation of financial sanctions.

These are the tests which the foreign policy community should apply to the B3E rules. There’s no need for alarmist scenarios. The rules proposed last July would not challenge the dollar’s dominant position in international finance. Treasury bills are considered risk-free under the framework and owning them will not force banks to hold any additional capital. And there is no doubt following the GFC, and more recently the collapse of Silicon Valley Bank, the Basel process and other regulatory changes are needed and useful.

But the challenge going forward is to think about B3E beyond the impact on the banks and into the realm of foreign policy and geoeconomics. In the hearings this week Chair Powell recognized the rules need to be looked at and even revised before they are final. Hopefully the Fed will consider the foreign policy implications of their decision, too.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Economic targets for 2024

The 2024 Government Work Report sets this year’s economic targets, which are virtually identical to those made in 2023. GDP growth is planned to be “around 5 percent”, with a central government budget deficit of 3 percent of GDP in continuation of a proactive fiscal policy and a prudent monetary policy. In particular, China plans to issue one trillion yuan of ultra-long special government bonds to support the budget; and to raise the special local government bond quota to 3.9 trillion yuan from 3.8 trillion yuan in 2023. The urban unemployment rate is set at around 5.5 percent with twelve million new jobs to be created.

More interesting than the targets are the government‘s priorities as reflected in the increases in spending. Total central government expenditure is projected to increase by 3.8 percent to 28.5 trillion yuan (almost $4 trillion), with debt interest payments topping the list rising by 11.9 percent; followed by science and technology at 10 percent; stockpiling of grains, edible oils, and other necessities at 8.1 percent; national defense at 7.2 percent (same as last year); diplomatic activities at 6.6 percent; and education at 5 percent.

The planned fiscal deficit at 3 percent of GDP—declining from the realized deficit of 3.8 percent in 2023—along side the commitment to“prudent” monetary policy have disappointed many analysts and financial market participants who had hoped for a “big bazooka” stimulus plan to kick start the lackluster economy. Furthermore, they point out that this year will not benefit from the base effect resulting from earlier slow growth due to Covid-19. As a consequence, most analysts are keeping their estimates for 2024 growth below 5 percent, with the IMF expecting 4.6 percent.

The key factor in this year’s growth prospects is whether the property sector starts to stabilize, having been in a sharp decline over the past three years. In particular, after suffering the worst price fall in nine years—a drop in investment of 9.6 percent and in new construction starts of 20.4 percent in 2023—home sales and prices have increased modestly in recent months. If this trend gains traction, it would set the stage for the series of moderate support measures implemented so far to show some positive results. In this context, it is interesting to note that Rhodium Group, which had estimated actual 2023 growth to be 1.5 percent instead of the official 5.2 percent, has expected a cyclical recovery to 3.5 percent in 2024.

Developing the “New Three” for high-quality growth

In any event, more important than the exact GDP growth estimates is the NPC’s endorsement of the decisions made earlier by the CCP Politburo. These decisions reflect Xi Jinping’s emphasis on developing new quality productive forces, through strengthening capability in science and technology to form the foundation for high-quality growth. This has emerged as Xi’s main strategy to develop a new engine of growth for China. It is also a way to stay competitive with the West in science and technology, not the least to sustain the modernization of the Chinese military.

New quality productive forces refer to new clean energy technologies and products—dubbed the “New Three” by the Energy Intelligence Group. These include electric vehicles (EVs), lithium ion batteries, and renewable energy products such as solar panels, wind turbines, storage facilities and other infrastructures—all together accounting for 11 percent of China’s GDP. These sectors were targeted in the 2015 “Made in China” plan as well as the 14th Five Year Plan adopted in 2021. Last year, with state guidance and support, the New Three sectors have experienced a surge in investment of 6.3 trillion yuan ($890 billion)—40 percent higher year-on-year. According to Finland’s Center for Research on Energy and Clean Air (CREA), without that investment, China’s growth in 2023 might have been 3 percent instead of 5.2 percent. The Energy Intelligence Group has estimated that the new clean energy sectors will continue to grow, accounting for 18 percent of China’s GDP by 2027—in contrast to the property sector shrinking to a smaller but more sustainable 15 percent from its former peak of 25 percent of GDP.

Overcapacity problems

The problem with this approach is that it has created substantial overcapacity in those sectors, leading to a surge in export at low prices to Europe, the United States, and the rest of the world.

For example, China accounts for 75 to 96 percent of the global production of various components of solar panels but demands only 36.4 percent of the output. The rest has to be exported. And China’s export of EVs has increased by 1,500 percent in the past three years, helping China replace Japan as the largest exporter of automobiles. All together, exports of New Three products increased by almost 30 percent in 2023, exceeding one trillion yuan ($139 billion) for the first time.

Alarmed at the prospects of their markets being swamped with Chinese green energy products enjoying state support, the EU has started an anti-dumping investigation into EV imports with a possibility of imposing countervailing duties. The United States has opened an investigation into the data security risks of Chinese vehicles using “connected car technology”. China has reacted strongly to such moves, threatening retaliation. And China will try to export those products to countries in the Global South, many of which having no domestic manufacturing and would welcome competitively priced goods for their climate transition efforts.

In short, one of the biggest implications of the Government Work Report is that the development of clean energy industries has been identified as a strategic focus to promote high-quality growth—a new Xi catchword. The chosen strategy serves China’s strategic and economic interests but has created serious overcapacity problems, distorting world markets and raising trade tensions with the West. This adds another dimension to the geopolitical rivalry between China and the United States, making it more intractable and difficult to diffuse.

Hung Tran is a nonresident senior at the Atlantic Council’s Geoeconomics Center; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Unpacking China’s 2024 growth target and economic agenda appeared first on Atlantic Council.

Rivers and canals

The Panama Canal services 50 percent of trades from Asia to the US east coast and a yearly merchandise value of $500 billion, two-thirds of which goes to the United States. Given the unprecedented droughts in that region and lower water levels in the Canal, the authorities have restricted the number of vessels that can pass through each day by 50 percent. Many vessels have fully given up on using the canal in favor of traveling around the Cape of Good Hope, increasing the cost of dry bulk shipping by approximately 14 percent compared to the previous year.

The current shipping crisis in the Panama Canal is not an anomaly. In the future, the Canal may only be functional at full capacity for three to four months of the year. Panama Canal Administrator Ricaurte Vasquez Morales explained last year, “This is a new reality that is not unique to the Panama Canal; it’s something that you’re seeing in some other rivers in Europe, it’s something that you’re seeing in the Mississippi… Climate change is essentially the reason why this is happening.”

Morales is not wrong. The Mississippi river, through which flows 60 percent of US grain shipments and 22 percent of oil and gas exports, faced the same challenge in September 2022 with a drought that increased grain shipment prices by 400 percent compared to the average, in turn raising the price of delivered soybeans by 24 percent. Just a month earlier and in another part of the world, a drought in China’s Yangtze decreased the river’s width by half. The Yangtze is critical for connecting cities like Chongqing and Wuhan with major coastal ports like Shanghai. After the August drought, container export volumes fell by 8 percent along the river, and the transit period from Chongqing to Shanghai increased by three times. Other examples include drought-related shipping bottlenecks along the Rhine River in Europe and rivers in the Amazon, all of which are creating significant challenges for the local economies with ripple effects on the global economy.

Seaports

There are more than 3,800 commercial seaports and inland ports through which more than 80 percent of global trade is processed. Rising sea levels are threatening the viability and functionality of the seaports. According to The Global Maritime Trends 2050 report, some of the world’s major seaports—such as Shanghai, Houston, and Lazaro Cardenas—could become inoperable by 2050 if the sea levels only rise by 40 cm, which is very probable if the current global warming trajectory is not effectively addressed now. These are serious threats to global trade because port of Shanghai alone is responsible for more than a quarter of all China’s foreign trade and its value of imports and exports are estimate to be near $1.4 trillion in 2023. Moreover, in 2022, Port of Houston contributed more than $900 billion to the US economy.

At the same time, the higher frequency and intensity of storms are undermining the operations of seaports and inland ports. The estimated cost of severe climate events on ports around the world are estimated to be around $7.5 billion each year. Additionally, 0.8 to 1.8 percent of world’s maritime trade—$200 to $450 billion in value per year—is facing disruption risks because of severe weather events, and Small Island Developing States face about four times higher trade risks that of other economies.

Arctic trade route

As climate change is threatening some trade routes, it is opening new ones. It is estimated that within three to four decades, the Arctic will no longer remain frozen all year-long, opening up new, shorter maritime trade routes. New route openings, such as the Northern Sea Route and Northwest passage, would make it possible for ships to move between the Pacific Ocean and the Atlantic Ocean. The tremendous economic benefit of these shorter trade routes, in addition to Arctic’s massive natural resources, has led to increased geopolitical tensions in this part of the world between the United States, European Union, Russia, and China. The war in Ukraine, Finland’s recent ascension into NATO, and Sweden’s serious move towards NATO membership have further exacerbated the geopolitical tensions in the Arctic. Seven NATO and soon-to-be NATO members of the eight-member Arctic Council—comprised of Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the United States—have suspended all forms of cooperation with Russia on Arctic governance. Hence, Arctic melting has not only opened new trade routes but also ignited fresh arenas of great power rivalry and increased the risk of conflict in this part of the world.

The case for multilateralism

These emerging challenges can only be addressed through a more effective multilateralism both to address global warming and to devise new frameworks of cooperation for existing and new trade routes. Governments cannot face this mounting challenge alone. The world needs a new multilateral framework where relevant private sector entities, international organizations, academia, and civil societies are involved in the conversation. Failure to do so not only risks disrupting trillions of dollars in global trade but also undermines the stability and growth of the global economy in the decades to come.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington DC. Follow him on X at @AMohseniC.

Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The backdrop to MC13

Ministers have gathered to discuss a series of critical issues including environmental issues like fisheries and climate change; digital trade; investment facilitation; and new negotiations on agriculture and industrial policies. In addition, the WTO is adding two new members, Timor-Leste, and Comoros, demonstrating that countries continue to see value in joining the WTO.

Yet within the WTO, members disagree on the form and prioritization of potential agreements—with more advanced economies pushing for forward-leaning issues like digital and climate change negotiated with a subset of members, while less developed countries push for work on issues such as food security as well as special and differential treatment. As the WTO rules require unanimous approval, countries’ willingness to use their veto power as a bargaining tool creates complex negotiations. Ministers must advance their country’s and citizens’ priorities, but increasingly narrow, nationalistic policies such as tariffs, export restrictions, import bans, and discriminatory non-tariff barriers make finding middle ground and compromise in negotiations more challenging than in the past. At MC13, the WTO’s consensus driven process will require ministers to find a balance in addressing these divergent but connected issues and finding common ground where possible.

While the substantive issues are important, the most critical issues ministers must address are the structural deficiencies that undermine the future health and functioning of the WTO. The WTO has undertaken many reforms since MC12, with improvements implemented via changes in the WTO’s typical practices. However, critical areas remain unresolved within the four primary areas of work within the WTO: (1) negotiations, (2) technical assistance, (3) reviews, and (4) dispute settlement. Currently, both the negotiation and dispute settlement functions are broken and not working to their full potential. Before tackling additional issues, the WTO members must first make the WTO functional and fit for purpose.

Negotiations

Reviving the negotiating function of the WTO is the most important outcome of MC13. In the past thirty years, the Doha Development Round talks collapsed and have remained dormant. The WTO members concluded a plurilateral agreement on Trade Facilitation in 2013, and the first phase of an Agreement on Fisheries Subsidies in 2022, but members have concluded no other agreements. The Fisheries agreement took more than twenty years to negotiate and despite heroic efforts by several dedicated chairpersons, members agreed to kick some unresolved issues into a Phase 2 agreement that is still being negotiated. Today’s world requires that the WTO and its members move faster on dynamic and urgent issues.

In 2019, a sub-group of countries tried another approach, launching three new plurilateral negotiations on (1) domestic regulations for services, (2) e-commerce, and (3) investment facilitation, in a new format known as the “Joint Statement Initiatives (JSIs).” India and South Africa have challenged the legal basis for these agreements as outside Annex 4 of the WTO Agreement and argue that they undermine multilateralism. With agreements concluded on Services Domestic Regulations (67 signatories) in December 2021 and Investment Facilitation for Development (130 supporters) at MC13, a small group of countries continue to oppose including them as official plurilateral agreements to the WTO.

Innovative approaches to negotiations could strengthen the multilateral trading system while accommodating the diverse interests of WTO members. If the WTO remains confined to negotiating only on issues that all 164 members (soon to be 166) can agree upon, this prevents the institution and its members from updating or adapting trade rules in a timely manner. Without such flexibility, the WTO will become brittle and irrelevant, with countries moving to other fora such as regional or bilateral agreements. At MC13, it is critical to resolve this issue and find a path forward.

Dispute settlement

The second important reform is revisions to the WTO’s dispute settlement. Ensuring that WTO members comply with their obligations instills fairness and confidence in the global trading system. Due to concerns with previous rulings, the United States blocked appointments to the dispute settlement’s appellate body since 2017. The EU led the creation of an alternative system, but countries have appealed dozens of cases “into a void.” Members must discuss meaningful reforms to the dispute settlement system at MC13 and outline either a new process or reforms to correct imbalances in the previous process. There are glimmers of hope for progress at MC13 with members constructively engaged.

Priorities for MC13

If these reforms received meaningful progress at MC13, the WTO could move to work on forward-looking global issues where it can make meaningful contributions. The UAE, as host of MC13, will present a strategic report on trade and trade policy in 2050, providing a vision for the WTO. This report will try to marry the forward-looking issues such as technology and climate change, with the needs of less developed members who still need assistance to develop and cover the basic needs of their citizens. Future-proofing the WTO will necessitate ongoing dialogue, adaptation, and institutional reform to remain relevant in a rapidly changing world. Providing a common vision for 2050 will require the UAE to be an active and engaged chair.

The WTO has a lengthy list of other issues that ministers will discuss at MC13, especially with the e-commerce moratorium generating attention.This agreement on duty-free cross-border digitally delivered services will expire, and members need to decide whether to extend or retire the moratorium. The United States and China agree with extending the moratorium, a rare occurrence. And they’re right about it: As governments grapple with how to fund their activities when economic activity shifts online, study after study has shown tariffs are an easy but inefficient and counter-productive method of raising revenue.

Finally, the WTO will address several environmental issues during MC13. Beyond the Agreement on Fisheries Subsidies, which impacts overfishing and overall health of our oceans, the WTO will also look at other areas where trade and environmental goals are mutually reinforcing, as well as areas of friction including in industrial policies. Director General Ngozi Okonjo-Iweala has repeatedly pointed to the significant role trade must play in addressing climate issues for all countries.

At a time when global fora are dwindling, the WTO remains an imperfect but important forum for countries to engage in constructive conversations about economic and trade issues. World merchandise exports grew from around $5.4 trillion in 1995 to over $19 trillion in 2019, with a similar increase expected over the next 25 years. Ministers must use this week’s meeting to outline a robust, future-looking agenda, built on strong foundational reforms and reflecting the need to balance the needs of advanced economies and less developed economies. A strong political message from the ministers this week that integrates the interests of all stakeholders and fosters consensus-building will be essential for revitalizing the multilateral trading system and ensuring its long-term sustainability.

Penny Naas is a nonresident senior fellow with the Atlantic Council’s Europe Center and was most recently UPS president for international public affairs and global sustainability.

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In the immediate aftermath of the invasion, a combination of G7 sanctions and export controls, as well as broad moral outrage, caused Western exports to fall some 63 percent from their pre-COVID, 2019 average. Though G7 exports to Russia did make a slight recovery in the second half 2022, they have since fallen to new lows. In the final months of 2023, G7 exports to Russia were valued at just 28 percent of their 2019 average. Since then, however, Moscow has been able to substitute its long standing trading relationships with the G7, and most importantly the EU, with China. Today, China exports more to Russia than the entire European Union (EU), Russia’s former largest trading partner, did pre-COVID.

However, the EU and broader G7 coalition are still sending Russia around $3.2 billion in goods a month in 2023. What are they still selling to Russia? And what are the products that Beijing is producing and trading with Russia that have since made it Moscow’s most important trading partner? 

What is the G7 still trading with Russia? 

Over the past two years, a coalition of countries, dominated and led by the G7, has implemented the largest sanctions and export controls regime ever imposed on a major economy. This has severely restricted, and in some cases halted, the export of a range of goods to Russia including aviation and space equipment, raw materials, and certain industrial machinery.

In addition to suspension in trade of explicitly controlled items, more than 1,000 companies have voluntarily restricted their operations in Russia or engagement with Russian firms and consumers beyond the minimum legal requirements. The combined impact of this has been a precipitous drop in trade between Russia and the West with exports dropping from around $9.3 billion a month in 2019 to $3.2 billion a month in 2023. 

While total exports from the G7 to Russia fell by around 65 percent in the first eleven months of 2022 when compared with the same time period in 2019, certain goods categories were more impacted than others. In line with the formally-controlled goods categories, the strongest-hit export categories were transportation goods such as air and spacecraft falling 99.6 percent, boats falling 99.4 percent and cars falling 83 percent; raw materials such as iron and steel falling 92 percent; chemicals such as dyes and paints falling 93.3 percent; electrical machinery and electronics 90 percent; and rubber falling 87 percent. (For a full overview see this table.) 

Many of the least-impacted goods were either foodstuffs and pharmaceuticals—two categories that are exempt from sanctions or export controls to avoid causing humanitarian crises. Total G7 food and animal product exports have still fallen by around 15 percent from 2019 to 2023 though pharmaceutical exports remain the same from 2019. 

The EU has felt the brunt of these trade restrictions. Though the United States has experienced a larger percentage drop in export value—falling 90 percent from $484 million a month in 2019 to $48 million a month in 2023—the absolute effects were relatively benign for an economy that, in 2019, exported $212 billion a month. In contrast, for many EU member states like Latvia and Lithuania, Russia still is an important export market. In 2019, EU exports comprised 85 percent of total G7 exports to Russia, or around $7.7 billion a month. By 2023, monthly EU exports had fallen by nearly $5 billion to $2.9 billion a month. 

This exemplifies the disproportionate economic impact the war in Ukraine has had on European countries compared to the broader G7. It also explains EU resistance to additional G7 trade restrictions, such as efforts last year to shift the current sector-by-sector controls regime to a complete export ban with only a few exemptions.

What is China now exporting to Russia?

As Russia’s importing relationships stabilized throughout 2023, it has become increasingly clear that new Chinese exports to Russia have replaced the lost EU imports. While EU exports have fallen by just under $5 billion a month from 2019 to 2023, Chinese exports have risen by just over $5 billion a month growing from $3.9 billion to $9 billion a month over the same time period. 

Most of the West’s attention has been rightfully focused on surging Chinese exports of raw material inputs and finished industrial goods. This isn’t surprising. Russia needs these products, like rubber, chemicals, and plastics, to sustain its wartime economy. China has also become the main machinery shipper to Russia, with a nearly 129 percent increase in exports over the first nine months of 2023 from the same period in 2019. However, Chinese exports have not fully replaced Russia’s lost G7 exports.

While Chinese machine exports have surged by $1.9 billion a month in 2023, G7 exports have fallen by $2.1 billion dollars a month compared with 2019. These are the goods most important to Russia’s war effort, and it has been able to recover most (but not all) of what it lost. Based on data from Brugel’s Russian foreign trade tracker, Russia’s imports of categories that capture goods subject to G7 controls are now around 75 percent their 2019 average meaning that Russia is still unable to import key dual-use and industrial equipment from China and other alternative trading partners. 

But this is only one part of the story. Nearly half of the goods China shipped to Russia in 2023 are consumer goods, not industrial ones. Just as Russian factories are now dependent on Chinese inputs, Russian households are increasingly dependent on Chinese-made apparel, toys, and even office equipment. Many Russians have been forced to swap out the western fashion houses of Paris, London, and Milan for Shanghai’s suits and Fujian’s footwear. They are also now driving Chinese cars: Chinese vehicle exports are 900 percent higher in 2023 compared to the same time frame 2019. 

Russia’s overwhelming reliance on Chinese industrial and consumer imports have increasingly suggested the Russia-China relationship is no longer an equal partnership. Instead, Russia is increasingly playing the role of an economic vassal to China. Moscow has little choice but to turn to Beijing for its large economy, technological prowess, and global clout. While the relationship is certainly asymmetric in China’s favor, Moscow is a rare bright spot in Beijing’s souring global trading relationships. In 2023 Chinese exports globally fell by 5 percent compared with 2022. In contrast, Chinese exports to Russia grew 46 percent. As China faces large domestic industrial overcapacity issues, an increasingly hostile trading environment from its traditional export markets such as the EU, and a return to export oriented growth, Russia is a vital release valve to absorb Chinese products, supporting Beijing’s own domestic economy. 

Because of the importance of Moscow as an export market, as well as Beijing’s own strategic interests regarding the war in Ukraine, it’s unlikely Chinese President Xi Jinping will yield to Western pressure to halt its broad exports to Russia. Additionally, after two years of conflict, the G7 have implemented almost all available sanctions and export controls against Russia that could reach consensus within the group. As the final few months of 2023 demonstrate, Russia’s global trading relationships are beginning to stabilize. China imports will still rise just as G7 imports will continue to fall, though not nearly with the same intensity as during the first eighteen months of the conflict. As the war enters its third year, there is less and less that can be done on the import side of Russia’s trade balance. Instead, the G7 will likely increase focus on stemming Moscow’s ability to pay for its imports by focusing on the other half of Russia’s trade balance and restricting its exports and the payments it receives from them. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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Geopolitics is rearranging FDI

Geopolitical tension and geoeconomic fragmentation have elevated uncertainty which, together with slow growth, have significantly cut back global FDI flows as a share of economic activity—from 3.3 percent of global GDP in the 2000s to only 1.3 percent in the past five years. In absolute terms, FDI has increased modestly: In 2023, global FDI flows reached an estimated $1.3 trillion or 3 percent more than in 2022.

The slowdown in FDI has disproportionately affected emerging-market and developing countries (EMDCs). FDI flows to developed countries increased by 29 percent, to $524 billion. But flows to developing countries decreased by 9 percent to $841 billion.

These shifts are not driven merely by economic factors: Detailed analysis of almost 300,000 instances of greenfield investment projects from 2003 to 2022 by the Center for Economic Policy Research (CEPR) shows an economically significant role of geopolitical alignment in driving the country allocation of bilateral investments. The friendshoring and nearshoring approaches used to derisk from economic dependencies have significantly affected the pattern of FDI flows of the two main protagonists—the United States and China.

The United States and China

Between 2019 and 2023, FDI flows from the United States to China fell from a 5.2 percent share of total FDI to 1.8 percent—or a drop of 3.4 percentage points of total US FDI outflow. By contrast, shares of US FDI to more geopolitically aligned countries increased—for example, plus four percentage points to India (from 7.6 percent to 11.6 percent); plus 3.4 percentage points to the UAE; plus 2.2 percentage points to Mexico; and roughly plus one percentage point to several Southeast Asian countries such as Malaysia, the Philippines, and Vietnam.

Due largely to the sharp drop of FDI from the United States, total FDI flow to China has declined significantly—from an annual average of $235 billion in the ten years 2011-2020 to $344 billion in 2021, $180 billion in 2022, and only an estimated $15 billion in 2023—mainly due to heightened geopolitical tension and slow growth in China.

Outbound FDI from China has also diminished from a peak of $196 billion or 1.9 percent of GDP in 2016 to $146 billion or 0.8 percent of GDP in 2022. Traditionally, China’s FDI outflow has favored developed countries in North America and Europe (accounting for more than 60 percent of the total) followed by Asia. In recent years Asia’s share has risen. For example, the share of China in ASEAN FDI inflow was 3 percent (8 percent including Hong Kong) in 2016 rising to 8 percent (13 percent including Hong Kong) in 2021. (That is still lower than the 23 percent share of the United States, the biggest investor in the region.) It is important to keep in mind that developing countries have received the lion’s share of China’s international construction projects financed by debt, now totaling $815 billion, mainly through participating in the Belt and Road Initiative (BRI).

The “connector” economies

FDI, especially from competing countries like the United States, Europe and China, have tended to flow to not only geopolitically close countries satisfying friendshoring and nearshoring criteria, but also—especially in the case of Western companies—to those having a minimum necessary political stability, legal, and regulatory environment and manufacturing capabilities including suitable labor supply. As a result, only a dozen or so countries have experienced increased FDI flows from both the United States and China.

In particular, five countries (Vietnam, Indonesia, Mexico, Poland, and Morocco) have been dubbed “economic connectors” by Bloomberg Economics. These countries have combined appropriately calibrated foreign policies and sufficiently developed economic capabilities to navigate geopolitical rivalry and benefit from geoeconomic fragmentation—which has driven the reconfiguration of global supply chains. Basically, they have been able to leverage the friendshoring and nearshoring approaches of the United States and China to attract more greenfield investment from both. They have also increased their exports to the United States (or to the EU in the case of Poland) and their imports (mostly of intermediate goods) from China.

The experiences of the five economic connectors show that there is a pathway for developing countries to navigate geopolitical tension while developing their economies. However, it requires those countries to be able to compete with fellow developing countries to attract trade and investment from either or both China and the United States (and other developed countries). Many may lack the capacity to do so, especially low-income countries and those without natural resources or basic manufacturing capabilities.

In short, the geopolitically driven fragmentation of the global economy has several dimensions: division between developed and developing countries; according to geopolitical alignment; and among developing countries themselves based on their abilities to compete for trade and investment in the reconfiguration of global supply chains. This has increased the complexity of the fragmentation process, probably making it more difficult to measure as well as more costly to the global economy than so far expected. Unfortunately, low-income countries will likely experience the worst outcomes.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund

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Some of the factors in China follow the youth unemployment story we continue to see around the world, including inadequate private sector job creation and skills mismatches. In China, the number of new graduates entering the labor market is also rising—to nearly 12 million in 2024, and there aren’t enough jobs to keep pace, especially as regulatory burdens are dampening growth in industries most likely to employ young people such as technology.

But the youth labor market in China has a few unique characteristics as well. The cultural demands on young Chinese workers are high—they are routinely expected to work “9-9-6”—from 9 am to 9 pm, six days a week. The resulting burnout is a key contributor to the elevated and stubborn youth unemployment. The general economic downturn and collapse of the property and housing market in particular has led to a hiring slowdown, with jobs that might be most suitable to new labor market entrants continuing to be among the hardest hit. Meanwhile, in the face of grueling hours for low pay, young people in China are opting out, choosing instead to “lie flat”—remain idle and not work or engage in any economic activities—or become “professional children,” paid by their parents or grandparents to live with and care for them.

At the same time, with higher deaths and fewer births (even with the end of the one-child policy nearly a decade ago to in part to help mitigate the aging population) younger Chinese women face further constraints to getting or keeping a job as society and employers are averse to hiring them and instead discourage them from joining the workforce versus staying home to have and raise children.

Failing at first to acknowledge the extent or damage of the crisis, the response from the government has been slow. Enforcing labor laws and financial incentives to hire youth and efforts to smooth the school to work transition (especially from university) can help, but macroeconomic risks as well as longer-term structural or societal challenges—including relevance of education, rapid urbanization, and emotional mental health—demand attention with a youth lens, too.

The implications of the situation are stark not only as a drag on Chinese productivity and growth but, given the outsized role of China in the global economy, its weakening has the potential to impact youth labor markets worldwide. That’s especially true in countries—in Africa and Latin America for example—where Chinese development finance, investment, and trade are critical to their own dynamism and job creation amid debt distress.

Nicole Goldin is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Brazil’s breadbasket to the Global South

Beginning in the 1970s, both the Brazilian government and private entities invested heavily in agricultural innovations, leading to the development of more resilient crop varieties. Along with the expansion of farmland and widespread adoption of double cropping, the investments significantly enhanced agricultural productivity and gave Brazil an edge over other farming nations.

Fast forward to 2022 and Brazil has become the world’s second-largest exporter of agricultural products. It leads the world in soy, meat, coffee and sugar exports and is the second-largest exporter of oilcake and corn. Several large economies, emerging markets in particular, now heavily rely on Brazil to secure their food needs.

The benefits granted by MERCOSUR, a regional trade bloc within South America, make Brazil a prime source of agriculture for Argentina. Many Asian and African countries in the G20 are large consumers of soybeans, corn, and meat—all commodities where Brazil has a large market share. The United States, Mexico, and Canada in turn barely source any agriculture from Brazil as they source the majority of their food imports from one another as a result of the benefits granted by USMCA. Most European countries similarly import the majority of their agriculture from other European countries in the single market. 

Across the G20 economies, China is the most reliant on Brazil for agriculture, buying up a quarter of all Brazilian exports including most of its soy and beef. Brazil’s rise as an agripower since the 1970s aligned neatly with the population boom in China and the growing concern of the Chinese Communist Party over how to secure food for its population. But the real push came in the last decade as Beijing looked for agriculture suppliers other than the United States following intensification of trade tensions. 

To help Brazil increase its capacity and to reduce logistical costs, the state-owned China Oil and Foodstuffs Corporation (COFCO) invested over $2.3 billion, amounting to about 40 percent of its worldwide investments, in Brazil’s agricultural infrastructure since 2014. A key investment is at the Port of Santos, where a terminal expansion will take the company’s own capacity from 3 million to 14 million tonnes. Further cooperation in Brazilian railways, waterways, and farmland restoration is on the agenda.

Lula’s leverage is his history 

By itself, influence in the agriculture sector vis-a-vis emerging markets doesn’t provide a pathway to leadership of the Global South. Agriculture is not like semiconductors; food is an absolutely necessary resource for physical survival. Russia’s sudden blockage of the Black Sea in 2022, for instance, led to massive global grain shortages that created significant price spikes for food around the world. Moreover, the United States remains the world’s largest exporter of agriculture and for several countries in the G20, it remains the largest supplier. Lastly, although Brazil supplies about a fifth of global corn exports, it has relatively little weight in the global market for grains like wheat and rice, two critical food items for developing economies.

But Lula and Brazil nevertheless bring unique credibility with developing and advanced economies on the subject of food security.  

When he first came to office in 2003, Lula launched the ‘Fome Zero’ (Zero Hunger) programme, a series of coordinated large-scale government interventions that resulted in Brazil’s removal from the United Nations’ Hunger Map in 2014. Throughout the 2000s, Lula’s Brazil also mobilized budgetary, legislative, organizational, and narrative channels to orient its foreign policy toward hunger-reduction abroad. 

Since his return to power in 2023, Lula has once again made hunger a domestic priority. He has consistently raised the issue internationally. Now, his moment has come. As President of the G20, he has announced Brasília’s intention to launch a Global Alliance Against Hunger and Poverty at the Leaders Summit in November.

Both Brazil and the global economy have evolved since Lula was last in power. But the country possesses decades of trade and technical assistance relationships with developing economies, the know-how in the sector, and a track-record in hunger-reduction. Chronic hunger and famine remain real prospects for a tenth of the global population and developing countries will likely see Lula’s Brazil to act as a reliable representative in trying to bring together a global consensus on the path forward.

In recent years, China and India have both positioned themselves as leaders of the Global South. Now, the leader of the former is focused on his troubled domestic economy and the leader of the latter has an election on his hands. Meanwhile Lula is about to host the world twice—once for the G20 this year and then again for COP30 in 2025. If Brazil delivers tangible, material, and clearly observable benefits on food security, it will cement its position as a key leader of the Global South.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Mrugank Bhusari is assistant director at the Atlantic Council GeoEconomics Center focusing on multilateral institutions and the international role of the dollar.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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While the United States is well on its way to building the next generation of facilities to produce the integrated circuits, solar panels, and batteries needed to supply its digital and green transitions, the EU is struggling to connect its companies with state financing. In theory, the EU’s 27 members have matched US efforts through the European Commission with the NextGen EU recovery fund, a debt-funded program worth around $880 billion. However, because the commission lacks a permanent fiscal union with centralized taxation and borrowing powers, it has had to rely on member states to design and implement plans for NextGen funds. This decentralized approach, in conjunction with stipulations attached to its disbursements, have made it far harder for EU companies to access funding. 

NextGen EU funds are contingent on governments meeting performance targets set by the Commission. As of early 2024 just 18 percent of the Commission’s targets have been met, meaning that only about 30 percent of available grants and loans have been released to member states. Some member states, such as Poland and Hungary, have been blocked from accessing a bulk of their allocation because of the Commission’s rule-of-law concerns. Others, like Germany, have been stopped by their own constitutional court from releasing the funds to industry. These funding lags and uncertainties have stymied EU manufacturers’ investment at home. In contrast, the scale and accessibility of funding in the United States has meant that some major European manufacturers such as Volkswagen, BMW, Enel, and Norwegian battery group Freyr, are opting to instead prioritize investments in the United States.

What’s driving the US manufacturing construction boom

In line with IRA and CHIPS and Science Act priorities, construction is overwhelmingly concentrated in the computer, electronics, and electrical manufacturing sectors. This broad sector covers manufacturers producing computers, communications equipment, similar electronic products, as well as products that generate, distribute, and use electrical power. In other words, the goods needed to facilitate the green and digital transitions. Since the start of 2022, spending on construction for this sector has approximately quadrupled.

This surge in spending has transformed the computer and electronic segment into the dominant driver of US manufacturing construction. In 2023, the sector contributed some 64 percent of all construction manufacturing spending. Just five years earlier, its share stood at a meager 11 percent. The growth in computer and electronic manufacturing has not come at the expense of other sectors. Chemical and transportation manufacturing construction spending is also up 4 and 21 percent respectively from 2022 to 2023, and food and beverage manufacturing construction spending has remained steady.

While this historic expansion in US manufacturing construction is the first step to the reshoring of domestic production, concerns remain over whether the framework will be able to deliver the manufactured products. Labor force bottlenecks remain as the most immediate risk to the Biden Administration’s success. The US Bureau of Labor Statistics’s Job Openings and Labor Turnover Survey (JOLTS) notes that there were 601K open manufacturing jobs and 449K open construction jobs in December 2023. With US unemployment currently sitting at 3.7 percent, well below the average rate of 5.8 percent of the past two decades, the Biden administration’s main challenge will be to find workers to build and staff these new manufacturing facilities. One way to do this will be to support the transition of workers away from declining industries through the upskilling domestic workers. However, this alone will likely be insufficient. The US will also need to bring in skilled workers from abroad through reforms of its immigration system. 

With US industrial policy implementation well underway, the White House should now shift attention toward how it can best bring along the US’ allies and partners. Delays around NextGen EU, the elevated energy costs and economic uncertainty stemming from Russia’s invasion of Ukraine, and structural differences between the the US and EU’s governance structure mean that the Commission will not be able to galvanize investments in manufacturing production facilities at the same scale or speed as the United States. This is further complicated by the EU’s surging green goods imports originating from China as Beijing attempts to export its production overcapacity abroad. If Washington wants to ensure the European green and digital transition is built by friendly manufacturers, it should aim to do more to directly support its partners in Brussels, Berlin, and beyond. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

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The hit to share prices in Shanghai, Shenzhen, Hong Kong, and New York has reached some $7  trillion since early 2021 (over $6 trillion on the Chinese markets and hundreds of billions more from Chinese companies listed on Wall Street). While share prices have bounced back a bit in recent days as Beijing has taken steps to put a floor under the market, investors’ deep disenchantment remains.

The market downturn comes on top of the real estate debacle that caused developers to default on bonds and saddled China’s local governments with $13 trillion of debts. The stock downturn has specifically shaken technology companies that Beijing regulators had favored with fast-track access to initial public offerings of shares. While China led the world in IPOs during the first eight months of 2023, those issues subsequently dried up, and many startups are starving for cash.

All of this adds up to ever-deepening disenchantment for foreign institutional investors, many of whom made big bets on China a year ago in expectation of a post-COVID economic boom. As last year’s rally evaporated, an estimated 90 percent of those once-bullish foreign investors headed for the exits; some of them were also nursing their wounds from the property companies’ defaults on high-yielding, dollar-denominated bonds. The reversal of capital flows was amplified by foreign manufacturers moving factories away from China, producing an unprecedented decline in foreign direct investment last year.

The institutional exodus from China’s markets has been dominated by “passive funds” who buy stock index contracts and their component stocks, and long-term growth funds who buy and hold shares. While some money continues to come in—especially investors targeting China’s government bond market—net foreign inflows to China’s stock markets last year—at $6.1 billion— were the lowest they’ve been in recent years.

Every index tracking China share prices had a terrible 2023, with the declines continuing through last month. That includes indexes in China’s markets, Hong Kong, and those tracking Chinese companies on Wall Street. At the same time, markets from Tokyo to Mumbai to New York enjoyed solid gains, with the Asian markets especially benefiting from money pulled out of China.

A January 2024 Bloomberg analysis of 271 US pension funds with assets larger than $500 million showed only fourteen held in Chinese shares listed on Wall Street. Institutional investors are now favoring other emerging markets with better economic prospects and less political risk than China, as reflected in the performance of two Morgan Stanley Capital Index (MSCI) benchmarks.

The roots of the market’s downturn rest with government policies that have undermined consumer confidence and drained private sector dynamism. The authorities sought to deflate a property market bubble in 2020, but were slow to react when developers collapsed. Meanwhile leading e-commerce conglomerates had their wings clipped by an ideologically charged regulatory assault on what Beijing regards as corporate excesses—at the cost of lost job opportunities for millions of college graduates and anemic business investment.

US-China tensions also have loomed over the market and made many foreign investors more cautious about Chinese shares. Washington has declared various listed Chinese companies— largely technology and state-owned firms—off limits to US investors, and some of those firms have been forced to delist from American exchanges. In addition, US threats to impose wholesale delisting on all Chinese firms listed on Wall Street in a dispute over Securities and Exchange Commission access to their books contributed to the early stage of Chinese shares’ decline in 2021. But that threat receded after a bilateral agreement was reached in 2022.

Beijing recently has taken steps to support the stock market and address the underlying economic issues. It has sought to put a floor under the share prices by pushing state-controlled funds to buy stocks, restricting short-selling, and talking up the market. It also has promised more fiscal stimulus, which some analysts see boosting growth this year. But a stock market recovery will require evidence of a more forceful response to the property crisis and a sustained effort to stimulate the economy, especially household demand. (The market collapse also has hit China’s 220 million stock investors, many of whom also are homeowners.)

In Xi Jinping’s China there is always a need to keep a weather eye on the political winds. Even if the economy and property market bottom out in 2024, there are worrying signals about the government’s intentions for stock investors. Over the past few months, there have been various pronouncements directed at financial markets that suggest less tolerance for business as usual. For example, at a Chinese Communist Party Central Committee “study session” last month, Xi called for “the combination of the rule of law and the rule of virtue to cultivate a financial culture with Chinese characteristics” that would avoid “a single-minded focus on profit.”

It is worth recalling that the first shot in the campaign to rein in online companies was fired at the stock market in 2020, when regulators sank Alibaba Group’s plans to launch an IPO for its Ant Financial subsidiary after Alibaba founder Jack Ma publicly criticized regulators. What followed was a campaign under the banner of Xi’s 2021 call for “common prosperity”—a slogan associated with wealth redistribution that ultimately was directed at various unwelcome capitalist practices. The campaign was muted after it was seen to be undermining business confidence, but the latest broadsides from Beijing may prove unsettling to the markets.

Foreign investors tend to avoid commenting on Chinese political developments. But Lazard Asset Management offered a glimpse of their thinking last year when it wrote, “Factoring political risk into investment decisions will likely also be critical in the months and years ahead, given the scale of uncertainties—including the potential consequences of Common Prosperity.”

Nonetheless, some fund managers inevitably will return to China if the economy and markets show signs of a sustained recovery. But investing in China likely will become the domain of foreign bargain hunters and hedge funds, some of whom already are actively trading in the market (though apparently making more money in commodities-related securities). China’s markets will be a destination where investors will be able to make fast profits, but also risk losing their shirts—as occurred last month when the Singapore-based hedge fund Asia Genesis was forced to close after losing a bet that Chinese equities would rally.

All of which must be considered ironic since one of the original purposes of China’s policy of opening its markets to foreigners was to attract stable, long-term institutional investment. Instead, most of those coveted investors will be elsewhere, and the fund managers who remain could end up contributing to the volatile swings in fortune that are everyday life in China’s markets. That will hardly be an outcome conducive to Xi’s “rule of virtue.”

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

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Missing from this estimation is China. Yet while there is little data on Chinese private funding for generative AI, a comparison of broader AI-related venture capital deals places it in third, after the US and EU.

Policymakers in the United States and European Union increasingly view generative AI, which can produce text, images, or other data from user-generated prompts, as one of the technological “commanding heights” of the coming decade. The increase in productivity from widespread adoption could add up to $4.4 trillion to the global economy annually, according to a McKinsey estimate—a figure comparable to the entire GDP of Germany. However, the technology has also raised new concerns over privacy, election misinformation, and cybersecurity. Likewise, the ability to produce advanced foundation models (large, general-purpose models which underlie generative AI) has implications for national security, where such models may be used for military training, cybersecurity and autonomous or biological weapons systems.

Like earlier waves of startups, many small tech firms rely on venture capital (VC) to scale their operations. Transatlantic divergence in this respect is stark. Last year, over 90 percent of venture capital dedicated to generative AI was concentrated in the United States. In similar fashion, nearly twice as many generative AI startups were founded in the United States as in the European Union and UK combined.

More broadly, these figures reflect a smaller European VC market. The US has just 23 startups per VC firm, and an average of $4.9 million for each. The typical EU entrepreneur has less than one-fourth that amount available–and 198 other startups per VC firm. Yet in tech, the gulf widens. When it comes to private funding for these new commanding heights, the Rockies reach far higher than the Alps.

To some, this disparity in funding can be attributed to differences in regulation. In December the European Parliament reached agreement on the final text of the EU AI Act, a sweeping set of regulations on general AI models intended to encourage transparency and protect copyright holders. Earlier versions drew opposition from France, Germany, and Italy, along with warnings from the US, that the legislation would stifle the growth of continental competitors in AI. (While the United States has not passed comparable legislation, the Biden administration released an executive order on AI in October.)

Others may recall earlier tech waves (think Amazon, Alphabet, and Apple, and the rest of the “Magnificent Seven”) in which the European Union produced few startups but many standards, including on privacy. In the optimistic view, Europe’s policies, such as the General Data Protection Regulation (GDPR), Digital Markets Act (DMA), and Digital Services Act (DSA), have helped shape standards of foreign tech giants—a so-called “Brussels Effect.” In the pessimistic view, they have engendered long-running disputes and created serious compliance (and competitiveness) challenges for the continent’s youngest firms.

Today however, the new EU and US approaches on AI bear significant similarities. To be sure, the US executive order on AI lacks strong enforcement mechanisms included in the AI Act, the latter of which includes substantial fines (7 percent of global turnover) for non-compliant firms. Nevertheless, both adopt a similar focus on “risk-based” approaches, transparency requirements, and testing. More broadly, the United States and the EU have coordinated their approaches through the G7 Hiroshima AI Process, UK AI Safety Summit, Administrative Arrangement on Artificial Intelligence, and the Trade and Technology Council (TTC).

One contrast with previous tech waves is that the European Union is increasingly pairing injunctions with incentives. Shortly after the European Commission reached agreement on the AI Act, it announced new measures to assist AI startups, including dedicated access to supercomputers (“AI Factories”) and other financial support expected to raise $4 billion across the sector by 2027.

While increasingly aligned on regulation, such measures aim to overcome the more enduring disparity in private funding between the two jurisdictions. For now, while Europe is trying to catch-up in the innovation race when it comes to the newest chatbots, the United States still looks more, well, generative.

Ryan Murphy is a program assistant at the Atlantic Council’s GeoEconomics Center. He works within the Center’s Economic Statecraft Initiative, supporting events and research on economic security, sanctions, and illicit finance.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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PES was central to the agenda in principle if not in name at last month’s World Economic Forum in Davos, featuring in both official and unofficial conversations and convenings. New announcements and commitments echo this sentiment and especially illustrate how the private sector, in partnership with governments, can and should play a role in advancing PES. For example, more than twenty Ministers and CEOs came together in a WEF alliance to mobilize financing for the clean energy transition in the Global South. The Network to Mobilize Clean Energy Investment for the Global South will amplify the investment needs of developing nations and advance actionable solutions to increase green energy capital flows globally. Comprising Ministers from Colombia, Egypt, India, Japan, Malaysia, Morocco, Namibia, Nigeria, Norway, Kenya, South Africa, and ten other countries, the Network to Mobilize Clean Energy Investment for the Global South “will provide a collaborative space for its members to accelerate clean energy capital solutions in emerging market contexts—through innovative policies, new business models, de-risking tools and finance mechanisms—and exchange best practices for attracting sustainable flows of clean energy capital.”

Also this month, the US Millennium Challenge Corporation marked the 20th anniversary of its founding, bringing to light its two decades of economic growth and poverty alleviation investments whose model and eligibility requirements—including democratic rights and control of corruption ‘hard hurdles’—have unlocked policy reforms, unleashing the “MCC effect” in numerous countries. To date, MCC has invested over $17 billion in infrastructure and policy reforms in health, education, power, agriculture, and transport in forty-seven countries, benefiting over 300 million individuals worldwide. This year, Cabo Verde was selected for development of a new regional compact “as a result of its strong commitment to democracy, its economic development needs and lingering poverty, and the potential opportunities to strengthen regional economic integration and trade in West Africa with a committed and engaged former MCC partner”; while Tanzania and Philippines can begin developing threshold programs to advance the rule of law in support of compact eligibility after selection by the Board in December 2023.

A third illustration, the European Commission and the Africa Development Bank signing of a Financial Framework Partnership Agreement on January 29 to boost energy, digital, transport infrastructure investments across the continent with co-financing. The agreement falls under the EU’s values-driven Global Gateway initiative which prioritizes advancing rule of law, human rights, and international norms and standards alongside inclusive economic growth, health and education in its cooperating countries: its 2021-2027 package with Africa will support investments worth €150 billion.

Where else might we see PES this year? Here’s a few things worth watching.

While PES has been more complicated to enact in multilateral contexts, this year’s G20 has potential beyond the strength in numbers alone. The members of the G20 represent around 85 percent of the world’s GDP, and more than 75 percent of world trade. Brazil took the reins of the G20 Presidency in November 2023, and has put development front and center on the agenda, opening the door to a robust PES orientation: its three key priorities comprise combating hunger, poverty, and inequality; advancing the three dimensions of sustainable development (economic, social, and environmental); and reforming global governance. Indeed, in the run up to the Leader’s summit in November, the Sherpa’s Development Working Group will convene again in March and May to further public policies to reduce inequality, trilateral development cooperation (grants, technical assistance, lending) and more specifically investments in water and sanitation. At the same time, PES will take center stage as the work of the Finance track gets underway next month when Ministers and central Bankers will convene and deliberate how preferential trade and fiscal incentives might be deployed to address fragmentation and debt challenges of lower middle-income countries.

As it relates to conflict response, we see PES as a frame for continued and specific bilateral and multilateral support to Ukraine’s economic recovery as well as EU expansion—with aid and membership contingent on and related to reforms which capacity building, technical, and financial assistance will be targeted to advance. A €50 billion ‘Facility’ from the EU has just gained unanimous approval, and we could see other moves such as extending Ukraine access to the Single Euro Payments Area (SEPA). The United States Agency for international Development (USAID) Ukraine Mission has forecast awarding this year a new flagship trade and competitiveness project to encourage business enabling reforms, support industries and firms, further job creation, and increase exports.

Similarly, as war rages in Israel and Gaza, fomenting humanitarian crisis, we are likely to see PES incentives. Those could include development grants and economic aid to encourage neighboring countries Egypt and Jordan to increase their intake of refugees and facilitate logistical humanitarian support, as well as to Gaza and the West Bank themselves for economic recovery and reconstruction alongside promotion of rule of law and peacebuilding.

On trade, as fragmentation threatens supply chains, including for critical minerals, new and improved preferential trade and finance mechanisms that reduce dependence on China or bolster regional ties will be on the table. The US African Growth and Opportunity Act is up for reauthorization. First passed in 2000, The African Growth and Opportunity Act (AGOA), which makes preferential terms of trade and investment support dependent upon favorable annual reviews of a country’s economic policies, governance, worker rights, human rights, and other conditions, was last reauthorized in 2020 and is set to expire in 2025. With US Senator Coons releasing a discussion draft of reauthorizing legislation in November 2023, that in part incorporates AGOA with the nascent African Continental Free Trade Agreement, we can expect to see robust, and perhaps unusually bipartisan, discussion this year.

Finally, this year marks the 80th anniversary of the Bretton Woods Conference that launched the World Bank (then IBRD) and International Monetary Fund (IMF) as the nature and direction of global economic governance continues to evolve, creating an important entrée for PES. Over the past decade, developing countries’ options for financing have increased as China and others have increased their global footprint giving way to more strategic competition. At the same time, as their fiscal space tightens and liquidity constrained, the case for using positive economic statecraft tools is clear and all signs point toward seeing more of it than before in 2024. It will be important to monitor impact and learn from effectiveness (or not) of these solutions in real time as well as over time as resulting policy reforms and investments take hold and bear fruit.

Nicole Goldin is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center.

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Given how far from credibility China’s 2023 statistics were, closer attention will be paid this year. Institutions which previously took China’s official numbers at face value, including the IMF and OECD, know that individuals, firms and countries with fewer analytical resources depend on them to check the math. Updated IMF WEO projections released January 30 upgraded China’s 2024 forecast by 0.4 percentage points, to 4.6 percent. Meanwhile, the Fund’s Article IV report on China, with its franker Staff Report section, should come out soon. Together these will clarify how international organizations assess the health of China’s economy.

Rhodium Group’s growth outlook for China in 2024 is again lower than consensus, as it was last year, but because our 2023 estimation was so much lower than the official figures (a mere 1.5 percent GDP growth at best) we see 2024 as a modest recovery rather than the continued deceleration reflected in consensus numbers. This is a cyclical stabilization resulting from property hitting rock bottom.

Still more secular stagnation will come—until Beijing gets back to long-deferred structural reform work that President Xi Jinping started in 2013 only to pause in the face of challenges. But a cyclical breath may be what Beijing needs, and explains People’s Bank of China (PBOC) Governor Pan Gongsheng’s remark last week, “now that China’s economy is recovering, we have greater room for maneuver in terms of macro policy”. Greater room, yes; but not a great amount of room. Even the 3-3.5 percent GDP growth we imagine possible for 2024 will require Governor Pan and peers to regain credibility by doing what is necessary to sustain economic growth even when it requires political sacrifices.

Daniel H. Rosen is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and a founding partner of Rhodium Group where he leads the firm’s work on China, India and Asia.

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As a consequence, it seems likely that China will not significantly intensify its military exercises and excursions around Taiwan, which could escalate risks of direct confrontation with the United States. Instead, China will step up various forms of economic sanctions against the island. The economic coercion approach would allow China to put increasing pressure on Taiwan, without being directly confrontational to the United States and would leave it with a lot of leeway to calibrate trade measures depending on the circumstances—ratcheting all the way up to a maritime blockade against Taiwan. These measures would have increasing impact on Taiwan’s economy and beyond—and should be taken into consideration while assessing the economic outlook for the foreseeable future.

China’s economic sanctions against Taiwan

China has often used economic sanctions against Taiwan. For example, China banned the import of several agricultural products and fish from Taiwan as part of its reaction against former US Speaker of the House Nancy Pelosi in August 2022. A month before Taiwan’s elections on January 13, 2024, China suspended twelve of Taiwan’s petrochemical products from the zero tariff treatment provided in the Economic Cooperation Framework Agreement (ECFA) signed in 2010 between the two sides—ostensibly to counter Taiwan’s discriminatory policies against Chinese products but widely seen as China’s attempt to influence the elections.

More seriously, China’s Ministry of Commerce announced in early November 2023 that “it is looking to terminate the ECFA in full or rescind some of the preferential tax rates for Taiwanese products.” The ECFA offers zero tariff for 806 of Taiwan’s agricultural, aquatic, and petrochemical products; its termination will affect a small portion of total China-Taiwan trade of $244 billion in 2022 (with China running a deficit of $156 billion)—but will heighten uncertainty and weaken Taiwanese business confidence. At the same time, offering carrots to complement its sticks, China has proposed to cooperate directly with Taiwanese farmers to help them sell more in the mainland. This way, China hopes to be able to persuade them to temper the DPP’s pro-independence policies. Taiwan’s election has weakened the DPP Presidency because the party lost control of the Legislature. Any obstacles and delays in cooperation among the three parties to pass needed legislations on a timely basis to tackle various serious problems would darken Taiwan’s economic outlook, reflecting poorly on President-elect Lai—and could play into China’s hands.

Maritime blockade

How far will these economic coercion measures go? A possible maritime blockade of Taiwan has increasingly been viewed by Western analysts as a less risky, more flexibly implementable option for China, compared to an outright invasion, in pursuit of its national goal of unifying with Taiwan. As a recent Atlantic Council report put it, “a nonkinetic blockade, [being] the lowest level of coercive action that could remain below the threshold of open hostilities…[has become] the PRC’s most strategically viable option.” As an island, Taiwan is extremely vulnerable to such a blockade.

While imposing a blockade against an independent country is considered to be an act of war under international law, China can find excuses to camouflage its blockade measures as enforcing laws and regulations within areas it claims to be under its sovereignty, using Coast Guard and maritime militia vessels instead of People’s Liberation Army Navy (PLAN) warships—which can provide strategic backup and support. Furthermore, China can calibrate blockade measures according to circumstances: ranging from harassing merchant ships to and from Taiwan; to efforts to board and inspect cargos; to diverting ships to Chinese ports; to fully blocking ships from going to and from Taiwan’s ports. In other words, a blockade strategy would be scalable and reversible at China’s initiative, depending on how things pan out. Basically, it does not take a full blockade to disrupt and raise the costs of trading with Taiwan—especially shipping insurance premiums.

Western sanctions in response to a Chinese blockade would be more difficult for the United States to organize and sustain for a sufficiently long period, compared to sanctions against an outright invasion—as in the case of Russia against Ukraine. More importantly, US and Western efforts to sustain Taiwan throughout the blockade would be costly with clear risks of escalation—for example, by maintaining sufficient supplies to Taiwan via airlifts or using Navy vessels to escort merchant ships running through China’s blockade. At the end of the day, it becomes a question of staying power and it is not clear which side is willing and able to persist longer.

The damages of China’s full blockade of Taiwan would be significant—costing the global economy an estimated $5 trillion, according to Bloomberg Economics, and would push the world economy into a deep and destabilizing recession.

How reliable is Taiwan’s “silicon shield”?

Many analysts have argued that China’s dependence on semiconductor shipments from Taiwan for its own manufacturing activities would limit the extent of China’s punitive actions. As noted in a recent Atlantic Council report, semiconductors “are simply too important for Beijing to punish—short of a decision to cut off its nose to spite its face”. This can serve as a “silicon shield” protecting Taiwan from China’s extreme economic attacks, putting the island’s economy in jeopardy. However, China can address this dependency by exempting shipments of semiconductors from Taiwan from economic sanctions or even a blockade. Moreover, geopolitical tension and de-risking policies by many countries, such as Taiwan’s own New Southbound Strategy, has reduced the share of China (plus Hong Kong) in Taiwan’s exports from 44 percent in 2020 to 35 percent last year—still significant as Taiwan’s exports account for 60 percent of its economy. In particular, the portion of electrical machinery including semiconductors has fallen from 37 percent to 19 percent of exports. This means non-semiconductor export to China is substantial enough to leave plenty of room for China to squeeze Taiwan.

In the longer run, China’s dependence on Taiwan for semiconductors is likely to diminish, weakening the value of the silicon shield. In mature semiconductor chips (nodes of 25-nm and above) not subject to US sanctions, China has made substantial investment in recent years, boosting its share in global production to 31 percent in 2023, which is expected to rise to 39 percent in 2027. In advanced chips (14-nm and below), subject to US sanctions, China’s share has fallen from 8 percent to 6 percent last year. In particular, Taiwan has claimed to have stopped selling advanced chips to China, complying with US controls. (Despite US sanctions, Chinese entities including the military have been able to buy advanced chips, due to loopholes in the US control regime.) Consequently, any Chinese actions curtailing Taiwan’s shipments of chips, especially the advanced ones, would hurt China, but probably less than expected, and could be devastating to Western economies totally relying on TSMC advanced chips.

Conclusions

Going forward, it is likely that China will roll out more coercive economic measures to put pressure on Taiwan—hoping that businesses, big and small, on the island will push the government to be more accommodative to China—especially through the two opposition parties which form a majority in the Legislature. Concretely, one can envision a scenario according to which Taiwan refrains from entertaining visits from high-ranking US officials from the Administration or Congress. In return, China could scale back its military excursions around Taiwan. However, beyond these largely symbolic steps, it is highly unlikely that the main bone of contention between China and Taiwan can be resolved. China has refused to talk to the DPP government unless it accepts the 1992 Consensus recognizing the principle of one China—something which the DPP cannot agree to without negating its own raison d’être. It is also unlikely that either side will change its position. Eventually, the longer this stalemate remains unsolvable, the more likely the prospect of a maritime blockade against Taiwan. Governments and businesses around the world should seriously incorporate this scenario in their strategic planning.

Hung Tran is a nonresident senior at the Atlantic Council’s Geoeconomics Center; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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10 percent of the population takes home nearly 60 percent of the nation’s gross annual income. That works out to nearly $2 trillion a year. For perspective, that’s larger than the GDPs of Australia, South Korea, and Spain, and closing in on Italy.

This means there is essentially a rapidly growing advanced economy within an emerging market. Major companies, ranging from luxury goods makers Gucci and Louis Vuitton to manufacturing powerhouses like Tesla, are racing to expand across the sub-continent.

And while inequality is a concern, the data shows that India’s gap is no worse than many G20 peers and is better than the gap in the United States. Inequality in this case is unfortunately in line with the norm.

There is one way in which India’s inequality stands out: Female labor force participation. In India, the share of the female working age population that’s engaged in the workforce (24 percent in 2022) lags behind similar rapidly-growing economies. In China, women’s participation in the workforce has been around 70 percent for the last decade. For India to sustain high growth into the future, it will need to make it easier for the other half of its population to join the economy.

To be sure, India’s economic growth does face headwinds, including slow reforms to governance and the ease of doing business, concerns on freedom of the press, high youth unemployment, and high adult illiteracy. For India to fulfill its growth potential and wield the power of its domestic market, it will need to address these risks. If it does, the potential in the years ahead is striking.

One only needs to look at the data to see there is a good reason why both the UK and EU are busy working on possible trade deals with India.

Back at the 2010 World Economic Forum in Davos, a speech by China’s Vice Premier Le Keqiang captured headlines when he said, “A big developing country with over one billion in population has to overcome many challenges to realize modernization…so we will focus on boosting domestic demand.” That didn’t happen for China. But it turns out a big developing country with over one billion people did shore up domestic demand—it was India.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director for the Atlantic Council GeoEconomics Center where she supports the center’s work on trade.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Private firms around the world are the ultimate decision makers regarding the international use of the dollar and they respond to the incentives facing them, namely access to and costs of dollar financing. And, for the first time in nearly 20 years, it is substantially cheaper to conduct short-term borrowing in renminbi (RMB) rather than dollars. In other words, a portion of the dedollarization trend is driven not only by geopolitics but also by interest rate differentials.

Fluctuations in the dollar’s global dominance is not a recent phenomenon. As a reserve asset, for example, the dollar composed nearly 80% of global reserves in 1970. By 1980, that number fell below 58 percent. It then plummeted to 47 percent in 1990. The dollar recovered to around 71 percent of global reserves in 1999, though it has since declined gradually to 59 percent in 2020—not in favor of any replacing currency, but a number of smaller currencies including the RMB.  Current trends in dedollarization in global payment must be seen with this historic context. While this is an important trend for policy makers to watch, given its underlying drivers, they should be careful not to attribute all the motivation to geopolitical tension, possibly leading to wrong policy conclusions.

The dedollarization story so far

The reluctance to use the dollar has not been driven by the rise of a competing currency such as the RMB, but more importantly by the growing trend of using local currencies in bilateral cross-border payments. However, because of China’s large footprint in international trade and investment, the RMB’s usage in international transactions has captured increasing attention as the primary challenger to the dollar, following a rapidly growing number of bilateral cross-border payment arrangements. 

Analysts, including our Dollar Dominance Monitor, have pointed to a range of signs indicating a growing risk to the dollar. Last year, global payments settlements using RMB nearly doubled, albeit from a low base of 1.91 percent at the start of 2023 to 4.61 percent in November 2023. The SWIFT data may underestimate the RMB’s true international usage because it may fail to reflect uses of RMB in bilateral cross-border payments facilitated by central banks’ currency swap arrangements. On the other hand, about 80 percent of the use of RMB outside of China takes place in Hong Kong—without Hong Kong, the international use of the RMB remains quite small. More importantly for China, about half of its bilateral cross-border trade and investment transactions are now settled in RMB, reducing its vulnerability to US financial sanctions.

Some of this shift is in response to G7 sanctions imposed following Russia’s illegal invasion of Ukraine in early 2022. Those measures reanimated concerns across global capitals around the risks of overreliance on Western financial infrastructure and the US dollar and generated urgent demand for alternatives to the US-led financial system. But this is not the only explanation and too much focus on it can lead analysts to overestimate the costs of those sanctions. In fact, the dollar was also facing macroeconomic headwinds and its use in cross-border payments likely would have declined to some extent even without the Russia sanctions.

Macroeconomic headwinds for the dollar 

Countries at risk of sanctions, like China and Russia, are the largest individual contributors to dedollarization but they are not alone. As Bloomberg’s Gerard DiPippo points out, Russia-China trade accounts for only 27 percent of the increase in trade settlement in RMB. The remaining 70 percent is likely RMB-denominated trade with Beijing’s neighbors primarily in Asia, but also abroad such as Argentina, Brazil, and the Gulf countries. Without the imminent threat of US sanctions on Beijing, this shift to RMB trade is likely motivated more by lending costs and availability. 

It’s important to understand the integral role trade finance plays in facilitating global commerce. Payments are not made instantaneously; there is a gap from the time firms receive payments for the goods they ship and when they need to pay suppliers for those same goods. Firms often turn to banks to provide loans to help bridge the gaps. Because of this, firms seeking to minimize financing costs pay close attention to the relative cost of capital and available dollar liquidity. Rate hikes by the US Federal Reserve (Fed), which coincidentally began to take full effect in the months after Russia’s invasion of Ukraine, have caused borrowing in dollars to become more expensive and scarcer, encouraging emerging market firms to seek dollar alternatives—namely the RMB. 

Relative costs of capital 

For the first time in nearly 20 years it is substantially cheaper to conduct short-term borrowing in RMB rather than dollars. Borrowing costs, as measured by the proxy of a one-year government bill, imply short-term borrowing in RMB is around two percentage points cheaper than analogous borrowing in dollars. This is pushing firms, particularly those engaging with Chinese individuals and firms on either end of the transaction, towards RMB-denominated debt for trade financing to take advantage of efficiency gains.

This surge in dollar borrowing costs reflects the US Federal Reserve’s rapid rate hike campaign to rein in US inflation, which had hit 8.5 percent. China has not experienced the same sort of surging inflation, so was able to leave its short-term rates largely constant. Notably, this flip in relative financing costs happened in close proximity to Russia’s invasion of Ukraine. This may have caused some commentators to solely attribute firms shifting their trade finance arrangements from dollars to RMB to the overuse of US sanctions. 

Dollar liquidity squeezes

A second, related, macrotrend disincentivizing dollar use in international trade is the appreciation of the dollar and its impact on dollar liquidity in emerging markets. In early 2022 the value of a dollar against a basket of global currencies jumped 19.8 percent from right before the start of the invasion to its peak in October 2022. While its value has dropped in the year since, the dollar’s value still remains elevated by around 10 percent compared to its pre-invasion average. This was also caused by Fed rate hikes; higher rates increased the value of dollar-denominated assets, which created strong incentives for global investors to buy dollars to buy those assets. The war amplified this. Investors also increased their dollar holdings as they view the dollar as a “safe haven asset” and expect the currency to retain, or even gain value during periods of global instability and economic downturn.

An appreciating dollar severely restricts dollar funding availability, particularly for emerging market firms who are more reliant on dollar-denominated credit. This is because a stronger dollar comes with incentives for lenders with large dollar liabilities to curb their willingness to provide new short-term dollar loans (such as the borrowing required for firms seeking to finance trade) and raise the rates they are willing to lend at—further amplifying the relative cost of capital effects discussed earlier. 

The Bank for International Settlements (BIS) finds that after the dollar appreciates, “banks with high reliance on dollar short-term funding reduce supply of credit more to the same Firm relative to banks with low short term dollar funding exposures.” The BIS continues, pointing out, “firms that borrowed from short-term dollar-funded banks will suffer a greater decline in credit following dollar strengthening.” 

Without abundant dollar financing alternatives, such as during the 2008 financial crisis, the impact of this would have subdued global trade. However, following concerted efforts by Beijing to promote RMB-denominated lending, firms seeking short-term finance can now turn to RMB lenders or RMB-denominated debt markets. Indeed, in the past year overseas units of Chinese firms, as well as Western companies like BMW and Crédit Agricole, have raised a record 125.5 billion RMB ($17.33 billion) selling RMB-denominated bonds during the January-October 2023, a 61 percent increase from the same period last year.

As rising dollar borrowing costs and decreasing dollar liquidity push firms to adopt the RMB for their trade financing needs, they are also more willing to engage with the alternative global financing infrastructure China is developing. In 2015, Beijing launched the Cross-Border Interbank Payment System (CIPS) to connect and control its own plumbing in the global financial system. The intention was to construct a new financial architecture to clear and settle transactions in RMB and facilitate the use of the currency in international business. Since 2015 CIPs has rapidly grown, settling just over 480B RMB ($75 billion) in Q4 2015 to 33.4T RMB ($4.6 trillion) in Q3 2023. While CIPS’ utilization growth has been largely steady since its inception, it does seem to experience substantial spikes following contractions in dollar lending availability. And though geopolitical trends may be integral in informing the strategic thinking around firms’ actions, outside of firms engaging with Russia, availability of liquid debt and efficient markets are a more likely proximate explanation for recent trends among emerging-market dedollarization.  

Importantly, geopolitics and macroeconomic trends can work together to support dedollarization efforts. One example is China’s push to denominate more of its Belt and Road Initiative (BRI) lending in RMB. Since its inception in 2013, China has hoped to use the BRI as a tool to promote the international use of its currency. In its first five years Beijing had mixed success at best, with the majority of BRI debt denominated in dollars. This can be explained in part by discrepancies in borrowing costs over the same period. Similar to the large difference in short term lending which provided a cost advantage to US denominated debt throughout most of the 2010s, longer term borrowing was also skewed in the dollar’s favor. A $5 billion loan Beijing offered to Indonesia in 2017 demonstrates this. The loan is split between RMB and dollars with 60 percent denominated in US dollars, carrying a 2 percent interest rate, and 40 percent in RMB, carrying a 3.4 percent rate. 

However, as rates converged in 2018 and onward, China had more success encouraging RMB-denominated debt. By 2020 loans in the Chinese currency overtook dollar denominated debt. While a convergence in interest is not the sole explanation for Beijing’s success, it’s undoubtedly easier to encourage countries to adopt debt in RMB if they cannot point to high opportunity costs by not borrowing in dollars. 

The future of dedollorization 

There are important structural limitations to the international use of the RMB. Prime among them is that the RMB is not freely convertible. Foreign firms that hold RMB or RMB-denominated assets are operating under the direct oversight of the Chinese government, whose interests may not always align with their own. This will give pause, particularly to firms based in advanced economies. China’s legal system also gives firms pause. As Chinese President Xi Jinping has centralized authority, the Chinese system has become increasingly opaque and volatile, offering little protection or recourse for firms who are harmed by central government actions. Finally, China’s financial markets remain less well developed and supervised than their Western counterparts. In particular, China’s bond markets are still far less developed and less liquid than US treasury markets. Though they have been valued at around $8 trillion in recent years, they pale in comparison to the US which is pushing $30 trillion.

Even so, in the coming year macroeconomic trends will likely continue to push emerging market firms towards RMB-denominated debt for trade financing in particular, amplifying the use of the RMB in international trade. While the Fed will likely begin to cut key rates later this year, decreasing the cost of US capital and borrowing, it’s unlikely Washington returns to the near-zero target rates that supercharged cost advantages for borrowing in dollars. 

It will be key for policy makers to disaggregate these macro effects from the very real geopolitical backlash against sanctions and similar tools that are also pushing countries to explore dollar alternatives. Without understanding the relative importance of both trends, US and allied policy makers risk overestimating global sanctions backlash, possibly imperiling the G7 economic response to Russia’s illegal invasion of Ukraine. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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CBDCs may have various benefits, such as replacing cash in island economies, enhancing resilience in more advanced economies, and improving financial inclusion. The tokenization of financial assets, such as bonds issued on blockchains, opens doors for CBDCs to be used in wholesale forms of payment.

Efforts to enhance cross-border payments have also gained momentum. Sending funds across jurisdictions is still too expensive, slow, and limited in availability. Cross-border payments must be improved for the sake of users, inclusion, and business efficiency. The cost of inaction on this front may include fragmentation in capital flows and compliance with international standards, as well as diminished effectiveness of policies for monetary and financial stability.

While resources are allocated to near-term improvements, it is important to explore medium-term solutions that leverage new technologies. This could include infrastructure based on blockchain technology to facilitate settlement (not just clearing) of cross-border payments and to manage risks and information flows through programming of basic financial contracts and encryption. This infrastructure (“cross-border platforms”) could facilitate the exchange of CBDCs in wholesale or retail form, interface with traditional forms of money, provide FX conversion, and manage payment risks. The use cases could be both small- and large-value payments.

The role of the public sector in developing new platforms would be key. While the private sector is actively piloting and testing the transfer of on-chain financial assets, the public sector should actively investigate and establish desirable features to support policy objectives. These objectives encompass operational efficiency and stability; market contestability and integration; innovation; and applicability to both large- and small-value payments in the context of financial inclusion. Other areas of focus include effective monitoring; data integrity and privacy; implementation of domestic macro-financial policies; monetary sovereignty and financial stability; limited spillover effects; evenhandedness; and fair representation, among others.

Solid governance and oversight will also be needed for these infrastructures to ensure they are aligned with policy objectives and that the infrastructure and participants are compliant with rules and standards. Indeed, this will be key as trust in ensuring that compliance checks are appropriate is fundamental to safeguarding financial integrity. An important question is who will be responsible for the application of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures and for monitoring compliance. Other challenges will include determining the jurisdictional domicile of the platform, ensuring coherence of legal requirements of participating jurisdictions, as well as addressing legal uncertainties including smart contracts, data protection, and roles and responsibilities of operating and oversight bodies.

There should be no presumption that platforms are necessarily desirable, nor of who should build and operate them—whether the public or private sector. To the extent the private sector is involved and pursues its own interests, platforms should still be designed to facilitate the payment and financial needs of the underserved, to the extent they are compliant with rules and standards.

New technologies like programmability and encryption offer new functionalities that could increase efficiencies and help develop new solutions and business models. Competition from purely private solutions (including stablecoins and crypto assets) pushes the public sector to improve infrastructures and services and to counter the forces of fragmentation that could undermine the International Monetary System. Collaboration among international institutions, central banks, and ministries of finance is crucial in providing guidance and setting design contours for cross-border platforms. The IMF is committed to playing its part in this collaborative effort.

Tobias Adrian is a guest contributor to the GeoEconomics Center and IMF Financial Counsellor and Director of the Monetary and Capital Markets Department.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Those shaky finances have come into focus as the Chinese economy slows amid a property crisis, depressed business and consumer confidence, and soaring youth unemployment. Governments from modern mega-cities like Tianjin and Chongqing to the backwater provinces of Guangxi and Guizhou have saddled themselves with debt obligations that an International Monetary Fund (IMF) research paper last year called China’s “Achilles heel.” Small wonder then that Moody’s Investors Service cut its credit rating for China last month to negative from stable.

The pain is already being felt across China as local governments struggle to repay those debts and Beijing accelerates an effort begun last year to restructure them. As one Chinese hedge fund advisor writes, “the depletion of local governments’ credit capacity has not only crowded out the rising demand for social security, but also undermined the financial health and confidence of Chinese households.”

That suggests little relief in the coming year for businesses and families whom Chinese leader Xi Jinping, in his New Year’s message to the country, uncharacteristically acknowledged are facing a “tough time” and “remain at the forefront of my mind.”

The fixed-income investment giant PIMCO wrote in September that uncertainty about China’s local government debt is unlikely to pose “systemic risk” to China’s financial institutions, but so-called “idiosyncratic credit events could occur over the next six to twelve months.” Translation: fasten your seatbelts. The Rhodium Group has estimated that four-fifths of more than 2,000 corporate entities called “local government financing vehicles” (LGFVs), which local authorities have set up to borrow from banks and issue bonds, are unable to cover the cost of interest payments. A big chunk of that borrowing was incurred after COVID-19 hit in 2020 and local authorities were required to implement strict “zero Covid” measures. One Chinese academic calculates that the resulting  “Covid-induced deficit” totaled approximately 4.2 trillion yuan ($600 billion)!

Chinese banks and other government-linked institutions are the primary purchasers—and often the underwriters—of the LGFV bonds. But some private Chinese institutional investors and individual investors also have them in their portfolios because of the high yields, which have averaged 5-8 percent per year until recent restructurings. According to Fidelity International, LGFVs represent between 40 and 50 percent of China’s corporate bond market, while PIMCO estimates that Chinese banks’ loan exposure to the local government entities represents about 24 percent of corporate loans and 15 percent of total bank loans. Foreigners have largely steered clear of LGFV bonds, as their issuers are justifiably regarded as too risky.

The repercussions of all that borrowing are about to hit full force: LGFVs must repay (or refinance) $651 billion of renminbi-denominated bonds in 2024 alone. Yet that is only 7 percent of the total 66 trillion yuan ($9.292 trillion) of debt that the LGFVs were projected to have accumulated by the end of 2023, according to the IMF. And that does not include an additional 40 trillion yuan of debt that the IMF says is directly owed by the local governments.

However, Professor David Daokui Li of Tsinghua University insists that IMF estimates have underestimated debt because there is a need to include LGFVs practice using borrowed money as paid-in capital to fund subsidiaries, which then repeat the same practice with their own subsidiaries. This “pyramid structure,” he says, ends up disguising the true extent of LGFV obligations.

Nonetheless, the combination of the IMF’s estimate of LGFV and local government debt in 2022 (94 trillion yuan, or $13.429 trillion) equaled about three-quarters of China’s GDP ($17.96 trillion). That was far larger than the combined GDP that year of Japan ($4.23 trillion), Germany ($4.08 trillion), and France ($2.78 trillion).

Of course, debt in and of itself is not a sign of weakness. For example, US government debt in September 2023 was about 120 percent of GDP. The real issue is the ability to repay obligations, and China’s have become increasingly unsustainable at the local level.

Much of the LGFV borrowing has gone to fund infrastructure and other projects that cannot generate adequate revenue flows to service the debt. The Rhodium Group estimates that the median return on LGFV assets in 2022 was 1 percent, but the average interest rate on the associated debt was 5.36 percent. Of course, there are many reports of waste and corruption involving local investments.

To make matters worse, as China’s property market fell into crisis in 2021, local governments lost a major source of revenue from sales of land rights to developers. As developers collapsed under the weight of their own debts, local governments turned to LGFVs to buy the land. More than one-half of residential land purchased at auctions in 2022 went to LGFVs in transactions that totaled more than $324 billion. With residential and commercial construction unlikely to return to the record levels and prices of recent years, these purchases may prove unprofitable and the loans behind them unpayable.

The looming debt debacle places Beijing in a complicated policy bind. The central government relies on local governments—especially the country’s 2,850 counties—to provide a level of services unmatched by any other country, according to a 2018 IMF study. In the pre-COVID-19 period, local governments accounted for 85 percent of general government spending (89 percent with LGFV spending). That includes public pensions, unemployment benefits, and health programs. While Beijing transfers funds to local governments for these programs, local governments have been loaded down with considerable unfunded mandates over the years. David Daokui Li’s breakdown of 2020 local government debt shows that about 14 percent of obligations were incurred because of social spending.

In addition, Rhodium calculates that local government subsidies and tax incentives account for two-thirds of government funding for research and investment in science and technology at universities, research institutes, and state-owned and private companies.

Beijing is loath to see local governments default on their debts, but it also has shown no inclination to shift those vast sums en masse onto the central government’s books. Instead, over the past year it has announced programs to refinance, roll over, restructure, and reshuffle the local debt. Some bank loans have been extended for twenty-five years at lower interest rates, and provincial governments are accessing nearly 2.5 trillion yuan of unused central government funding for bonds to reduce funding pressures in cities and counties under their authority (with more bond financing expected to be announced when the National Peoples Congress meets in March). While the new bond issues have proved popular with some investors, the refinancings have faced some resistance from holders of the older, higher-yielding issues that are being replaced; only 59 percent of 2023 “redemptions” were approved by investors.

The government’s efforts to relieve the pressures building on LGFV debt so far pale in comparison with the total obligations that have built up in recent years across China, and however Beijing kicks the repayment can down the road, grassroots governments will remain on the hook for massive debts.

This could not come at a worse time for an economy shifting into lower gear and a population—more than 950 million of whom, by one recent estimate, live on less than $300 a month—already tightening its belts. With Xi Jinping’s government giving top priority to building a “modern industrial system” at the expense of spurring domestic demand, increasingly cash-strapped local governments will be hard pressed to meet the needs of their citizens.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post China’s local government debts are coming due appeared first on Atlantic Council.

The direct impacts of increased shipping time and fuel costs have captured the attention of market watchers and policymakers—but these are just the tip of the iceberg. As the disruption continues, firms will face challenges with increased insurance costs, decreased ship security, and wider ESG impacts, among others. The longer it lasts and the wider the area covered, the more numerous the challenges become.

The situation in the Red Sea also provides a small taste of the future of geopolitical risk. The Red Sea is one of the main trade routes between Asia, the Middle East, and Europe, with Clarksons estimating that 10 percent of world trade by volume utilizes this route. This includes 20 percent of all container shipping, nearly 10 percent of seaborne oil, and 8 percent of LNG. However, the Red Sea is not unique in its importance: Strategic chokepoints for maritime trade exist all around the globe, from canals to naturally occurring straits and funnels. As actors observe the impacts of Houthi threats and attacks, others will begin to consider their ability to orchestrate something similar. Of particular concern would be the potential for a global economic crisis if these methods were to be mimicked on other high-volume routes, in particular the South China Sea.

To prepare for and prevent these disruptions, policymakers need to understand the long shadow of disruptions to major shipping routes. And to do that it helps to explore the impact that the Red Sea disruption will have, depending on how long it lasts.

Effects of a disruption lasting one week to one month

Ship availability

In the medium term, one of the largest issues will be ships simply being in the wrong place. Supply chains have evolved to meet just-in-time strategies. This creates a delicate balance between each part of the supply chain, which is especially pressured between containers and ships.

Ports have limited berths, many of which are size specific, and limited physical space. Berths are booked months in advance to schedule appropriate port-side support for offloading, reloading, and refuelling. The ground delivery of containers and other goods are scheduled around these berth bookings.

As ships reroute or take alternative routes, the delays create a knock-on effect at the ports. When ships do not arrive at their berths on time, containers and goods fill the ports waiting for onward shipment. By rerouting or anchoring vessels, not only are supply chains slowed, but availability of transport options from ports is disrupted. Rerouted ships can overwhelm alternative ports, leading to back-ups at berths and clogged passage in/out of the ports.

As during the covid pandemic, containers quickly pile up in ports due to delays in ship arrival. This is exacerbated as vessels are repeatedly rerouted or ordered to anchor in an attempt to wait out the risk.

Insurance

Vessels “going dark”, when ships turn off transponders connected to tracking systems, has long posed a major risk. This is done to enable a wide range of illicit activities from evading sanctions to circumventing IMO rules or contractual limitations. The Red Sea has long been a hotspot for this activity due to its central positioning to countries bound by international trade sanctions. This is reflected in insurance premiums for vessels travelling through the area. Yet premiums will likely increase as the technique is utilised by ships to attempt to evade attacks from Houthi forces.

As ships go dark they become invisible to others in the area, both friend and foe. Ships are increasingly using this technique in the Red Sea as they anchor in place to avoid targeting. By masking their location, activity, and information from all parties they avoid detection by hostile forces, but also make the shipping lanes more dangerous. Transponders are utilised by other vessels to understand traffic, identify other ships in the area, and determine safe routes, particularly in crowded areas. An area such as the Red Sea filled with “dark” vessels would be equivalent to driving on a crowded highway in the dark without headlights. Without the information provided by trackers the risk of a major accident between large vessels increases substantially. That added risk will increase the cost of insurance.

Insurance costs will also be affected by the fact that the trip around the Cape of Good Hope is inherently riskier than Red Sea routes. Logistically, ships are required to not only navigate a longer route, but one battered by challenging weather patterns. Though ports across the Western coast of Africa are often better equipped to receive Capemax ships, this also enables possibilities for illicit activities based from and at ports. Geopolitically, vessels face increased danger from West African piracy, which is known for being particularly violent. This is further complicated by high levels of unrest across the area and limited state power should an incident occur.

Effects of disruptions lasting one to three months

Increase in shipping costs

Backlogs in ports, diversions, a decrease in ship availability, and the increase in insurance and other running costs will trigger pricing pressures. Shipping costs, which have already risen in the immediate term, will continue to rise. This is without considering the potential pricing impact if any vessel is significantly damaged during this period. Firms are likely to pass any price increase onto consumers to avoid substantial losses. This will hinder policymakers’ efforts to tame rising prices in an already high inflationary environment.

Carbon footprint

Shipping is already one of the most polluting industries in the world, contributing to nearly 3 percent of all global GHG emissions. “The sector, whose greenhouse gas emissions have risen 20 percent over the last decade, operates an ageing fleet that runs almost exclusively on fossil fuels,” according to the United Nations Conference on Trade and Development. But prolonged avoidance of the Red Sea will make that footprint worse.

The Cape of Good Hope route is not only considerably longer than the Red Sea-Suez Canal route—it also requires ships to burn significantly more fuel due to distance and the physical dynamics of the route. As more firms decide to send ships around the Cape, the carbon footprint of the industry is bound to increase.

For businesses, this comes as the EU rolls out their Emissions Trading System (ETS). As of January 1, maritime emissions are now included in the EU ETS for vessels calling at EU ports. The EU ETS levies a carbon tax based on the distance between the last port of call outside of the EU (excluding UK, Tangier and Port Said) and the first call into the EU. The charges are based on 50 percent of vessel emotions, half of the journey from a non-EU country into and out of the EU. As vessels increase the length of their routes and alternative ports become clogged, they will likely increase this distance and hence increase their tax liability. As the EU ETS system continues its rollout in the coming years, this added cost will only increase.

Effects of disruptions lasting three months or more 

Increasing pressure to “friendshore”/onshore

Outsourcing and importing of goods have long been a focus of ire for politicians. An increase in shipping lead times and impact of foreign actors on the availability of critical items only exacerbates this. As the disruption in the Red Sea continues, the pressure for policies which encourage onshoring, and where not possible “friendshoring”, crucial trading goods will increase. In the next year sixty-four countries will hold elections, including the United States and the UK. A geopolitical environment which already turned domestic first following recent supply chain pressures will prove ripe for politicians looking to further onshore activities.

The future is green, or is it?

One of the biggest challenges facing the maritime industry is decarbonising the global fleet. Though many options are being explored, there is still no easy solution or currently fully viable and agreed upon solution or fuel alternative.

Firms are investing vast sums to test and explore the practicality of alternative fuel options. Requiring ships to reroute quickly, for whatever reason, has the potential to undermine these efforts.

The first hurdle of the transition is costs. The massive costs and challenges inherent in outfitting ships limits the ability of firms to investigate their viability. Building ships capable of operating on alternative fuels takes a significant amount of time and money. If the baseline costs of shipping increase, specifically insurance and fuel consumption of existing vessels in the fleet due to longer routes and time at anchor, the availability of capital will be squeezed further. The transition in shipping cannot happen without vast sums of money and any cut in profit will be felt first in R&D for future ships.

Alongside this, alternative fuels, such as LNG, LPG, methanol, biofuel, electric, and hydrogen, are currently distance and route limited. Though there are numerous initiatives being trialled across the globe, testing remains in the very early stages.

For some options, current technology means longer routes are just not feasible. This includes electric alternatives which are only used for short-distance routes at the moment. For others, such as hydrogen or LNG, the distance may not be a hindrance, but refuelling is. The port infrastructure to support alternative fuels is in its infancy and availability is spotty at best. This limits viable refuelling stops for vessels along every route. Redirection further limits these options until routes become impractical. Increasing the complexity of testing by changing pre-established routes, along which the refuelling prospects and sea conditions may be vastly different, can prohibit firms from further exploring alternative fuels.

Going forward the maritime industry needs to seriously consider how to finance the transition to greener fuels and ensure their availability, regardless of route. The current reality is far from this.

Long-term security of shipping routes

Current ship security is based on armed personnel and, in extreme cases, state-sponsored military support. These systems were based on a history of small-scale, sea-based operatives and independent actors posing the greatest threats to vessels.

Recent attacks in the Red Sea open a new frontier in shipping security risk. The Houthis have relied heavily on drones and ballistic missiles for their attacks. These are more complicated, difficult to counter, and at times, more precise than small-boat piracy, which has been accepted as “standard.”

On-board armed security is no longer enough, nor are smaller military vessels without the ability to tackle these threats. As this technology becomes more easily accessible, ensuring ship safety will be more costly and require more advanced technology.

The future of shipping risk

Despite recent efforts by Western powers to restore shipping in the Red Sea, the genie is now out of the bottle. The widespread redirecting of global trade has illustrated the power non-state and state actors can exert.

Even if a lasting ceasefire is agreed to immediately, ships cannot simply turn around and go back to their original routes. The substantial change in situational risk of the route will require a significant amount of contract renegotiation between shipowners and operators. Some owners may even restructure contracts to bar their vessels from being utilised on these routes. Nor will insurers and financiers be particularly willing to return to pre-ceasefire risk assessments. The Houthi attacks have opened the possibility of more sophisticated attacks through relatively accessible technology in busy shipping lanes.

There is a real risk that this model could be repeated by actors bordering other high-volume shipping routes. An area of similar, if not larger, risk would be a repeat of these actions in the South China Sea. It carries up to a third of all trade by volume and is a main energy transport route; any redirection there would have massive effects on global trade. Unlike the Red Sea, which acts as a funnel towards the Suez Canal, a high concentration of South China Sea routes require transport through the relatively narrow Strait of Malacca. Acting as a strategic chokepoint, this area is incredibly vulnerable. Though alternative routes exist, the physical limitations of these waterways make it a practical impossibility for the vast majority of ships. The combination of high volume and narrow passage means a disruption of this route of comparable scale could easily trigger a global economic crisis.

The coming weeks will determine whether we are facing a minor inconvenience or a larger challenge for international shipping. However, like the COVID-19 pandemic, this incident has underlined not only the importance of maritime trade routes but provided insight into the future of geopolitics. The ability to apply pressure to global trade structures is steadily becoming more accessible. States must adapt their international strategies to mirror the reality of the outsized impact certain actors, state and otherwise, can have on global trade.

Alex Mills is an international trade expert focused on services trade, international investment, maritime law, and ESG. They have nearly a decade of experience across the private and public sector, including in UK and US politics and the financial sector.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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So, what are the reasons they might be wrong again this time? Think of the global economy like a Jenga tower. If you look from above, the tower seems tall and sturdy. That’s indeed what’s forecasted for next year—modest but consistent global growth. But if you pan the camera down and look at the sides of the Jenga tower, you see all the missing pieces. Each one is hollowing out the structure and you never know just how much instability the tower can take before it topples over. 

2024 starts with several missing pieces: China’s sputtering growth, the world’s major shipping companies stopping transit in the Red Sea, and the second largest economy in South America at serious risk of default. And that’s just scratching the surface. 

The most significant stories are often the ones economists overlook. With that in mind, we’ve picked five underappreciated trends that will matter for the global economy in 2024. With each one you’ll see where the shaky pieces are in the global economy—but also the stabilizing forces that may help throughout the year. 

1. A crack in the BRICS

Russia needs the BRICS a lot more than the BRICS need Russia. That’s the conclusion when you stack up projected GDP growth for both the original and new BRICS members in 2024:

This may make for an awkward summit when Putin hosts his colleagues in Kazan on the banks of the Volga River in October. The plan is to highlight Russia’s cultural treasures (Tolstoy studied in Kazan after all, and the Kazan Kremlin is a World Heritage Site).

But Putin has a problem: No fancy pageantry is going to hide the reality that economic stagnation is facing the Russian people in 2024. There’s a reason the BRICS’ own bank has stopped funding any new Russian infrastructure projects—even his friends know Putin can’t pay his debts.

2. China’s new bubble

Try to fix one problem, create another. That’s the story of China’s economy in 2024. For the first time since the People’s Bank of China began providing data in the early 2000s, Chinese banks are showing a year-over-year net decline in lending to the property sector. But look at what has risen to take its place:

If China pumps hundreds of billions into its manufacturing sector, Beijing is going to need someone to buy up all those goods. And with its own domestic consumption sitting near all-time lows, China will have to look back to the West. Get ready for a wave of electric vehicles, car batteries, and wind turbines headed our way.

Of course, the United States and Europe are not going to take well to a scale up in Chinese exports, especially in an election year. The EU anti-dumping investigation is just the beginning. 2024 is likely going to be a year of new trade fights.

3. Braking bad

The world’s #1 and #4 economies have self-imposed fiscal rules that tie the hands of their governments, even as they deal with crises. To see just how out-of-place these rules are compared to other major economies, check out the table below:

Germany’s most recent problem started back in November with the constitutional court’s ruling that the government couldn’t repurpose unspent COVID-19 funding to help with the green transition. The ruling will force future governments to go back to parliament and ask for further exemptions if they have not spent the extra money within the first one or two fiscal years. But that’s tomorrow’s problem.

Right now Berlin has to redo its entire 2023 and 2024 budgets to fit within the debt brake rules. Late in December it appeared the coalition reached a deal but the compromises have put the entire Scholz coalition at risk.

Combine Germany’s situation with the US debt limit hitting January 1, 2025 and you can see why next December is a looming fiscal cliff for some of the key pillars of the global economy.

4. The year of the governor

The world is facing a historic year of elections—seventy-eight countries will see voters go to the polls in 2024. That includes seven of the G20 members (more than any year in decades) and three of the world’s five largest economies (United States, EU, and India). But the under-the-radar story is how many central bank governors in these same countries are staying put:

In a year full of political instability and possible fiscal dysfunction, the world is going to look to its central bankers more than ever. With Fed Chair Jay Powell, ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Japan Governor Kazou Ueda all in the middle of their terms, the big central banks will have the independence to do what needs to be done, even if unpopular in the short-term. If fiscal authorities deadlock over debt, it’s the monetary policymakers who will be asked to steer the world’s largest economies to safe harbor.

If there’s one trend that will matter the most for your pocketbook—and the health of the global economy in 2024—it’s this one.

5. Forecasting rollercoaster

Up, up, up… that’s the trend for uncertainty in forecasting ever since COVID-19. If you needed one more reason to question the perfect landing scenario, here you go. Take a look below at how the world’s top economic prognosticators have been predicting very different realities in recent years:

The blue line in this graph goes up when the IMF and Goldman Sachs (leading public and private forecasters) disagree on how much the global economy will grow in the year. The difference in the predictions for 2022 was nearly a trillion dollars—or the entire economy of the Netherlands. 

Before you look at 2024 and think we’re returning to a pre-COVID normal, just remember that we’re still way above the pre-pandemic level of consensus. Bottom line? It’s always a good idea to take the average.

Niels Graham, Alisha Chhangani, Mrugank Bhusari, Phillip Meng, Shahjahan Bakhtiyar, and Harry Yueng all contributed research to this article.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director for the Atlantic Council GeoEconomics Center where she supports the center’s work on trade.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Unfortunately, the document was vague on several major points. As has been emphasized by the EU itself, its June 2023 communication on economic security was just a first step. In the next phase, the EU’s leadership must provide clear guidance in three areas. First, in the short run, the EU’s understanding of economic security challenges needs to be fostered by clarifying what the key concepts of the strategy actually mean. Then, second, more coherence is needed between the EU’s approach to economic security, the EU’s official political goals and policy instruments, and Europe’s longstanding existential challenges. Doing so effectively depends on the third, more long-term element, which requires the adaptation of the EU’s institutions to the changing world order.

The EU’s reluctant shift away from multilateralism

The EU is reluctantly adapting its economic governance model to a world in which economic relations are increasingly dominated by geopolitical and security dynamics, and by national power instead of international rules. In this world, the logic of conflict dominates the logic of cooperation. Although the European Commission and the EU member states understand that the world has changed, many European policy makers remain attached to a belief in multilateralism, so this shift does not come naturally.

The way the EU is set up is geared towards a predictable, rules-based system. Furthermore, because of its inner make-up, which allows for deliberation between national capitals and EU institutions, the EU may be at a relative disadvantage compared to both the United States and China as it tries to strengthen its economic security in a context of geopolitical strategic competition and conflict.

Yet the EU also has more experience than its peers handling disputes when regulatory decisions become politicized. One of the Common Agricultural Policy’s underlying rationales was to ensure that Europe would always have sufficient access to food by controlling its own production. Also, the EU’s trade policies have often had a political component: many developing countries were granted EU market access in exchange for domestic reforms. EU competition law evolved, partially, in order to prevent American companies from dominating the European market.

The first challenge for the EU’s approach to economic security is to make it clearer what the text actually means. Doing so will also help to identify blind spots in the EU’s strategic approach. For example, what does the European Commission actually mean with ‘economic security’ and ‘strategic dependencies’? While the apparent conceptual vagueness allows room for maneuver, it also threatens to undermine more concrete, tangible steps. And the current strategy also fails to make it clear how the different instruments and tools listed relate to each other and to the notion of economic security.

The EU also needs to understand that the risks to its economic security may not be ‘narrow’–as the strategy states. In fact, as the world order is shifting, in financial, technological, and military terms, the entire structure upon which the EU’s trade and investment relations is built may be at risk. To understand this, the EU must consistently look through a historical lens at the world’s financial and economic system and appreciate how that relates to the world’s military balance. Looking at historical trends, the EU may be forced to acknowledge that it faces much more profound economic security challenges, which may not be remedied with some technology subsidies here, some trade mechanism there. These challenges include, on the one hand, Europe’s long-term economic growth rate, and on the other hand, Europe’s dependence on the US military power to protect Europe’s economic interests.

Second, if Brussels is truly serious about economic security, the EU will need to reconsider adapting its institutional structure. While DG Trade created an anti-coercion unit, that may not be enough considering the scope of the strategy. However, the theme of economic security spans almost all the Commission’s DG’s, from Culture to Space. And national security remains a member state competence, which requires the role of the Council.

The scope and importance of economic security require that it be coordinated centrally and that it become the key responsibility of a future Commissioner. Also, to implement and develop the strategy, more high-level and pan-European coordination is required. That could be a Commissioner, or ideally someone combining the economic competencies of the Commission and the security competencies of the Council—akin to the High Commissioner. Such political responsibility must go hand in hand with specialized support personnel, with intricate knowledge about economic security and geopolitics.

Not all EU member states will like greater reach of the European Commission in matters of economic security. It will therefore be up to the Commission to convince the EU member states that their core interests are at stake in the longer run if the EU lacks the competencies and capacities to confront the economic security challenges. However, to convince the EU member states, the Commission will have to develop a better vision on economic security; the current one fails to address why economic security should be at the core of European integration. That leads to the third and most important point.

Third, the EU’s approach to economic security needs to take into account Europe’s existential woes, economic and societal. Additional bureaucratic structures and policy initiatives for economic security will not suffice to address those. The most important discussion about Europe’s economic security is how Europe can sustainably increase its economic growth rate, while strengthening its democratic values and rule of law, its socioeconomic cohesion and cultural-historical heritage, and its global geopolitical position. That should be the guiding principle, the touchstone for all European policy initiatives, whether those are called ‘economic security’, ‘strategic autonomy’, or something else.

The legitimacy of the EU and of its strategic approach to economic security depends on whether they serve Europe in the long run. Therefore, instead of focusing on technical details and institutional set-ups, the EU’s approach to economic security ought to be guided by more profound debates about the EU’s long-term political objectives. To what extent does the EU want to reinforce its liberal democratic values and internal rule of law? To what extent does the EU want to reinforce Europe’s middle classes and socioeconomic cohesion? And which security and defense strategies are needed to ensure that the EU can successfully attain its internal political objectives in an inherently unstable and uncontrollable international environment?

In the end, however, the EU’s approach to economic security can only be successful if it is tied to Europe’s long-term political objectives. This will also require that the EU’s policy makers consider how the evolving approach to economic security will benefit the values and interests of Europe’s citizens.

Dr. Elmar Hellendoorn is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and former advisor to the Government of the Netherlands

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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While no real damage has been done, top shipping companies such as Maersk, Hapag Lloyd, and MSC have decided not to use the Red Sea, pausing their ships before traversing the Bab-el-Mandab strait on their way to the Suez canal. Some ships have been diverted around Africa’s Cape of Good Hope—adding significant delays and costs. For example, voyages to Europe could be extended by up to two weeks, raising fuel and operating costs as well as delay costs for exporters, importers, and end users. Since 12 percent of global trade passes though the Red Sea, including 30 percent of global container traffic, accounting for one trillion dollars of trade each year, delay and diversion there would cause significant disruption to world trade. Oil and gas prices have already jumped following news of the attacks. Shipping insurance premiums have nearly doubled for some carriers over the past week.

The disruption to Red Sea shipping would create a strong headwind to the global economy which is still recovering from various shocks since 2020, such as the Covid-19 pandemic, Russia’s invasion of Ukraine, and the significant monetary tightening by major central banks. Energy importing regions will suffer the most; in particular low-income countries and Europe which is teetering on the verge of a recession. While the Israel-Hamas war has not yet had an impact on energy prices, the disruption in the Red Sea might. Rising oil and gas prices would keep headline inflation high, complicating central banks’ efforts to pivot to easing.

More importantly, the Houthi attacks have visibly raised the military tension in the region, threatening a spreading of the war in Gaza. The United States is about to launch a maritime protection force called “Operation Prosperity Guardian” including Western and Arab countries to protect shipping in the Red Sea. However, it is difficult to see how that can completely protect commercial ships from missile attacks or the threat of them. Bombing missile sites on Yemeni soil would expand the scope of the conflict and likely cause civilian casualties, further inflaming and dividing international public opinion.

In short, the longer the war in Gaza lasts, the longer shipping disruptions caused by missile attacks in the Red Sea will go on. The risk is that a widening conflict further destabilizes the regional economy, and in turn spills over into the global economy.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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In just under four years Chinese banks have gone from providing its domestic property sector with over one trillion dollars in new annual lending to a net decline in outstanding debt—for the first time since the PBOC began keeping track in 2005. Instead, Chinese banks are facilitating massive new borrowing for Beijing’s manufacturing sectors. In Q3 2023 Chinese banks extended nearly $700 billion in new loans—often lent at below-market interest rates—to the sector from the previous year. Across China, new factories producing electric vehicles (EVs), batteries, and other products integral for the green transition are springing up. However, with a saturated manufacturing sector and Chinese domestic consumption sitting near an all-time low, Beijing is now looking abroad to absorb this new production. These trade flows will exacerbate the tense trading relationship it has with economies like the United States and EU who are also fostering domestic industries and jobs producing many of those same products. 

This is not the first time Chinese overcapacity has caused anxieties in the US and EU over green energy manufacturing. A decade earlier a similar debate focused squarely on Chinese solar panel exports was playing out in Brussels and Washington. In 2007, 30 percent of global solar cells were produced in the EU, and a smaller but growing share in the United States. Unfortunately, the 2008 financial crisis and a new industrial policy effort led by Chinese local government subsidies quickly began eating away at Western companies’ market share. To protect their domestic industry, in 2012 the EU announced an anti-dumping investigation resulting in tariffs of 47 percent. In turn, China threatened to retaliate with tariffs on key European exports, forcing the EU to back down. They instead imposed a price floor. This was insufficient. China now dominates global solar panel production. In 2021, China made up just 36 percent of global demand but was responsible for well over three quarters of global solar production. 

Will Chinese lending toward manufacturing be a replay of this same dynamic? There is reason to believe this time could be different. Shifting views on China make Brussels less likely to capitulate to retaliatory threats from Beijing. China’s surge in manufacturing support coincides with similar efforts by both the United States and EU through programs such as the Biden Administration’s Inflation Reduction Act (IRA) as well the European Commission’s Green Deal. The scale of these endeavors are magnitudes greater than support each government provided to the solar industry a decade earlier, further incentivizing action by western capitals to defend priority industries.  

While promoting clean energy and addressing climate change remain the goals of the IRA and Green Deal, they go hand-in-hand with US and EU efforts to reshore domestic manufacturing capacity for solar and wind power equipment, batteries, heat pumps, electrolysers, and fuel cells. Both governments have emphasized the importance of their respective green transitions being supplied in large part by their domestic manufacturing sectors, not low-cost foreign suppliers like China. US and European initiatives should be thought of just as much as a jobs creation and manufacturing revitalization pushes as a green economy effort. 

However, while existing policies have insulated the US economy and de-risked its supply chains from Chinese imports, lack of EU action means that its markets have become increasingly dominated by cheap green technology imports from China. If the EU wants to avoid the fate of the global solar industry, its window to take action is steadily declining. 

The tension over who manufactures the green transition is already playing out in EVs. Over the past three years Chinese exports of EVs have surged more than 1500 percent. While high tariffs (27.5 percent for auto imports from China) as well as local content requirements have prevented this influx from reaching the United States, strong demand, low tariffs, and purchasing subsidies have made the EU a prime destination. 

From January to October 2023 the EU bought $12 billion or 42 percent of all Chinese EV exports. The influx of cost-competitive vehicles are now threatening Europe’s own emerging EV production. To respond, in October, the European Commission launched an anti-subsidy investigation into imports of Chinese made passenger battery electric vehicles. If the Commission is able to prove that its industry is directly threatened by Beijing’s countervailable subsidies, it can then move to impose tariffs above the standard 10 percent EU rate for cars. 

EVs, however, may just be the start of a series of trade disputes and investigations to determine China’s prevalence in most clean energy supply chains. It’s possible European Commission inquiries into wind turbines, heat pumps, and electrolyzers could be next. In October, Didier Reynders, the EU’s acting Commissioner for Competition, suggested Chinese turbine exports may merit a similar investigation. Like EVs, China’s wind sector has received generous subsidies and exports have surged in recent years. Since 2015, Chinese manufacturers have grown from supplying around 3.5 percent of global exports to 20 percent in 2022. This growth is of particular concern for Brussels because a larger share of these increased exports are making their way into the European market. In 2018, the EU purchased 21 percent of Chinese exports of wind turbines and their related parts. By 2023 this share had jumped to nearly 29 percent. 

The United States, in contrast, has effectively reversed this trend. In 2018, China sent around 20 percent of its wind exports to the United States. By 2023 the US’ share had fallen to just over 7 percent. This divergence in import share can be explained by a combination of declining US demand as well as new producers from Spain, India, and Germany entering the market. These alternative manufacturers were more easily able to divert US market share from China because tariffs implemented under the Trump administration during the US-China trade-war make Chinese exports more expensive in the US market than the EU market. 

Chinese exports of electrolyzers and heat pumps are also drawing attention from the European commission. This is for good reason. Over the past decade China’s share of global exports for electrolyzers has grown 10 percentage points to control 26 percent of global exports. Similarly, heat pumps have grown 14 percentage points with Chinese manufacturers encompassing 20 percent of global exports. Though its share is declining, the EU remains the primary destination for Chinese heat pumps with nearly 69 percent of Chinese exports traveling to EU member states in 2023. Beijing’s subsidized cost structure could increasingly challenge the EU’s own robust heat pump manufacturing sector. 

Though the EU currently makes up a far smaller portion of Chinese electrolyzers exports, that could quickly change. China’s state-led development of the sector has resulted in significant overinvestment in electrolyzer manufacturing capacity which now far exceeds short-term demand. China now has electrolyzer productive capacity four times what is required by global demand. 

China’s green technology exports are rapidly rising. As Beijing expands its bets on manufacturing and export-oriented growth, it is positioning itself as the global factory supplying all aspects of the green transition. So far Trump-era tariffs and stringent domestic continent requirements have insulated the US market—though this could change as the benefits of cheap lending filter through to export prices. The EU has been less lucky. If Brussels and Washington want to avoid the fate their solar industries experienced a decade earlier, they must deeply scrutinize Chinese exports of EVs, wind turbines, heat pumps, electrolyzers, and other similar products. If China is unwilling to reduce its own supply, western capitals may be forced to restrict foreign access to their markets. While this may save their own industries, new interventions will further fractionalize the global trading system. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The pandemic emergency fund was set up in 2021 when the Merkel administration, with support from Parliament, invoked the emergency exception clause, allowing it to borrow well beyond the constitutional debt brake limits (of 0.35 percent of GDP). But the unspent money cannot be reallocated to unrelated government programs in another year, according to the ruling. This has forced the government to remove the €60 billion from the CTF, freezing payments from the fund which had been scheduled to spend €177 billion over the next three years to speed up Germany’s green transition. The ruling has also thrown into doubt commitments already made by the fund and blown a double-digit-billions hole in the 2024 draft budget. As Finance Minister Christian Lindner said in a moment of political understatement, “this judgment has potentially far reaching implications for government practice and the budgetary policy”.

More importantly, the budget crisis has further undermined the credibility of the ruling coalition and in particular the Free Democrats Party (FDP), which embraces the debt brake and sound fiscal policy. This comes at a bad moment for the government, already losing in the polls due mainly to immigration, energy policy, and inflation. Indeed, popular support for the government has fallen to 34 percent—or 18 percentage points less than in the 2021 federal elections—with the SPD scoring 16 percent, the Greens 12 percent and FDP 6 percent. By contrast, the opposition CDU/CSU received the highest support of 30 percent, followed by the far-right AfD at 22 percent. These developments will likely intensify bickering within the coalition government over budget priorities to close the fiscal gap, further weakening its ability to deal with the multi-faceted challenges facing Germany—which is also currently mired in a possible double-dip recession.

Beyond creating immediate problems for the German government, the fiscal crisis has brought to the fore two important issues with international relevance. The fiscal brake does not work and only further erodes trust in economic policymakers. And it subverts much-needed public discussion about fiscal realities in democracies around the world.

Legal constraints on fiscal deficits are not a silver bullet

In 2009, under Chancellor Angela Merkel, the debt brake was enshrined in Germany’s Basic Law (i.e. Constitution) as reflected in Article 109, paragraph three: “The budgets of the Federal and State governments shall, in principle, be balanced without revenue from credits.” However, the federal government is allowed to borrow up to 0.35 percent of GDP (on a net basis) and can be exempt from the debt brake all together if Parliament declares “an extraordinary emergency situation”—which it did for 2020, 2021, and 2022. The debt brake has been promoted as an effective way to restrain politicians from fiscal profligacy, putting unfair burden on future generations.

To opponents, the debt brake idea has been seen as unduly constraining government’s ability to deal with cyclical downturns or unexpected difficult developments. In fact, efforts to close the budget gap caused by the court ruling could make Germany’s fiscal policy pro-cyclical, exacerbating an already bad economic situation. Faced with economic difficulties but constrained by the debt brake, a government may have to let an adverse situation deteriorate (to its political disadvantage) or resort to creative accounting to meet budgetary demands dictated by circumstances. These efforts would further undermine trust in the government’s integrity and competence.

The debt brake is not evidence of fiscal discipline but more a reflection of voters’ lack of trust in elected officials’ ability to conduct responsible fiscal policies. And it does not provide a solution to budgetary challenges facing governments. As such, the debt brake is not a good framework for fiscal policy making. These lessons should be seriously considered when Euro Area members debate the restoration of the Stability and Growth Pact suspended in 2020 (which originally limits members’ budget deficits to 3 percent of GDP, and public debt to 60 percent, over time). And they should be top of mind when countries such as the United States are toying with a balanced budget constitutional amendment.

Budgetary priorities and commitments need to be debated and supported by the electorate

At present, governments around the world find themselves in a very serious fiscal situation. Coming out of the Covid-19 pandemic and with the war in Ukraine still going on, governments everywhere are running large budget deficits of more than 5 percent of GDP, with near record levels of public debt—of 112 percent in advanced economies and 68 percent in emerging market and developing countries (EMDCs). From such a weakened fiscal position, they are faced with urgent demands for government spending in many competing domestic areas—ranging from basic infrastructure, social and healthcare, education and training, investment in high-tech activities, as well as defense and national security due to geopolitical tension. In addition, all have to devote more resources to fund climate mitigation and transition projects.

According to the IMF, for the world to reach the goal of net zero carbon emission by 2050, low-carbon investments need to increase from $900 billion in 2020 to $5 trillion per year by 2030. In particular, emerging market and developing countries (EMDCs) need $2 trillion a year, a five-fold increase from 2020. While private sector investments will need to be mobilized by appropriate policies in both developed countries and EMDCs, governments will have to significantly increase their expenditures for climate mitigation and transition—acting as catalysts for private sector involvement.

Moreover developed countries will have to respond to growing calls by EMDCs for financial transfers to help them make progress toward net zero—as evident in COP28 in Dubai. It is becoming obvious that, given their fiscal constraints, developed countries will not be able to meet climate financing demands from EMDCs. Instead of engaging in wishful thinking—especially about unlocking private sector climate investment—it is much better for the world community to recognize the hash fiscal reality and brings their discussions about climate financing transfers down to realistic and implementable levels.

Generally speaking, to better deal with difficult challenges ahead, governments should present a coherent medium-term fiscal plan with clearly defined priorities and required resources—and engage in serious discussions with voters to get them to support the fiscal plan. That is the only way to mobilize necessary fiscal resources on a sustainable basis to meet all the important challenges facing many countries. A debt brake would make such discussions difficult if not impossible. Without social consensus behind a well-articulated medium-term fiscal plan, the risk is high that politicians will make promises, especially in election campaigns, which they will not be able to implement. This will set the stage for popular disappointment, disillusionment, and deeper distrust of governments—making the situation worse off than it already is.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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We are therefore in uncharted territory. The threat of financial crisis at a time when governments are ill-equipped to respond is probably the greatest risk currently facing the global economy.

Financial deregulation and innovation—growth interrupted by financial crises

The process of financialization started in the 1980s, influenced by the economic thoughts of, among others, Milton Friedman (laissez faire capitalism with minimal role of government) and Eugene Fama (maximizing shareholder value). Waves of financial deregulation were implemented in the United States (under Ronald Reagan) and the UK (under Margaret Thatcher), allowing banks and other financial institutions to engage in more activities and markets. Corporate managers were increasingly incentivized by stock options, to align their incentives with shareholders. Financial innovation flourished—with many new financial instruments, especially derivatives, which facilitated active trading and hedging by market participants.

Debt increased over the same period while the credit quality of both public and private borrowers steadily deteriorated, weakening their abilities to service those debts. For example, there are only two S&P rated corporations with an AAA rating now compared to sixty in 1980; and the United States is about to lose its AAA status. Of particular concern has been the pattern of volatile capital flows to emerging markets and low-income countries, leading to debt buildup and subsequent crises—disrupting and retarding their growth.

Financial deregulation and innovation were supposed to improve the allocation of capital, promoting economic growth—which did occur, albeit unevenly, over the past four decades. However, global economic growth has been slowing down from 4-5 percent in the post-war decades prior to the 1980s to 3 percent or less at present. Moreover, growth has been interrupted by financial crises, requiring increasing government intervention and support.

In the 1980s, financial activities contributed to a sustained bull market in the United States and elsewhere, leading to the Black Monday market crash on October 19, 1987—accentuated by the pro-cyclical nature of new portfolio insurance techniques. Then market enthusiasm over the internet spurred the dot-com market bubble which burst in 2000. Lower inflation during the so-called Great Moderation allowed central banks to be accommodative in their policies which together with new instruments like credit default swaps and collateralized mortgages/loans obligations contributed to the Great Financial Crisis (GFC) in 2008. The GFC forced major central banks (including the Fed, ECB, BoJ and PBOC) to inject a huge amount of liquidity into their economies through quantitative easing—ballooning the size of their balance sheets, from $5 trillion in 2007 to $20 trillion in 2018. When the Covid-19 pandemic hit, causing market turmoil in early 2020, those central banks again came to the rescue, increasing their combined assets again to $31 trillion—or more than 30 percent of global GDP—in 2022 (Source: www.yardeni.com).

It is important to realize that central banks’ actions have reinforced expectations among market participants that their downside risks would be protected by the so-called “Greenspan put”—whereby the Fed cuts interest rates when markets wobble. While this stems market turmoil in the short term, the resulting expectation encourages risk-taking and is a clear example of moral hazard at work.

Furthermore, new sources of market turmoil are arising. Panic has been transmitted increasingly quickly through social media and online banking—as demonstrated by the 2023 US regional banking crisis. This has rendered obsolete some financial regulatory safeguards such as banks’ liquidity coverage ratio (requiring them to maintain adequate high quality liquid assets to meet unexpected deposit withdrawal).

The widening gap between finance and the economy

Over the years, the gap between the volume of financial transactions and the value of financial assets relative to the underlying economy has widened substantially. According to the Bank for International Settlements, the global foreign exchange trading volume has reached $7.5 trillion per day—far outstripping any notion of the FX transactions needed for international trade or direct and portfolio investment activities. The annual value of US equities turnover has amounted to $85 trillion, or 370 percent of GDP—about 60-75 percent of which has been executed by algorithmic and high-frequency trading, buying and selling securities in matters of seconds. It is not clear how such activities may have helped raise funds for companies to do business.

Most noticeable has been the growth of all kinds of financial derivatives whose notional value has exceeded $600 trillion—or more than twenty-seven times global GDP! Even though the gross market value of those derivatives contracts (summing positive and negative values) amounted to only $20.7 trillion in 2022, that estimate depends on the ability of counterparties in derivatives contracts to perform as expected. But during financial crises, counterparties often failed—leaving many market participants exposed to the full notional value of their derivatives positions.

Concurrently, according to the UBS 2023 Global Wealth Report, the value of global assets or wealth amounted to $454 trillion or 450 percent of global GDP at the end of 2022. That value is very unequally distributed: the top 1 percent of the population holds a big chunk of total wealth—for example, around one-third in the United States. On the other side of the coin, global debt has risen to $307 trillion in Q3 2023, according to the Institute of International Finance.

More important has been the role of the United States and the US dollar in financialization. In terms of value added to the US GDP, the financial sector, including banking, securities, insurance, real estate leasing, and rental activities, accounts for more than 20 percent, compared to 11 percent contributed by manufacturing activities. In terms of non-farm corporate profits, the financial sector accounts for around 50 percent of the total, rising significantly from 10 percent in 1947. Many industrial corporations have to rely on revenues and profits from financial activities to supplement those from manufacturing operations. For example, GE Capital accounted for 42 percent of GE’s total revenue in 2008, and much more in terms of profit, just when the GFC struck (GE sold GE Capital in 2015). At present, GM derives one-third of its pre-tax profit from financing the sales and leases of its cars.

Moreover, while the United States accounts for less than 25 percent of the world economy, the USD has taken the lion’s share of global financial transactions—88 percent in FX trading, 70 percent in foreign currency debt issuance, 58.3 percent of globally active banks’ international claims and 61.6 percent of their liabilities, and 58.4 percent of reserves holdings (down from a peak of 71.5 percent in 2001).

The economy depends on financial activities

Economies have become dependent on financial activities and the growth of asset values. That has made them more susceptible to financial instability and crises, which in turn require rescues by governments. In particular, the dominant role of the USD in global financial markets means that a dollar funding crisis has always featured in any global financial crisis. Consequently, the Fed has assumed a key role in stabilizing major global financial crises by supplying dollar liquidity to the international financial system when needed. However, after several rounds of fiscal supports and injections of central bank liquidity since the GFC, government resources have been significantly stretched—by high government debt (127.8 percent of GDP of the G7 countries) and massive central bank balance sheets (almost 30 percent of global GDP). Adding to government debts and central bank balance sheets would risk unleashing major inflationary episodes and economic dislocations. Furthermore, such interventions could be less effective in dealing with crises over time as the potential losses in asset values have skyrocketed.

Those factors will likely constrain governments’ ability to provide adequate support to stabilize future crises, especially those on the scale of the GFC of 2008. In other words, financial and economic activities are taking place around the world with a much overstretched and weakened financial safety net underneath. Nobody knows when the next major crisis will materialize and whether governments will be in a position to stabilize it like they did in 2008. That uncertainty is probably the greatest risk to the global economy at present.

This piece has been updated to chart annual FX turnover rather than daily. The text has been updated to match that calculation.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Events like the 2008 Global Financial Crisis, the Covid-19 pandemic, Brexit, increased trade tensions between the United States and China, the ongoing war in Ukraine, and coordinated G7 sanctions on Russia have demonstrated the rise of geoeconomic fragmentation. While trade volumes continue to grow, trade relationships around the world are fraying. A 2023 IMF report estimates the cost of trade fragmentation for global economy would be somewhere between 0.2 percent all the way up to 7 percent of global GDP.

Rising trade barriers and trade wars, reduced foreign direct investment (FDI), increased technological decoupling, and faltering multilateralism are the four channels through which geoeconomic fragmentation could impact global climate targets. Here I’ll focus just on geoeconomic fragmentation’s effects on climate change via trade barriers.

The energy transition depends on trade—and on China 

More than 50 percent of global greenhouse gas emissions are produced by China, the United States, the EU, and other G7 economies. All have target dates of 2050 to reach net-zero emissions.

Moreover, as shown in the charts below, these economies depend heavily on each other in trade of environmental goods and technologies central to the development of renewable energy and reducing emissions. Hence, trade skirmishes between these economies will pose significant risks to the green energy transition, imposing huge costs on the global economy.

It’s not just the G7 and the EU that depend on China for environmental goods—the whole world does. The Chinese supply chain for clean energy is so critical that, as of now, meaningful global energy transition cannot take place without it. In 2022 alone, China allocated $546 billion towards various investments in solar and wind energy, electric vehicles, and battery technologies. This amount dwarfed combined US and EU investments in these sectors, which amounted to $321 billion in the same year.

On the solar front, according to the International Energy Agency (IEA), China currently dominates the global production of solar panels across all manufacturing stages, boasting a market share that exceeds 80 percent and is expected to grow to 95 percent in the coming year. This should not come as a surprise given that China’s investment in the photovoltaic (PV) industry over the past decade surpassed $50 billion, a figure ten times greater than that of Europe.

On the wind front, Chinese manufacturers have also dominated the global market. About 60 percent of the world’s wind installed capacity is sourced from China. High-storage batteries are central to the energy transition and on this front too, China dominates the global market. Nearly 80 percent of the world’s battery manufacturing capacity is housed in China. This dominance is further exacerbated by China’s vertical integration across the entire electric vehicle (EV) supply chain, from mining to EV manufacturing.

Finally, rare earth minerals are critical resources for high-storage batteries and other high-tech industries. China dominates this space with more than 70 percent of the world’s rare earth minerals processed by Chinese companies. At present, it is estimated that China is home to roughly 34 percent of the world’s rare earths reserves.

Geoeconomic fragmentation will slow the energy transition

Therefore, any trade frictions with China in the form of tariffs, quotas, or export controls are likely to result in Beijing’s retaliation, and if the above-mentioned industries and commodities are part of China’s retaliatory measures, global climate targets will be negatively impacted. In fact, this is already happening. In July 2023, in response to US, Japanese, and Dutch export controls on semiconductor chips to China, Beijing announced that it was restricting exports of gallium and germanium, two crucial metals needed for the green energy transition and the development of advanced semiconductor technologies. China produces 94 percent and 83 percent of the world’s gallium and germanium, respectively. Some analysts have suggested these measures were largely symbolic; nonetheless, there is a real possibility of future retaliatory measures slowing trade in areas critical for the energy transition. For example, according to the IMF, “In our hypothetical scenario where trade of critical minerals between blocs is disrupted, investment in renewable energy and electric vehicles could be lower by as much as 30 percent by 2030, compared to an unfragmented world.”

The United States, the EU, and their allies are actively looking to create a more diversified supply chain in the green energy sector in the long run and reduce their dependence on Chinese supply chains. However, given the US and EU’s regulatory hurdles to mine in their countries and other places in the world—mainly because of environmental and human rights concerns—such plans will take at least a decade to reach an operational level equivalent to that of present-day China.

Given the pressing climate challenge, that is a very long time and the world simply does not have the luxury to wait on a more diversified green energy supply chain to reduce its emissions. At today’s emission rates, we will reach the 1.5 degrees Celsius target in only six years. In other words, limiting global warming to the 1.5 degrees Celsius target will require reducing greenhouse gas emissions to zero by around 2035.

The world’s largest economies need to seriously heed the negative climate impacts of geoeconomic fragmentation on the livelihood of the world’s 4.2 billion population residing in low and lower-middle-income economies. These economies are only responsible for 17 percent of the global CO2 emissions but bear the brunt of climate change and any delays in green transition. The Bretton Woods Institutions (BWIs) have an important role to play in reducing geoeconomic fragmentation and promoting multilateralism in this increasingly splintered global economy. This will be challenging, as China, the United States, EU and other G7 economies will likely prioritize their own national interests and security considerations over global welfare and climate. However, there is much that the BWIs can do to ameliorate or reverse some of negative impacts of fragmentation on climate issues while also improving their effectiveness and efficiency operating in a more fragmented global economy. For example, the World Bank and WTO should encourage their member countries to advocate for policies that make “green corridors” a reality, where production and trade in environmental goods and services are safeguarded from fragmentation and rivalry between world’s leading producers and exporters of such goods and services. 

Finally, let’s not forget that besides its negative impacts on the environment, geoeconomic fragmentation has other significant effects on the global economy. That is why the IMF’s managing director has called on world leaders to resist it for the sake of the global economy, continued prosperity of humanity, and most importantly, the future of the climate. COP28 is an ideal opportunity for the world’s leaders from the private and public sector to devise pathways and reach concrete agreements to reverse and reduce geoeconomic fragmentation, or at the very least safeguard climate targets from its detrimental impacts.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington DC. Follow him on X at @AMohseniC.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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CBDC initiatives continued to gather momentum during the first half of 2023 as noted in the Atlantic Council’s CBDC Tracker:

The current leaders in CBDC development and experimentation include the Euro Area, the UK, Sweden, Singapore, China and several developing countries. The United States remains conspicuous by its absence.

Divergent regulatory and technological standards are evolving along geopolitical fault lines. However, the cross-border role of digital currencies requires policymakers to provide at least a modicum of international interoperability in order to deliver operational efficiencies and cost-effective solutions. Therefore, we believe the most likely near-term scenario for CBDC development will see clusters of national CBDCs becoming interoperable only among geopolitically friendly countries—while being ring-fenced against outside state and non-state actors. Indeed, several multi-CBDC cross-border payment test projects have been going on. Generally speaking, fragmentation is the prevailing policy trajectory.

Such an outcome would be costly. Limited, geopolitically-constrained interoperability would introduce frictions and inefficiencies into the global payment system, which in turn would impose costs on businesses and consumers, further fragmenting the world economy.

Divergent regulatory standards 

Three sets of regulatory standards are evolving, closely reflecting the three geoeconomic power centers in the world: China, Europe, and the United States. All seek to address the following issues concerning both CBDCs and the crypto sector:

• Protecting citizens’ privacy
• Safeguarding national security concerning the collection and use of data about financial transactions of individuals and firms
• Interoperability
• Cybersecurity safeguards
• Strict parameters around the use of programmability which can restrict the unfettered use of digital money compared to cash

China: Full, unrestricted government monitoring 

China has proclaimed a “managed privacy” regime where information belonging to businesses and individual users will be protected from each other, but open to the government—especially the security authorities. The “big three” data laws—the Cybersecurity Law, Personal Information Protection Law, and Data Security Law—have prescribed tight control of the collection, transfer, and use of data by companies and private organizations, especially involving the transfer of data to foreign entities. The enhanced ability to monitor citizens’ financial transactions through CBDCs will strengthen China’s efforts to perfect its social credit system to control and influence social behavior of its citizens.

Europe: Regulatory priorities on investor protection, financial stability, and privacy

The European Union (EU), by contrast, has chosen mostly to prioritize rule-making that provides guardrails around private market transactions. Borrowing heavily from securities regulation rules, EU policymakers in 2022 promulgated the regulation of markets in crypto assets (MiCA), covering issuers of utility tokens, asset referenced tokens and stablecoins, and service providers such as trading venues and digital wallets. The aim was to protect investors and financial stability while fostering innovation and competition in the crypto asset sector. The digital currency arena regulatory structure also includes the Digital Markets Act and the Digital Services Act to regulate digital market services and the General Data Protection Regulation which establishes a data protection framework for individuals vis-a-vis corporate and government actors. Substantial additional laws, rules, and regulations are expected as the European system prepares to issue a digital euro.

United States: Stablecoins, not CBDC

By contrast, the United States has been far more cautious. As of this writing, conflicting cross-currents among legislators, regulators, and the central bank render the policy landscape filled with ambiguities.

During 2022, the Fed had been quietly undertaking a range of important technical moves designed to create a glide path for digital dollar issuance. The most important of these initiatives involved a technical project between the Federal Reserve Bank of New York and the Monetary Authority of Singapore regarding a wholesale CBDC. Dubbed “Project Cedar”, the 2022 initiative explored whether distributed ledger technology could be used to make cross-border settlements between currencies more efficient.

But the FTX implosion in late 2022, followed quickly by the “speed-of-light” bank run at Silicon Valley Bank in March 2023, shifted the policy landscape materially. By the time the final report regarding the Project Cedar experiment had been published in May 2023, the policy landscape in the United States regarding digital currencies had shifted significantly.

The Federal Reserve is now deeply cautious if not ambivalent, consistently resisting calls for it to issue a digital dollar. In parallel, many Members of Congress, especially Republicans in the House of Representatives, remain hostile to CBDC issuance. Concerns center on the risk that private financial transactions could become the subject of federal government monitoring and that the acquired information could be used for political purposes. Some Republican House members have even introduced several bills to prohibit the Fed from issuing a digital dollar. 

Separately, a crypto bill has passed the House Finance Services Committee seeking to constrain regulatory discretion regarding cryptocurrencies in general and stablecoins in particular. A stablecoin is a cryptocurrency whose value is pegged to another asset. The bill seeks to foster private stablecoin issuance, effectively creating an alternative to a digital dollar because the vast majority of stablecoins (98.9 percent) are backed by the US dollar. If passed into law and implemented, the bill would place the Federal Reserve at the core of oversight regarding privately issued digital dollars in addition to delivering regulatory clarity regarding cryptocurrencies. 

The Federal Reserve is not waiting for the legislation to become law. 

On August 8, the Federal Reserve formally shifted its stance to promote stablecoin issuance by banks. The new policy at least on paper provides a mechanism for automatic but tacit approval of such issuance for banks that meet specific pre-requisites. The most important pre-requisite involves ensuring that the issuing bank’s digital architecture provides visibility and access to transaction-level data for the purpose of complying with anti-money laundering (AML) laws and rules. The open question is whether such a structure will enhance or hinder market usage of USD-backed stablecoins. Legislative inaction thus provides ample opportunity for regulatory initiatives, with the current policy trajectory favoring private stablecoin issuance rather than official CBDC issuance. 

A fractured future—led by Europe?

Potentially divergent US and European policy trajectories do not occur in a vacuum.  Geopolitical conflict between the United States and China is undermining established, reliable frameworks for international cooperation across multiple disciplines. In global cross-border payments, growing policy divergences are imposing real costs and frictions on the global economy to the disadvantage of all.

The Chinese and American legal and regulatory frameworks regarding digital currencies are rather unique to their national circumstances. They are not likely to provide a policy template for many other countries. We therefore believe that many countries around the world will seek to conform to the comprehensive (and still evolving) digital currency policy framework articulated by the EU.

The United States and Europe have an opportunity to generate a better outcome together through cooperation—but that requires policymakers in Washington to resume their positive leadership role on the global stage.

Risks to the dominant role of the US dollar

CBDC fragmentation creates a significant risk that the US dollar (USD) will experience a gradual diminution of its current prominent role in the international financial and payment system—in three ways.

First, clusters of interoperable CBDCs will greatly reinforce the already growing tendency of using local currencies in bilateral and eventually plurilateral cross-border payments. At present, the dominant role of the USD remains unchallenged, accounting for 85 percent of the $7.5 trillion in global foreign exchange daily trading turnover. Increased interoperability among national CBDCs will reduce reliance on the USD as an intermediary currency in executing exchanges between pairs of currencies. As Hong Kong Monetary Authority Chief Executive Yue recently observed at an ASEAN + Three (South Korea, Japan, China) conference with the Bank of Finland, the questions is when, not whether interoperable CBDC local currencies will reduce the use of major reserve currencies. 

Second, reduced demand for the USD in foreign exchange trading can trigger parallel decreases in central bank USD holdings, amid a long-term gradual decline regarding reliance on the USD as a reserve currency. In 2001 the USD accounted for more than 70 percent of global reserves. By 2023, the USD share has fallen to 59 percent. Interestingly, the shift away from the USD has not generated a parallel increase in any single alternative currency but has benefited a range of smaller currencies.

A shift by importers to rely on local digital currencies interoperable with other non-USD digital currencies decreases the need for central banks to hold USD to cover foreign exchange trading. Central bank reserves currently seek to provide importers with around three months of FX liquidity. As importers shift to local currency CBDCs, central banks will have no choice but to increase their holdings of those currencies to cover the trade account, thus reinforcing declining reliance on the US dollar.

While resistance to the US dollar has existed for decades, its continued dominance in private commerce has been predominantly driven by the lack of an alternative. Enduring value propositions require more than the lack of competition and low transaction costs. Continued free market reliance on the US dollar requires that counterparties globally trust the United States to make the right decisions and serve a positive leadership function. The fabric of trust in the United States has been fraying for two decades.

Globally, many resent being compelled to support US foreign and security policy as the restrictions on permissible counterparties for US dollar-denominated transactions have increased. The rapid rise of cryptocurrencies during the Great Financial Crisis gave voice to a generation of technologically savvy individuals who distrust central authority in general and the Federal Reserve in particular.

Historical precedent encourages economists and analysts to assume that only one global reserve currency can exist at any given moment. But a distributed financial system linked through electronic ledgers creates an alternative scenario for reserve currency shifts. 

No individual currency needs to replace the US dollar for it to lose its role as the main reserve currency. A gradual shift to multiple alternatives can achieve the same result.

If the United States seeks to retain its role as a global reserve currency, it must now win back the trust of the global economy. Locking people into the US dollar through a privately issued stablecoin does not make the positive case for the US dollar. Trust is won in many ways, but one key avenue involves making a positive contribution at the global policy table. It requires joining the policy discussion with a positive, forward-looking agenda.

Instead, for the first time in post-war history the United States will be absent from, or much less effective in, global monetary standard-setting bodies and discussions as the policy focus shifts to CBDCs. 

Failure to initiate a digital dollar strategy domestically creates a significant risk that the United States will be missing in action regarding cross-border payments interoperability. Driving digital dollar policy through a tokenized banking system and bank-issued stablecoins will do little to address the frictions and costs discussed earlier. Markets and central bank reserve policies could easily shift to least-cost alternatives, leaving the Federal Reserve with oversight of a smaller universe of economic activity.

Actively and publicly exploring CBDC architecture and policy options will at least ensure that US priorities are part of the global conversation. US policymakers should be aware of the saying, “If you are not at the table, you are on the menu!”

Hung Tran and Barbara C. Matthews are Nonresident Senior Fellows at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Short-term implications 

With no new appropriations, the shutdown will halt most discretionary federal government spending—around 27 percent of overall federal spending—though not mandatory spending on programs such as Social Security, Medicaid, or Medicare. The effects of this will be immediately felt on the US economy as the government stops providing or purchasing certain goods and services until funding resumes. Public and private sector estimates generally project this to lower annualized quarterly GDP growth by 0.2 percentage points for each week it lasts. 

If the funding impasse is brief, the impact will be negated once government spending resumes. Shutdowns delay government spending, but do not cancel it. An extended shutdown of two to three weeks could have more lasting GDP effects. While net government spending will remain unchanged, uncertainty around the situation could dent consumer confidence. Following the 2013 shutdown, a survey found around 47 percent of Americans curbed spending. This could have a small, but lasting effect on the US economy. A temporary shuttering of some important economic programs, such as Small Business Administration loans, could also amplify this. 

Hundreds of thousands of government employees would also be furloughed. Previous shutdowns have furloughed around 800,000 civilian workers. This year, one estimate projects the number at 737,000.

The shutdown will likely have a minimal impact on markets. Past shutdowns have been non-events for US and global stock markets. Treasuries may experience a slight rally as investors park capital to avoid the minor uncertainty stemming from the shutdown. Market risks are lower than the spring debt limit battle as a shutdown will not impact the Treasury Department’s ability to cover bond payments or issue new debt. 

A government shutdown, especially if it is extended and severe, is one of a number of headwinds increasing bond market volatility. Taken with additional sources of global market volatility like the war in Gaza and the prospect of higher-for-longer US and global interest rates, the shutdown could undermine investor confidence.

Longer-term implications 

A severe and sustained shutdown could have serious implications for the US Federal Reserve’s ability to guide the US economy. While the Fed will continue normal operation—its staff will continue working and be paid—some of the agencies which it relies on for data, like the Bureau of Labor Statistics, will not. If it lasts, a shutdown will stop the publication of key October and November data including the November Initial Jobless Claims (November 22 and 30), Revised Q3 GDP growth (November 29), October Durable Goods Orders (November 22) and October Personal Income and Spending (November 30). An extended shutdown could also diminish November’s data quality. Shutdowns suspend data collection so if it lasts more than two weeks, BLS statisticians will be forced to collect retrospective data, rather than current data. In particular, this could reduce the quality of November CPI and possibly employment data because of the ways the subcomponents of these datasets are collected. 

This potential reduction in data availability and reliability comes at a particularly inauspicious time. A combination of headwinds and shifting macroeconomic fundamentals have contributed to the highest level of macroeconomic uncertainty since the aftermath of the global financial crisis. For a Fed that continues to emphasize its “data-dependent approach,” the shutdown could impede its ability to calibrate its monetary policy and prevent it from developing an up-to-date, accurate understanding of the latest developments in the US economy ahead of its December 12 and 13 meetings. 

An extended delay in data collection and publication could be especially damaging in the leadup to the December Fed meetings as meeting participants will submit their projections of the most likely outcomes for real GDP growth, unemployment, and inflation for each year from 2023 to 2026 and over the longer run. A lack of data could muddle these projections, obscuring the direction of the US economy. Beyond the Fed, this could force fiscal policymakers, investors, businesses, and consumers to fly blind as they make key economic decisions. 

Governments and investors around the world are taking note that, for the third time in less than a year, brinkmanship in Washington threatens the US government’s ability to function. Last week Moody’s, a credit rating agency, lowered its outlook on the US credit rating to “negative” from “stable.” Moody’s actions follow a downgrade earlier this year by Fitch, another ratings agency, after this spring’s political dysfunction around the US debt ceiling.

While a brief and shallow shutdown will likely pass mostly unnoticed by economic actors and markets, if the impasse persists for more than a couple of weeks it could have more serious implications for US employment and growth. A shutdown would also draw attention to Congress’s current inability to operate effectively and could impact global perceptions of the United States’ ability to manage its own fiscal affairs—as well as to lead the global economic system.

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

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Digitalization, understood as the utilization of digital technologies to transform services or businesses, presents an opportunity for countries across the world to advance carbon-neutral goals. Digitalization can increase connectivity between people, governments, and businesses during crises, offering nations, especially those in the Global South, a novel opportunity to build climate resilience if properly supported by the Bretton Woods Institutions (BWI).

In 2021, the top 10 percent of emitters per capita were responsible for about half of global CO2 emissions whereas the bottom 10 percent only produced 0.2 percent. 85 percent of these top 10 percent of emitters are located in advanced economies like the United States, Australia, and EU nations, as well as oil-producing nations with smaller populations such as Qatar. Countries in the Global South, who comprise the majority of the bottom 10 percent of emitters, face the disproportionate burden of climate change perpetuated by advanced economies to the detriment of their citizens and economies. In 2017, Hurricane Maria caused more than a 200 percent loss of GDP in Dominica—a country that only produced 1.56 tons of CO2 per capita that year.

While major emitters should aim to reduce per capita emissions, developing nations can also adapt their practices to mitigate climate effects. The World Economic Forum estimates that digital technologies could reduce emissions by up to 20 percent if scaled across the energy, transportation, and industrial sectors, thus boosting these sectors’ long-term sustainability.

Developing economies could apply digitalization in a variety of ways to the energy, transportation, and industrial sectors. In the energy sector, real-time pricing and web-controlled appliances can create flexible energy demand thus helping to stabilize grids. Blockchain-based trading mechanisms can also assist with distributed energy generation, facilitating the buying and selling process and promoting the localization of energy generation. With respect to the transportation sector, 5G and big data analytics will advance the safety, efficiency, and reliability of electric and driverless vehicles. Additionally, Internet of Things (IoT) and geo-location technology can help drive system decision-making for the transportation industry, enhancing the accessibility and efficiency of transportation systems. Finally, in the industrial sector, artificial intelligence (AI) can spur the development of ultra-low-carbon materials, and network technologies can increase precision in manufacturing thus saving critical energy and materials.

While digital technology is only one plank of the necessary energy transition, it presents multiple opportunities for countries in the Global South. First, in some cases it could allow them to “leapfrog” more developed economies by skipping dated infrastructure. Second, while energy infrastructure with digital capabilities may be more expensive up front, it is also an investment in those countries’ technical capabilities. Policymakers in the Global South may rightly be wary about adopting Western technologies in such a key sector. But if done correctly, investment in digital solutions may be able to simultaneously generate competitive industries while combating climate change.

Ending barriers to global implementation

However, the implementation of digital solutions will face various barriers as it is scaled globally. The energy sector is subject to a multitude of institutional constraints and differing levels of data availability among nations. Similarly, the transportation sector is subject to high capital costs and a lock-in of existing vehicle stock. Finally, with respect to industry, many countries lack strong policies to implement digital solutions and face insufficient demand for change from customers. These challenges will likely manifest at different magnitudes depending on the preparedness of sectors to digitalize and the status of climate-resilient strategies. In the face of these challenges, the BWIs are uniquely poised to develop a framework for gradual implementation, help involve stakeholders, and present the potential benefits of digitalization.

Many governments and private entities in the Global South are ill-equipped to leverage digital technology for a low-carbon transition as many countries have low resilience and high exposure. Countries with a low resilience (closer to one) will face difficulties adjusting to large structural transitions. Countries with high exposure (closer to one) remain highly reliant on fossil fuels or carbon-intensive exports. Many of these nations also spend a small percentage of their GDP on climate change expenditures—another measure illustrating low preparedness.

Moreover, the Global South presently lags behind in national digitalization and connectivity, as the majority of the 2.9 billion people offline globally are located within these nations. Many nations also face a lack of infrastructure and dedicated government offices. To handle these challenges, countries must establish digital infrastructure resilience. Citizens must also be able to readily access digital tools. Additionally, industries must promote digital inclusion, data sharing, and standardization practices.

The mounting concerns about climate change and the barriers to digitalization present an opportunity for BWIs to assist with establishing a strong foundation for climate resilience in developing economies. BWIs must collaborate with local governments to evaluate the efficacy of the current processes and technologies. In 2020, the World Bank published a set of strategies to aid countries combat climate change by investing in trained human capital, implementing efficient monitoring practices, and anticipating macro and micro-economic shocks.

Collaboration facilitated by the BWIs could unite private and public stakeholders, donors, and climate funds to uncover potential funding sources. For example, the United Nations Environment Programme works with partners to discover technology to advance environmental sustainability, climate action, and pollution prevention. BWIs must also continue to act as policy analysts to assess the efficacy of current strategies and provide governments with strategic insights, as exemplified by the Climate Change Policy Assessments. These initiatives demonstrate that BWIs ought to support climate resilience within the Global South by equipping nations with the information, financial support, and guidance necessary to implement digitalization. However, they must be true partnerships to ensure that countries adopting these solutions are also building domestic industries and acquiring technical expertise.

Digital technology provides the opportunity to assist a low-carbon transition as it can reduce emissions while enabling countries in both the developed and developing world to foresee adverse climate impacts and bolster their responses. It may also strengthen access to public opportunities and social protections, decrease the technology gap, and spur widespread economic activities. With the BWIs acting as the main coordinators, the Global North may be spurred to reduce emissions, and many emerging nations may see a positive impact on infrastructure, health, and economic growth.

Camilla Valente is a former Next Gen Bretton Woods 2.0 Fellow at the Atlantic Council GeoEconomics Center.  She is a junior at the University of Pennsylvania studying Philosophy, Politics and Economics and minoring in Economics, and East Asian Languages and Civilizations.

Saffiyah Coker is a former Next Gen Bretton Woods 2.0 Fellow at the Atlantic Council GeoEconomics Center. She is a senior at Tufts University studying Economics and International Relations.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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That’s because the United States is expected to make multiple major announcements around its Indo-Pacific Economic Framework (IPEF) as well as a number of bilateral investment deals with APEC member economies. These announcements will highlight the economic dimension of the United States’ pivot to Asia and will cover a range of topics related to US economic security. Here’s a rundown of what to expect.

The background to IPEF

Launched in Spring 2022, IPEF is designed to re-establish US economic engagement in the region and provide an alternative framework to China. The agreement is Washington’s first attempt at putting forward an affirmative economic agenda in Asia since its withdrawal from the Trans-Pacific Partnership (TPP) in 2017 (the TPP subsequently collapsed). IPEF includes all Asian members of the TPP plus South Korea, as well as India, Thailand, and Indonesia—three large, emerging economies responsible for much of the region’s projected growth. The United States is betting that these emerging markets will buttress Washington’s efforts to reduce its dependence on Chinese trade and facilitate the development of new supply chains in friendly economies— a policy Washington has called “Friendshoring.”

IPEF provides a platform for the United States and its negotiating partners to align on “behind-the-border trade barriers,” such as diverging rules and regulations, or opaque compliance regimes. IPEF also provides an opportunity to establish a multilateral, unified set of rules and norms for vital economic issues like labor protections, supply chain resilience, and the green transition. 

IPEF is designed around four distinct chapters or “pillars”: trade; supply chains; clean energy, decarbonization, and infrastructure (Clean Economy); and tax and anti-corruption (Fair Economy). 

With the supply chain agreement already published earlier this year, it is widely anticipated that the United States will use APEC to formally launch the Clean Economy and Fair Economy chapters. Elements of the trade pillar may also be published during APEC, though negotiating officials have signaled it is the furthest behind of all pillars so it’s unlikely they will be able to publish the final text. Across all pillars, commitments that help align regulations and facilitate commerce between the US economy and the large and rapidly growing economies of Indonesia, Vietnam, and Thailand will be most important. 

IPEF’s “Fair economy” and “Clean economy” pillars

While specifics on the final arrangement have been scarce, much to the ire of Congress, the Fair Economy chapter of IPEF will likely aim to make progress in combating corruption and financial crimes and improving tax administration and information sharing among IPEF economies. The United States has proposed doing this by encouraging its IPEF partners to make a series of non-binding commit to: 

• Adopting and enforcing measures to prevent bribery and related corruption offenses.
• Increasing transparency regarding measures to identify, trace, and recover proceeds of crime.
• Establishing confidential systems to report corruption in the public and private sectors.
• Implementing the Financial Action Task Force international transactions standards.
• Enforcing labor rights and ensuring that migrant workers are respected.
• Fostering better tax administration practices and capabilities through increased cooperation and information sharing.

To accomplish these goals, the United States has offered to provide technical support and capacity building. Given the wide range of IPEF members’ levels of development, robust information sharing and technical support across the framework could meaningfully improve its members’ economic prospects. If effectively implemented, such anti-corruption and tax measures could boost commerce, trade, and investment among IPEF economies. 

Similar to the Fair Economy chapter, the Clean Economy chapter will likely consist of a series of non-binding commitments. It expands on existing APEC commitments toward clean energy transitions, decarbonization, and scaling and cost reduction of green infrastructure development. Though little has been released concerning the final agreement text, the United States has proposed doing this by: 

• Advancing cooperation on research, development, commercialization, and deployment of clean technology in priority sectors. 
• Strengthening demand for low- and zero- emissions goods and services.
• Identifying and improving access to public and private investment and financing for climate-related projects. 
• Managing risk for IPEF citizens and economies against the future effects of climate change.
• Enforcing labor rights and ensuring that migrant workers are respected.
• Fostering better tax administration practices and capabilities through increased cooperation and information sharing.

The United States aims to accomplish these goals by sharing expertise with its IPEF partners on laws, regulations, and policies that would help economies reduce greenhouse gas emissions and promote the green transition. The United States also aims to build the Clean Economy chapter into a platform for IPEF partners to collaborate on mutually beneficial initiatives and projects that will advance shared climate objectives. 

Bark or bite? 

The announcements the United States and its IPEF partners make around the clean energy and fair economy pillars will provide a good indication of the policy directions these economies plan to pursue in the future, but they will have little immediate impact. Without binding commitments, the announcements will be starting points for future work countries may pursue. More important will be IPEF countries’ willingness and ability to follow through. The same is true for any new updates regarding the already-published Supply Chain chapter which aims to address supply chain disturbances both proactively and as issues arise, by encouraging shared value chains and creating a crisis response network.

The most immediate implications for businesses operating throughout the Indo-Pacific will likely stem from disclosures around the trade chapter, which, according to US Trade Representative (USTR) Katherine Tai, will include binding commitments on some of the issues it covers such as agricultural trade, cross-border services trade, and customs and trade facilitation. Because it will contain at least some binding provisions, agreement around the trade pillar’s text can be seen as an end within itself. This is unlike IPEF’s other three pillars whose impact will be determined by their implementation.

IPEF is the first trade agreement between the United States and four of its five fastest growing trade partners in the Indo-Pacific. Across all pillars of the framework, IPEF can help align the United States with these economies. 

In addition to the goods and services trade announcements that will largely be driven by IPEF, the United States will also seek to highlight the impact of its private sector investments in the region through the APEC CEO summit. 

Unlike goods trade, which has surged between the US and APEC economies, according to data from the US Bureau of Economic Analysis, in the past five years, US investment in APEC countries (excluding Canada and Mexico) has been stagnant. If China is excluded, investment has actually fallen by just over 1 percent. This is largely driven by large drops in US foreign direct investment (FDI) to advanced economies in the region such as Japan and South Korea. In contrast, many emerging economies have outpaced US overall global FDI growth. US FDI in Malaysia, India, and Vietnam, for example, has grown 12, 14, and 40 percent, respectively, from 2017 to 2022. Many US companies increasingly view partner economies such as India and Vietnam as an alternate hub to China for goods production and are shifting new investments there. 

Delivering on IPEF would substantially support US friendshoring efforts. It would make it easier for companies to trade and invest with partner economies, encouraging efforts to shift supply chains out of China and to emerging economies like India, Vietnam, and Indonesia. An ambitious IPEF with high standards—and incentives for countries to implement them—could help codify the US’ preferred standards and norms on a range of issues such as labor, environmental protections, and digital privacy. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post What to expect from the Asia-Pacific Economic Cooperation forum appeared first on Atlantic Council.

As the year comes to a close, we are taking stock of the progress on CBDCs around the world since our last check in, in March.

The single biggest news since then concerns the Eurosystem: The European Central Bank (ECB), one of the largest central banks in the world, took a significant step toward CBDC exploration, announcing a new “preparation phase” for a digital euro in October. The digital euro is intended to be a digital form of cash that provides offline services, high levels of privacy, and instant settlements in central bank money. The ECB spent the last two years in its “investigative phase” where the bank explored potential design and distribution models for a CBDC. The new “preparation phase” will begin in November 2023, and will last for at least two years. This critical phase will lay the foundations for a digital euro, focusing on finalizing a rulebook, selecting providers for platform and infrastructure development, and conducting extensive testing and experimentation. 

One of the key features in the investigative phase is implementing a compensation model. This model aims to create incentives for banks and payment service providers (PSPs) to distribute digital euro and to ensure that these payments will be free of charge and widely accepted across the euro area. Although this phase will not include a decision on whether to issue a digital euro, it signals a commitment to preparing and innovating for the future of digital currency in the Eurozone. The ECB’s approach emphasizes the significance of comprehensive research and collaboration with industry stakeholders. As the preparation phase progresses, it is expected to generate valuable insights that may play a pivotal role in shaping the introduction of a digital euro, and potentially influencing the border financial landscape. 

The ECB is not the only central bank making progress in CBDC development: Here’s a tour of how CBDCs have developed over the past eight months.

Country updates

Argentina

Juan Agustín D’Attellis Noguera, Director of the Central Bank of Argentina, announced that the bank is working on the legal framework for the CBDC project in pesos. Argentina is considering introducing a CBDC to primarily address economic issues and inflation.

Australia

In October, Mastercard successfully concluded a CBDC blockchain pilot with the Reserve Bank of Australia (RBA), demonstrating the potential for CBDCs to interoperate with various blockchains. However, as of November 2023, the RBA suggests that the development of a full-scale CBDC is still a few years away. 

Brazil

The Central Bank of Brazil is addressing issues of privacy and infrastructure as it develops the digital real (DREX). The first-phase launch is planned for May 2024, aiming to expand their CBDC across all financial services. 

China

PetroChina, a Chinese oil and gas company, has completed the first international crude oil trade using China, the e-CNY. The transaction involved the purchase of 1 million barrels of crude oil settled in e-CNY at the Shanghai Petroleum and Natural Gas Exchange. The deal was part of the efforts to address the Shanghai municipal government’s requirements to use the e-CNY in cross-border trade. 

India

The Reserve Bank of India intends to launch its CBDC in the interbank borrowing market, particularly the call money market, using CBDCs as tokens for call money settlement. India’s CBDC is currently undergoing a pilot phase, with the central bank aiming for one million daily transactions by the end of 2023.

Japan

The Bank of Japan launched a forum in partnership with 60 companies for the pilot program on a digital yen. The discussions will focus on various aspects of retail settlements with CBDCs. 

Nepal

Nepal Rastra Bank announced plans to develop a CBDC. However, this will be challenging with ongoing bans on cryptocurrency and stablecoin activity. 

Philippines

The Philippines is moving forward with plans for a wholesale CBDC, partnering with Hyperledger Fabric for its first digital peso pilot, Project Agila. The pilot program aims to enhance large cross-border foreign currency transfers and mitigate settlement risks by using a wholesale CBDC.

Russia

Russia is pushing forward with its plans for a digital ruble, aiming for mass adoption among its citizens by 2027. This follows the Russian Parliament passing a digital ruble bill in August.

South Korea

The Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service are jointly planning a pilot test for a CBDC to assess its potential use in both retail and wholesale payments. Wholesale testing will begin this month and retail testing will begin at the end of 2024.

Switzerland

The Swiss National Bank is partnering with six commercial banks and the SIX Swiss Exchange to pilot a wholesale central bank digital currency (CBDC) named the Swiss franc wCBDC. The pilot, known as Helvetia Phase III, will test the use of the Swiss franc wCBDC for settling digital securities transactions from December 2023 to June 2024.

United States

Congressman Stephen Lynch (D-MA) reintroduced legislation to develop a US CBDC in September. This move followed the announcement of the Congressional Digital Dollar Caucus, a group that will focus on advancing the development and understanding of a digital dollar.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Cross-border projects

Project Mariana

The Bank for International Settlements (BIS) concluded Project Mariana, a wholesale CBDC experiment in collaboration with central banks from France, Singapore, and Switzerland, focusing on cross-border trading and settlement using automatic market makers. The project aimed to enhance efficiency and mitigate credit and settlement risks, while highlighting the importance of international cooperation and  interoperability of digital currencies.

Project Sela

The BIS, alongside the central banks of Hong Kong and Israel, successfully completed a retail CBDC test, Project Sela. Their proof-of-concept retail CBDC combined cash-like features with digital infrastructure while emphasizing privacy and accessibility. 

Looking ahead

The GeoEconomics Center will continue to track CBDC exploration around the world, as governments and central banks continue to adopt efficient, resilient, and inclusive digital solutions. To stay updated on these developments, follow our CBDC tracker and our Future of Money work. As we enter 2024, we can expect much more from the digital currency world.

Join the GeoEconomics Center on November 28th for an upcoming conference: “Exploring central bank digital currency: Evaluating challenges & developing international standards.” This first-of-its-kind convening of leaders from international financial institutions, central banks, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

November 28, 2023

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Register Here

Alisha Chhangani is a program assistant with the GeoEconomics Center focusing on digital currencies. Follow her on Twitter @alisha_chh.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Central bank digital currency evolution in 2023: From investigation to preparation appeared first on Atlantic Council.

After Russia’s illegal full-scale invasion of Ukraine in February 2022, Western partners imposed unprecedented financial sanctions and export controls against Russia. These measures aim to achieve three objectives:

1. Significantly reduce Russia’s revenues from commodities exports;
2. Cripple Russia’s military capability and ability to pursue its war;
3. Impose significant pain on the Russian economy.

The Atlantic Council’s Russia Sanctions Database tracks the restrictive economic measures Western allies have placed on Russia and evaluates whether these measures are successful in achieving the stated objectives.

The Database also centralizes the financial designations of more than five thousand Russian entities and individuals sanctioned by the Group of Seven (G7) jurisdictions, Australia, and Switzerland. The Database is updated quarterly and can be queried to determine if an individual or entity is designated. Please refer to the appropriate designating jurisdiction’s websites and platforms for additional information and confirmation. The data provided in the Database is intended for informational purposes only.

Objective 1: Significantly reduce Russia’s revenues from commodities exports

To hit Russia’s war chest and thwart its ability to finance the war on Ukraine, the G7 allies targeted:

1. Russia’s payment channels by banning Russia from SWIFT and sanctioning major Russian banks; 
2. Russia’s oil revenues—by imposing the sixty dollar price cap on a barrel of Russian crude oil;
3. Russia’s reserves by blocking three hundred billion dollars of Russia’s sovereign assets held by the G7 jurisdictions. 

Despite these measures, the Kremlin still receives significant revenue from oil exports: In 2022 and 2023 (including October), Russia made a total of $381.8 billion. 

If the West imposed sanctions specifically with the purpose of cutting off Russia’s revenue, how is Moscow managing to receive payments and fill its coffers? 

Unfortunately, all of these restrictive economic measures had loopholes, exemptions, or flaws Russia was able to exploit. The SWIFT ban was a half-measure that did not include banks facilitating energy transactions. The oil price cap lacks a solid enforcement mechanism: Russia is circumventing it by using the shadow fleet for shipping. Finally, Russia’s reserves in the West were immobilized but Moscow had stocked up its gold reserves long before the 2022 invasion, allowing Russia to mitigate the effect of this measure.

Russia still has access to SWIFT

On March 2, 2022, the European Commission implemented regulation to remove seven sanctioned Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), an interbank messaging system that enables banks to communicate transaction information. Later, in June 2022, the European Union (EU) cut off three more major banks from accessing SWIFT. “De-SWIFTing” was considered the “nuclear option” and aimed to restrict Russia’s ability to perform international transactions and make it more difficult for banks around the world to transact with Russian banks.

However, this ban was a half-measure and only targeted large EU-sanctioned institutions unrelated to energy transactions. For example, Gazprombank, which is designated by the United States, United Kingdom, Canada, Switzerland, and Australia, was spared from the SWIFT ban due to its role in facilitating payments for energy trade. The bank remains connected to SWIFT and is able to perform transactions unrelated to energy without any EU or Japanese restrictions. Further, most of Russia’s regional and smaller banks, over three hundred, still have access to SWIFT enabling Russia to conduct cross-border payments and transactions for imports and exports. While recognizing that many banks have been intentionally left on the SWIFT system in order to facilitate energy and other non-sanctioned transactions, it is clear there is more that can be done. 

The oil price cap needs a better enforcement mechanism

The G7 allies imposed the price cap on Russian crude oil in December 2022 with the goal of keeping oil flowing out of Russia while limiting the revenue flows to Moscow. The allies set the cap at $60 per barrel, just high enough for Moscow to keep producing and exporting oil, but limiting revenues at the same time. Since the policy went into effect, Russia has lost an estimated $47.3 billion in revenues. However, the policy came under scrutiny when Russian export prices rose above $60 per barrel in July, reaching above $80 per barrel in both September and October.

Russia has been able to circumvent the oil price cap by decreasing reliance on the G7 shipping services and instead resorting to the use of the shadow fleet. The shadow fleet allows Russia to charge higher fees and prices for oil, manipulate vessels’ locations, and disregard maintenance needs. Apart from allowing Russia to circumvent the price cap, Russian shadow vessels do not follow the safety requirements, a practice that could lead to environmental disasters.

One way to increase the effectiveness of the price cap is to require adequate insurance for passing through G7/EU territorial waters and increase safety standards. This will force Russia to turn back to Western insurance providers and maintain higher safety standards, which will increase costs associated with oil sales. In the meantime, the US Treasury is imposing sanctions on entities and vessels circumventing price cap restrictions and the Price Cap Coalition shared best practices on maritime trade of crude oil and petroleum products to prevent sanctioned trade and enhance compliance. This is critical as recent data has shown that violations of the price cap via “attestation fraud” became widespread. In October, essentially all seaborne crude oil exports took place above the price cap while G7 service providers continued to be involved.

Russia generates revenues from non-oil commodity exports

Apart from oil, Russia has been generating revenue by exporting diamonds. Russia happens to be the largest diamond mining country in the world. The US Treasury designated Russia’s state-owned diamond producer Alrosa in 2022, and as a result, Russia’s diamond exports decreased in 2022. However, Alrosa still managed to boost its sales in 2023, and in response, the EU recently moved to ban Russian diamonds altogether. 

While the EU ban will decrease Russia’s diamond revenue from the European market, it is anticipated that Russia will continue to sell its diamonds in the United Arab Emirates (UAE), which was the number one destination for Russian diamonds this year. Working with the UAE to limit Russia’s income from diamond exports should be the G7’s next step in reducing Russia’s revenues from commodities exports.

Russia also reportedly uses diamonds as a payment method for sanctioned goods, since unlike digital financial transactions, they cannot be traced. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published an alert in March 2022, warning that Russia may use diamonds for sanctions evasion because they are portable and highly valuable replacements for currency. Financial institutions should follow FinCEN’s guidance and increase scrutiny of transactions involving precious metals and gemstone trading companies. 

Gold helped Russia stabilize the ruble exchange rate

When the G7 allies immobilized Russia’s central bank reserves in March 2022, one of the initial effects of sanctions was the free fall of the ruble’s exchange rate. Soon enough though, it stabilized. How did Russia manage this?

Gold’s role in ruble’s recovery is often overlooked. In addition to the major factors of energy revenues and strict capital controls, indirect peg to gold also helped CBR stabilize the ruble and dollar exchange rate. 

The Central Bank of Russia (CBR) fixed the price of gold at five thousand rubles per gram from March 28 through June 30, 2022. The price of gold is linked to the dollar (sixty-three dollars per gram at the time), so fixing the ruble to gold effectively created a gold-based exchange rate of one dollar to seventy-nine rubles. This indirect peg allowed the CBR to stabilize the ruble and dollar exchange rate and recover from the initial shock of the free-falling ruble.

Apart from stabilizing the ruble’s exchange rate, gold continues to dominate Russian reserves along with the yuan. In case of a major financial crisis, Russia could sell its gold to balance the budget deficit, or directly use the money to fund the war. However, such a sell-off of Russian gold has not yet been observed mainly because Moscow continues to generate income from oil and other commodities such as diamonds.

Objective 2: Cripple Russia’s military capability and ability to pursue its war

Western export controls have a limited effect on Russia’s imports of sophisticated battlefield technology

In conjunction with financial sanctions, the West also imposed multilateral export controls on dual-use technologies with the goal of degrading Russia’s military capabilities. While export controls effectively reduced dual-use technology exports to Russia in the months following the invasion, the impact gradually diminished as Russia began sourcing technology components from third countries. Moscow imported $902 million worth of battlefield items per month from January to July 2023—a significant increase from the $619 million it imported in the first five months following the invasion.

Russian entities are able to obtain dual-use technology from Western companies through resellers and manufacturers in third countries. Roughly half of Russia’s battlefield-related imports come from Western producers that are part of the export control coalition. While rarely selling products to Russia directly from their locations in the West, these companies have factories in China and Hong Kong and other places from where they are shipping goods to Russia, or third countries. For example, 75 percent of US microchips were shipped from Hong Kong or China. To close this loophole in enforcing export controls, Western governments should share information with the private sector to improve export compliance practices for identifying end users of dual-use technologies, investigate export violations, and pursue criminal prosecution or administrative enforcement actions where necessary.

Export controls have stunted Russia’s aircraft production

Russia’s aircraft industry was one of the primary targets of export controls in 2022. However, US export controls on Russian aircraft producers started back in 2014, in response to Russia’s invasion of Crimea. Coincidentally, Russia’s aircraft production has been stunted since 2014: Russia was not able to ramp up the production of tactical aircraft in preparation for the full-scale invasion in 2022.

At the onset of Russia’s full-scale invasion of Ukraine in February 2022, Russia had approximately nine hundred tactical aircraft. Over the course of the war, it lost dozens of planes and expanded the expected life span of its aircraft more quickly than anticipated. This, combined with the strength of the Ukrainian air defense, might explain why Russia has relied so heavily on its ground forces in Ukraine.

To make up for the “imputed losses,” Russia will have to either procure or produce aircraft, or fix the damaged ones. While export controls have eroded Russia’s ability to produce new aircraft, Russia has built the capacity to maintain and repair them. Reportedly, Russia imported fourteen million dollars worth of US-made aircraft parts from third countries such as China and Turkey in 2022. To close this loophole, US aircraft producers should increase export controls compliance, while financial institutions should increase scrutiny of transactions involving aircraft manufacturing companies in Asia and the Middle East.

Objective 3: Impose significant pain on the Russian economy

Western measures have achieved some success in imposing significant pain on the Russian economy, Russia’s technology sector being among the impacted industries. Oil revenue provides a crucial funding stream to the government, while government spending is stimulating the economy. Businesses have found workarounds for sanctions, and annual growth has reached 5.5 percent in the third quarter of this year. 

Moscow has allocated one-third of next year’s budget for the defense sector and has rolled out training to upskill unemployed Russians to enable them to work in the defense industry. Military spending will exceed social spending in 2024, a sign that continuing this war is now in the Kremlin’s interest because the war is driving production and job creation. 

Despite the economic growth, certain industries, such as the Russian technology sector, are suffering from a lack of access to Western hardware and software, as well as labor shortages. Russia’s technology sector has been one of the main drivers of the country’s economic growth since 2015. However, about 10 percent of the information technology workforce left Russia in 2022 and more than one thousand Western firms exited the market. The Russian technology industry is now deprived of access to global connectivity, research, scientific exchanges, and critical technology components. In the long term, Russia’s technology sector is likely to fall behind other global powers such as the United States, China, and the European Union.

Conclusion

We have shown that Western measures—such as financial pressure, export controls, and the oil price cap—and the enforcement of these measures need to improve to achieve the desired effects. The West has taken important measures to deprive Russia of revenue and military power; it now needs to address Russia’s evasion techniques and work with the private sector to increase compliance and enforce economic actions. The Kremlin will keep its war machine humming as long as oil revenues flow in and Russia is able to mitigate and evade Western restrictive economic measures.

Economic statecraft measures, while significant, are falling short in achieving their intended goals to counter Russian aggression and help Ukraine win the war.

Authors: Kimberly Donovan, Maia Nikoladze, Yulia Bychkovska

Contributions from: Charles Lichfield, Ryan Murphy

Data source: Castellum.AI

The post Russia Sanctions Database: November 2023 appeared first on Atlantic Council.

Our team analyzed the relative strength and weakness of these countries using the “Misery Index”—the sum of the inflation and unemployment rates—weighting the data by GDP.

The results clearly show how this time is different, from an economic perspective. Today, the Misery Index for these countries is higher than at any point since 2000.

Egypt’s inflation soared to 38 percent in September and its currency reserves are rapidly drying up. Lebanon has had triple-digit inflation for the past three years and its entire economy is in crisis. Jordan is comparatively better off but unemployment has hit a new high of 22 percent in 2023.  

While past flashpoints posed challenges for Israel’s neighbors, they did not have to contend with the risk of recession or worse at the same time. And that means that economic statecraft by the United States and its partners could be particularly effective in navigating the current crisis.

Right now, policymakers are rightly focused on how to limit Iran’s involvement in the conflict—largely through “negative” economic statecraft like sanctions. But economic statecraft has a “positive” side, too, comprised of policies that reward countries for desired behavior. Those inducements have the potential to be particularly effective given the economic difficulties that Israel’s neighbors face.

For instance, there is currently a $5 billion stalled IMF program and Cairo is desperate to have access to at least part of the money. Jordan was supposed to receive a $100 million loan from Japan for an upgrade to its electricity grid. Before October 7, France had committed (but not yet fully sent) over 30 million euros in financial relief to Lebanon.

There are dozens of similar financial levers the West could pull in the days ahead to get more collaboration on the Rafah crossing for humanitarian relief, reconstitute the cancelled Arab Leaders Summit in Amman with President Biden, and send a deterrence signal to Hezbollah to avoid escalation in the north. If ever there was a moment to leverage the combined influence of the dollar, pound, euro, and yen this is it.

There are limits to this approach that the Biden administration should also bear in mind.

In 1956, US Secretary of State John Foster Dulles informed Egyptian President Gamal Abdel Nasser that the United States was withdrawing its financial support of $70 million (nearly $800 million in today’s dollars) for the construction of the Aswan Dam on the Nile. Dulles was upset that Egypt had formally recognized the new communist Chinese government in Beijing (and abandoned the nationalists in Taiwan). He thought Egypt’s economy was so weak they couldn’t build the dam without US support. He was wrong. The Soviets stepped in. An emboldened Nasser nationalized the Suez Canal, which brought the UK, France, and Israel into a war.

Today, Gulf states like Saudi Arabia and Qatar are in a much stronger economic position—closer to Israel’s than its neighbors’—and they could step in to fill the void.

One of the lessons from 1956 is that if countries don’t get support from the West, they will get it from somewhere else. With China serving as the world’s largest bilateral lender, that’s even more likely today than it was then.

The bottom line is that all conflicts, especially those of the past several years, have a military and economic dimension. It’s time for the G7 to start using all the tools at its disposal.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser at the International Monetary Fund.

Phillip Meng, Niels Graham, and Sophia Busch contributed to this piece. This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, please email SBusch@atlanticcouncil.org.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Israel’s neighbors are in dire financial straits. Here’s what that could mean for the war in Gaza. appeared first on Atlantic Council.

Across the past two administrations, Americans have witnessed significant changes to US trade policy. Though President Biden denounced Trump’s “America First” rhetoric, the administration has moved away from traditional, market-opening free trade agreements, opting instead for strategic partnerships such as the Indo-Pacific Economic Framework for Prosperity. US Trade Representative Katherine Tai has pursued a “worker-centered trade agenda”, which aims to protect American workers from unfair trade practices while raising labor standards around the world. Tai believes that past approaches to trade, including traditional free trade agreements, have enabled corporations to employ cheap labor overseas that does not meet basic rights requirements; hence, she has led America’s shift towards a new trade outlook. Can trade policy be a tool for promoting labor rights globally? And, if so, which mechanisms work?

There are two major trade policy tools that the United States might use to promote labor rights: free trade agreements and the Generalized System of Preferences (GSP) program. The former entails bilateral or multilateral agreements in which countries agree to lower trade barriers and follow a set of shared rules. The latter is a program where the United States removes duties for some goods and services imported from beneficiary developing countries that meet certain conditions. GSP has been lapsed since 2020 but remains an important potential trade tool. Both policies are crucial to promoting US and global economic prosperity, and they guarantee preferential access to the US market in exchange for adopting the US’ preferred standards on governance, environment, and labor. Such “quid pro quo” mechanisms are effective in some areas, but worker rights have historically taken a backseat in US free trade agreements and the GSP, in favor of issues like intellectual property. In both cases, the mechanisms for considering labor standards exist, but enforcement has been lacking.

Free Trade Agreements

The United States currently has 14 free trade agreements with 20 different countries—Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. Agreements negotiated since 1994—all except Israel—have included labor standards provisions including the freedom of association, the right to collective bargaining and strikes, minimum employment and wage standards, and protection against forced and child labor. However, whether these standards have been upheld remains unclear.

Between 2006 and 2023, no US free trade agreement partners witnessed improvement in the status of associational and organizational rights as measured by Freedom House. In fact, some countries have experienced stark declines, as exemplified by Nicaragua’s notable drop from a score of 8 to 2. A lack of monitoring does not appear to be the issue, given annual reports from the US Departments of State and Labor that track human rights and labor outcomes, in addition to numerous reports from NGOs such as Freedom House that track similar metrics.

US free trade agreements may lack adequate mechanisms to promote compliance and progress. Enforcement mechanisms differ across agreements but have included dispute settlement systems, monetary penalties, labor affairs councils, and capacity building programs. While these mechanisms appear comprehensive in theory, they do not appear to have been sufficient in practice to support widespread and sustained labor rights progress.

America’s latest free trade agreement, the US-Mexico-Canada Agreement (USMCA), entered force in 2020 and pioneered new enforceable labor standards such as wage requirements and a ban on the importation of goods produced using forced labor. These standards are strengthened by a Rapid Response Labor Mechanism that has already facilitated the fast and successful resolution of nine labor violations. However, given that many of these mechanisms are focused on the automobile industry, it is unclear what USMCA’s large scale impact on labor standards across industries will be.

Likewise, the Indo-Pacific Economic Framework for Prosperity (IPEF), launched in 2022, contains novel measures for reporting labor violations and addressing possible labor issues. But it remains too soon to say whether those mechanisms will lead to greater enforcement of labor standards.

Generalized System of Preferences (GSP)

GSP is a program in which beneficiary developing countries receive preferential access to the US market, but the converse is not true. GSP was first established by the 1974 Trade Act with the intent of promoting economic progress and opportunity in developing countries. The program ran from January 1, 1976 to December 31, 2020, but it has not been renewed since then. At the time of expiration, the program had 102 participating countries and 17 territories.

Independent of labor rights concerns, GSP plays an important role in leveling the playing field as noted by the leaders of many developing countries, who remain hopeful about the possibility of reinstatement.

Once again, US monitoring efforts are thorough, with an annual GSP report produced by the US Trade Representative, and GSP has specific criteria for country eligibility, including a clause on worker rights requirements. The United States has enforced compliance with eligibility criteria in the past by fully or partially suspending GSP benefits. For instance, Bangladesh was removed from the program because it achieved inadequate progress on worker rights. Since countries benefit from being able to export more cheaply to the United States through GSP, beneficiary countries are incentivized to improve worker rights standards to avoid suspension.

Yet, GSP beneficiary countries show a steady decline in associational and organizational rights from 2006 to 2023, similar to US free trade agreement partner countries. The fact that many of these countries nevertheless maintained their beneficiary status indicates that such a decline was insufficient grounds for suspension, either because the metrics used by the US government differ significantly from those used by Freedom House, or because the threshold for suspending benefits on the basis of worker rights is high. It may also be the case, as both figures suggest, that labor rights standards are on a global decline, making it more difficult for the United States to determine whether a country’s progress is poor enough to warrant revocation.

Nevertheless, given the role that GSP can play in expanding economic opportunity for developing countries, the program should be reauthorized with more substantive labor provisions. By reinstating strong economic ties with these countries, the US can support workers’ rights through new enforceable standards, dispute settlement mechanisms, and technical assistance programs such as those implemented through USMCA.

The future of labor rights in US trade policy

Free trade agreements and GSP are no doubt valuable policy tools in that they create mutual economic benefits, serve the strategic interests of the United States, and promote prosperity around the world, but neither policy has succeeded in advancing labor rights globally. Of course, labor standards are the product of many different factors, so it is unreasonable to believe that US trade policy alone might ensure progress. However, within these agreements, stronger enforcement mechanisms and deeper multilateral collaboration between the United States, international organizations such as the WTO and the ILO, and third countries may allow for more consistency in the path to a world of more free and fair labor. Greater focus on technical assistance may ensure that countries not only have the economic incentive to protect worker rights, but also the capacity and resources to do so. It would be important for the United States to act in accordance with the principles it preaches in its trade policy.

Uma Menon is a Next Gen Bretton Woods 2.0 fellow at the Atlantic Council GeoEconomics Center. She is a senior at Princeton University majoring in the School of Public and International Affairs with certificates in South Asian Studies and Gender & Sexuality Studies. Her writing has appeared in The Washington Post, The Huffington Post, and The Progressive, among other publications, and her research interests include human rights, law, and development.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The status of labor rights in US trade policy appeared first on Atlantic Council.

The US Treasury has designated nearly one thousand individuals and entities to date connected to terrorism and terrorist financing by the Iranian regime and its proxies. Despite being heavily sanctioned, Tehran has continued to provide more than $700 million annually to support terrorist groups, including Lebanese Hezbollah, and up to $100 million annually to Hamas and other Palestinian terrorist groups. It has also transferred artillery rockets to Palestinian groups. More importantly, Iran has transferred the know-how and equipment to give Palestinian terrorist groups the capability to build rockets and missiles locally. Given Tehran’s long-standing support of Hamas, the United States and Qatar on October 12 agreed to block Iran’s access to six billion in funds from South Korea that were transferred to Qatari accounts last month as part of a deal to release American hostages in Iran.

In support of Russia’s war with Ukraine, Iran has been supplying Russia with Shahed-136 unmanned aerial vehicles (UAVs). Even though the Treasury Department has issued nine rounds of designations targeting Iran’s UAV program, Iranian drones still continue to be a key tool in Russia’s hands.

Iran has managed to advance Hamas’s goals in Israel, and Russia’s in Ukraine, while being designated as a State Sponsor of Terrorism, designated across multiple jurisdictions and by the United Nations (UN) for a range of issues including, but not limited to, terrorism, proliferation, cybercrime, and human rights abuses. It has also been identified as a jurisdiction of primary money laundering concern by the United States and has been effectively shut off from the global banking system under the powerful Section 311 of the USA PATRIOT ACT. How does Iran manage to facilitate cross-border transactions and receive payments for oil exports despite being heavily sanctioned? Who is involved in Iran’s evasion network? Finding answers to these questions will be key in truly degrading Iran’s financial capabilities for bolstering state and non-state threat actors who wage wars and spread instability in the Middle East and beyond. 

United Arab Emirates: Global financial hub or global evasion hub?

As a countermeasure to US, Western, and UN sanctions, the Iranian regime has set up an illicit global network of shell companies, banks, and exchange houses that facilitate transactions on its behalf. This shadow network has been a target of the Treasury Department’s recent tranche of designations of facilitators of Iran sanctions evasion. A significant number of entities in Iran’s now-sanctioned “shadow banking network” are based in the United Arab Emirates (UAE), one of the world’s leading financial hubs. UAE-based foreign exchange houses have enabled sanctioned Persian Gulf Petrochemical Industry Commercial Co. (PGPICC) to facilitate sales of billions of dollars worth of petrochemicals from Iranian petrochemical companies to foreign buyers. Dubai-based front companies have also processed payments from foreign customers to PGPICC, all while hiding PGPICC’s involvement in these transactions.

The UAE has become a haven for evasion for sanctioned Russians as well. The US Treasury recently took action against several Russia-based financial services companies that have been laundering Russian money through the UAE financial system. For example, Huriya, a now-sanctioned Russia-based private equity company, moved Russian assets into UAE institutions where they would not be sanctioned right after Russia’s invasion of Ukraine began.

The UAE’s favorable, low-tax business environment, vibrant gold trade, and strategic location attract investors from around the world. Unfortunately, the UAE also attracts nefarious Iranian, Russian, and other actors who are taking advantage of loopholes in its financial system to evade sanctions. Western sanctioning authorities are running out of patience with the UAE and are pushing for the Emirati government to implement more robust controls and enforcement mechanisms. Earlier in March, the Financial Action Task Force (FATF), an international coordinating body combating money laundering, gray-listed the UAE. This listing requires UAE financial institutions to enhance their anti-money-laundering (AML) and counter-terrorist financing (CFT) regulatory regimes, and also warns non-UAE financial institutions to increase scrutiny of their transactions with the UAE. Given its aspirations of becoming a global financial hub next to New York and London (which would be challenging as a gray-listed country), the UAE took action on FATF’s recommendations, after which FATF improved the UAE’s rating but still left the country in the gray list.

The UAE is a valuable trading partner of the United States and a major financial hub of the Middle East and the world. The country has so far maintained a multi-vector foreign policy, one that enables the UAE to keep business ties with both the sanctioning and sanctioned parties. However, with the United States and European Union desperate to enforce sanctions to ensure that Iran-supplied Russia doesn’t outgun Ukraine on the battlefield and Iran is not able to fund its network of proxies and terrorist groups, neutrality on sanctions enforcement is not an option: Either the UAE stands with its Western partners and enforces sanctions, or it undermines Western sanctions, which will have implications for the UAE’s status as a global financial hub.

Western allies have so far refrained from sanctioning large financial institutions based in the UAE. However, if the UAE turns into a global evasion hub, Western allies will have no other option but to start sanctioning the UAE, however painful and undesirable that might be. Western allies have demonstrated a shared understanding and strong will in countering sanctions evasion, and have already set up channels for coordinating the sanctions designation process against Russia. Such channels can be leveraged to counter Iran’s evasion efforts. To this point, US Deputy Secretary of the Treasury Wally Adeyemo is traveling to Europe this week to work with European counterparts on degrading Hamas’s ability to raise and move money.

UN restrictions on Iran’s ballistic missile program have been lifted

Iran’s nuclear program is viewed by Israel as an existential threat and by the United States and most Western allies as an untenable threat to global peace and security. Since the early 2000s, the United Nations and Western allies have all maintained sanctions on Iran in an effort to thwart its nuclear proliferation capabilities. In 2015, Iran, China, France, Germany, Iran, Russia, the United Kingdom, the United States, and the European Union signed the Joint Comprehensive Plan of Action (JCPOA). The JCPOA required Iran to implement agreed-upon restrictions on its nuclear program and accept specific monitoring and reporting requirements in exchange for the gradual lifting of these sanctions.

The United States, however, exited the JCPOA in 2018 and snapped back sanctions, leaving the other signatories, mainly the European Union (EU), to pick up the pieces. Considering oil sales are generally settled in US dollars, US sanctions severely limited Iran’s ability to export its oil. Iran saw its oil sales decrease by more than double after the United States left JCPOA. Iran, in response, stopped implementing many of the agreement’s requirements, including the required International Atomic Energy Agency (IAEA) monitoring. Since 2019, Iran’s nuclear weapons development has exceeded JCPOA-mandated limits, reaching as high as 83.7 percent purity of enriched uranium earlier this year, far closer to the 90 percent threshold for weapons grade enriched uranium than ever before. 

Further, despite Iran’s nuclear development outside of the terms of the JCPOA, UN restrictions on Iran’s trade of missile-related technology expired on October 18, 2023. This could allow for supplies and ballistic missile components to move more freely to and from Iran and no longer require approval by the UN Security Council. The United States, United Kingdom, EU, and others have issued new sanctions on Iran to continue the prohibitions on missile and UAV technology, but without the UN restrictions in place it will remain to be seen how countries like China and Russia respond.

Any of the signatories can trigger the UN snapback mechanism, a clause in the agreement that would allow it to reimpose all sanctions—including those from China and Russia. The United States attempted such a trigger in 2020, but the maneuver failed due to the US exit from the JCPOA in 2018. The E3—Germany, France, and Britain—still has the authority to initiate the snapback but has yet to make such a decision.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a project assistant at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Yulia Bychkovska is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @_YuliaB_.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

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The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

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The fragmentation of the global economy has been on display at two international conferences in recent weeks—and it doesn’t bode well for deeply indebted developing countries beset by inflation and lost access to capital markets.

The fault lines, centered on the divide between the United States and China, are adding new difficulties to efforts to restructure defaulted loans, and that will produce more pain for countries whose limited resources go to creditors instead of their own people. The recent sharp rise of global interest rates will only exacerbate the problem.

The debt issue loomed over ministers from 190 countries at the annual meetings of the International Monetary Fund (IMF) and World Bank in Marrakesh, Morocco, earlier this month. There was one breakthrough: an agreement on restructuring Zambia’s debt to government lenders, of which China is the largest creditor. But that came nearly three years after the country defaulted and then only after nine months of hard negotiations with a creditor committee headed by China and France. Those talks followed a Group of 20 (G20) Common Framework agreement in 2020 to establish a mechanism for restructuring the debt of the world’s poorest nations. The Marrakech meetings also announced progress at a roundtable on “processes and practices” related to restructuring—euphemisms for technical issues (mostly raised by China) that have slowed the provision of debt relief.

Perhaps the most significant development on debt during Marrakech was bad news: Sri Lanka announced an agreement with the Export-Import Bank of China to restructure $4.2 billion of debt. Sri Lanka, a more developed country whose 2020 default is not covered by the G20 framework, has been conducting what one IMF official described at an Atlantic Council panel as “ten parallel discussions.” The agreement underlined China’s willingness to undercut a multilateral workout in pursuit of its own interests. In this case, Beijing cut its deal even as it sat in as an “observer” in talks between Sri Lanka and a creditor committee led by India and Japan. The Ex-Im Bank deal, whose terms have not been released, also got out ahead of Sri Lanka’s negotiations with private sector creditors.

China’s approach took on more meaning when representatives from more than 100 countries, including twenty-two heads of state, gathered last week in Beijing under the patronizing gaze of Chinese leader Xi Jinping to celebrate the 10^th anniversary of the Belt and Road Initiative (BRI). That vast effort has built infrastructure throughout the developing world, but also has saddled countries with over $1 trillion of debt. Unlike Marrakech, discussion of debt was largely absent from the proceedings, outside of remarks from Vice Premier He Lifeng at a side event and a paragraph in the forum’s 16,500 word “white paper.” Xi Jinping’s speech to the forum focused on the BRI’s achievements and criticized “ideological confrontation, geopolitical rivalry, and bloc politics,” a pointed reference to US policies toward China.

The divergence between the two international gatherings underlined the increasing difficulty of sustaining international cooperation on debt issues. In the pre-COVID era, restructurings normally proceeded quickly after a country defaulted, with the defaulter reaching an agreement with the IMF on a loan and reform program, creditor governments providing financing assurances to support restructuring, and subsequent debt talks normally taking about two months.

While the Zambia negotiations were an improvement over the first Common Framework process with Chad, which took eleven months, each restructuring is essentially terra incognita. These days, debtor countries face a complicated creditor landscape—a largely Western group of government lenders called the Paris Club; multilateral financial institutions like the IMF and World Bank; China and other new sovereign lenders like India, which works closely with the Paris Club; and the private sector, which accounts for the largest amount of lending in many countries and has its own conflicting stakeholders (traditional banks vs bondholders).

The Common Framework has sought to incentivize the various creditor groups to act in relative concert and reduce the negative economic impact on low-income countries. But distrust has made this much more difficult to achieve, especially as Beijing and private-sector lenders jostle for the best terms. The disorder is more pronounced in non-Common Framework countries, where there is no agreement on an orderly process. For example, the IMF now lends to Suriname while its government has stopped repaying Chinese loans—a process called lending into arrears—because Beijing has not provided assurances of continued financing during restructuring. Meanwhile, private bondholders forged ahead with a deal that will involve a 25 percent “haircut”—or reduction in principal owed—on two bond issues, with repayment to be funded by future oil revenues.

While it is useful that creditors and debtors meet under the aegis of the IMF and World Bank roundtable to discuss outstanding issues, this is no substitute for real progress. There are still many issues even for Zambia, which still must reach separate agreements with each individual creditor government. While it has reached an agreement in principle with Eurobond holders—with an 18 percent haircut—there is still a long way to go with other private-sector bondholders and banks, which include Chinese state banks that Beijing insisted be excluded from the sovereign portion of the Zambia agreement. There are many issues still to resolve before a final restructuring accord is in place, as Brad Setser and Théo Maret enumerated in September.

Private sector lenders will inevitably insist on similar terms to the sovereign creditors. But this emphasis on “comparability of treatment” may compound future problems because creditors in both Zambia and Sri Lanka are requiring higher interest rates on restructured debt if economic growth recovers. One problem this poses for debtor countries is that the burden of higher interest payments—which will only become heavier with global rates rising—will fall on already strained fiscal resources. An IMF study on debt in sub-Saharan Africa released during the Marrakech meeting detailed the sharp rise in the share of government revenue going to interest payments. It warned about the “difficult policy choices” countries will confront “to remain current on debt.” Those policy choices will hit the most vulnerable citizens hardest in the form of less money for health, education, and economic development.

The principle that a country should repay its obligations when economic conditions have recovered makes sense, at least in theory. However, if creditors insist that borrowers facing severe economic challenges continue to tighten their belts when conditions improve—which is what the growth-linked repayment schedules would entail—there will still be serious social costs. That will be part and parcel of an increasingly unmanageable restructuring process that likely will increase global inequality and fragmentation.

Vasuki Shastry, formerly with the IMF, Monetary Authority of Singapore, and Standard Chartered Bank, is the author of the recently published The Notorious ESG: Business, Climate, and the Race to Save the Planet.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF, CNBC Asia, and The Asian Wall Street Journal.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The IMF/World Bank meetings in Marrakesh

One of the concrete results of this year’s IMF/WB annual meetings is the agreement for an “equi-proportional” IMF quota increase without changing the relative voting shares of members. India’s Finance Minister broke the news of the quota agreement, affirming her country’s support for the US proposal as an immediate and temporary solution, pending continuing negotiations about changing the relative voting power.

By contrast, China has wanted both an increase and a realignment of quota to reflect the growing share of developing countries, especially its own, in the global economy. China’s view seems to be more in line with that of the G24 (comprised of major developing countries) which emphasized that an equi-proportional IMF quota increase without quota realignment will weaken the IMF by continuing to undermine its legitimacy and effectiveness. India has taken a pragmatic approach, agreeing to changes which are feasible now and not insisting on measures which are out of reach due to geopolitical conflicts among major countries.

Also noteworthy was the difference between the G20 Ministerial meeting statement coming out of the meetings. Under India’s chairmanship, the G20’s statement omitted condemnation of Russia’s war in Ukraine, as had the New Delhi G20 Summit statement.  India’s ability to craft a consensus statement yet again stands in contrast with the lack of consensus in the International Monetary and Financial Committee (IMFC) under Spain’s chairmanship. IMFC failed to issue a joint statement coming out of the meetings; instead the Spanish chair issued an individual statement containing a strong condemnation of Russia. This difference again highlights India’s ability to forge a global consensus over thorny issues.

The third Belt and Road forum

Since its inception in 2013, China’s Belt and Road Initiative (BRI) has concluded deals worth about $1 trillion in 150 countries. About 130 of those countries have sent delegations to this week’s Forum, including about twenty heads of state—of countries like Russia, Hungary, Indonesia, Sri Lanka, Argentina, Kenya and Zambia. India is conspicuous by its absence. The gathering is intended to showcase President Xi Jingping’s leading role in global development efforts—in contrast to his absence at the G20 Summit in New Delhi where Prime Minister Narendra Modi took the limelight.

Amidst criticisms about inefficiency in project implementations and huge debt buildups, China is using the Forum to affirm that the BRI will continue, albeit in smaller and greener forms focusing on digital infrastructure, instead of large-scale physical projects. The interests shown by many developing countries suggest that participation in the BRI will remain an important consideration in their dealings with China—especially if the United States and its allies don’t provide their own alternative financing. By contrast, India has criticized the BRI for promoting projects that have failed to meet international quality and transparency standards, and in particular has been against the China-Pakistan Economic Corridor, one of the BRI flagship projects, which has raised India’s sovereignty concerns as it passes through disputed Kashmir.

Reactions to the Israel/Gaza situation

Perhaps the most dramatic difference between China and India in response to recent events has been their reactions to unfolding events in the Middle East.

Immediately after Hamas attacks on Israel, PM Modi expressed shock over the terrorist attacks, saying “we stand in solidarity with Israel at this difficult hour.” The Indian government then reiterated its long-standing support for an independent Palestinian state. India’s stance is closer to that of the West.

By contrast, China has avoided condemning Hamas but called for all parties to push for a ceasefire, an end to the fighting, and returning to the negotiating table. However, in more recent days, China has criticized Israel’s actions as “acting beyond the scope of self-defense and should stop its collective punishment of Gaza civilians.”

China’s evolving view on the Israel/Gaza situation seems to be in line with that of many developing countries, including major ones such as Brazil, South Africa, and Indonesia as well as the African Union. That view attributes Israel’s denial of the fundamental rights of the Palestinian people as the root cause of the current tensions and calls for negotiations to resolve the conflicts.

Is there a consensus agenda of the Global South?

Recent events have revealed major differences in policy and posture, not only between China and India, but among developing countries. Those differences suggest that it is not straightforward to describe a grand common view of the diverse countries in the Global South. Nor is such a consensus around the corner. It is more likely that different configurations of countries will coalesce around different issues, depending on their circumstances and national interests.

Developing countries will likely pick and choose their alignment with China and India based on their specific goals. For example, developing countries eager to develop their trade and investment opportunities will continue to approach China—whose global economic footprint is much larger than that of India. Furthermore, countries with a strong anti-colonial inclination will find more affinity with China.

On the other hand, when countries prioritize the importance of being able to negotiate with developed countries to change current international economic and financial institutions and practices to be more supportive of their own economic growth and development, India’s pragmatic approach has become more attractive—as demonstrated by the support of major countries for India’s presidency of the G20 in 2023.

The result will be a complex web of multi-alignment, instead of simple non-alignment, among countries in the Global South. This will make it challenging for the West to win hearts and minds of developing countries in its geopolitical competition with China. It also highlights the importance for the West to engage constructively with countries like India to address the grievances and concerns of developing countries. Finally, it could constrain the diplomatic clout of both India and China, as neither will truly be able to say it represents the whole range of views of the Global South without a single overall consensus.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Breaking down China and India’s race to represent the Global South appeared first on Atlantic Council.

The forty-five-day funding extension agreed to on Saturday night came at the price of excluding new funding for Ukraine aid. Angry that this extension was passed with Democratic support, the far right of the Republican caucus orchestrated a “motion to vacate” in which eight Republicans joined with the entire Democratic caucus to oust Speaker Kevin McCarthy.

McCarthy’s removal on Tuesday has overwhelmingly been read as bad news for Ukraine. But just how significant is it?

Ahead of the original budget deadline, the Biden administration was requesting $24 billion for Ukraine over the next fiscal year. The current forty-five-day funding bill does not include this, and alternative options to keep money flowing from the United States to Ukraine are limited.

Ukraine has an immediate need for not only military, but economic assistance as it has lost a large chunk of its gross domestic product. The United States has committed $26.4 billion in financial aid since the beginning of the full-scale invasion, making up 34 percent of total US aid, including military assistance. This has already been spent. The administration has also exhausted its ability to approve more emergency Presidential Drawdown Authority (PDA) funds as it reached its limit of $14.5 billion for fiscal year 2023, which allows the president to authorize the immediate transfer of articles and services from US stocks.

There is still some flexibility for the next forty-five days. Ukraine can draw from already approved funding. And while more PDA funds cannot be approved, the already-approved PDA does not have an expiration date and there are some funds left. The Department of Defense (DOD) has $5.4 billion worth of approved PDA and $1.6 billion left to replace weapons. Available funds are less than the requested $24 billion, however that sum would have been used over the course of three to four months, not just the next forty-five days. If the DOD uses its transfer authority to reallocate approved PDA or uses separate funds aimed at building long-term capacity, such as Foreign Military Financing (FMF), Ukraine could still receive a similar amount of funding to what it might have received during this shorter window.

In the meantime, Congress does not have to wait until the forty-five-day funding bill expires to approve the requested funds for Ukraine. Congress can pass a separate spending bill for Ukraine’s aid or include it in a combined bill for security spending, before or after the current funding bill expires. However, McCarthy’s ouster and the need to find a replacement will consume the House’s time and the frontrunners for speaker will likely have to appeal to the right flank of the Republican Party to secure a win.

The consensus for now is that the events of the past week make the outlook for US aid to Ukraine more difficult, at least in the short term. Even if the Pentagon manages to re-arrange funding to provide surveillance and technical assistance in the medium term, it will not be possible to keep supplying Ukraine with as many weapons. The strategies, which have worked well so far, including backfilling Ukraine’s European neighbors with new arms as they give their older Warsaw Pact supplies to Ukraine, cannot work without appropriated funding.

The whole executive branch and especially the president are now under pressure to re-state clearly the importance of supporting Ukraine. A public statement will remind Americans the reasons why supporting Ukraine is important, assure allies in the US commitment, and show Russian leader Vladimir Putin he is far from winning. If the United States stops or dramatically reduces its funding, the European Union’s (EU) institutions and member states, as well as other supporters of Ukraine, will try but struggle to come up with alternatives. The EU institutions already have committed a total of $54.65 billion in financial aid through 2027, but Ukraine’s state budget is running at a large deficit, averaging $3 billion-$4 billion a month. Direct financial aid has been filling that gap and, without the United States, this will become much more challenging.

Most worrying, though, is the fact that support for Ukraine is not some randomly selected bargaining chip. Sentiment among some Republican members in Congress is shifting away from the near-consensus of early 2022 faster than many expected. Former President Donald Trump has called for a moratorium on Ukraine funding, and he remains the most likely candidate to win the Republican presidential nomination for 2024. This is despite polls showing that support for Ukraine remains significant among Republicans, if lower than among Democrats. These debates will only get more heated—and more challenging for supporters of Ukraine—heading into an election year.

Yulia Bychkovska is a Young Global Professional for the Atlantic Council GeoEconomics Center’s Economic Statecraft Initiative. Follow her on X at @_YuliaB_.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the GeoEconomics Center. Follow him on X at @clichfield1.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post By the numbers: Here’s how turmoil in Congress could impact US aid to Ukraine appeared first on Atlantic Council.

In the aftermath of the global financial crisis, a combination of low interest rates and abundant liquidity caused public debt in emerging market economies to almost triple from $215 billion in 2010 to $627 billion in 2021. But the Covid-19 pandemic dealt a heavy blow to sovereign financing. A sharp drop in investors’ risk appetite sucked capital from emerging markets, particularly from low-income countries, raising the “rollover” costs for governments carrying already high levels of debt. On top of soaring interest costs, governments issued more short-term debt as they needed additional cash to pay for vaccines and fiscal stimulus, which heightened refinancing risks. As low-income countries’ credit ratings were cut into junk territory, the G20 suspended their debt repayment for over a year and introduced the Common Framework to speed up restructurings. But a lasting solution to debt sustainability in low-income countries requires more dramatic action, in which the IMF will play a critical role.

Sovereign debt restructuring is essentially a zero-sum game of allocating the burden of a haircut among different creditor groups. Under the Common Framework, a debtor country would first request debt relief from official bilateral lenders before seeking treatment at least as favorable from its private creditors. While the Common Framework has looped non-Paris club countries like China (which has been resisting multilateral debt negotiations) into debt relief talks, it fails to help different creditors agree on what a fair burden sharing looks like.

One point of contention is the preferred creditor status of multilateral lenders. Notably, China has insisted that multilateral development banks (MDBs) take losses alongside bilateral and commercial creditors. Since the IMF cannot sign off on bail-outs unless all official creditors commit to writing down loans, China has tried to extract concessions from MDBs by delaying the installment of IMF financing. At the Global Sovereign Debt Roundtable in April, the IMF agreed to provide more grants to indebted countries in exchange for China softening its demand, although there was no guarantee from China that it would provide debt relief in line with other official creditors.

Then there is the matter of coordinating between official and private creditors. The Common Framework delays restructuring by forcing private creditors to wait for and follow the terms set by the official creditors’ committee. This would have worked in the days when official creditors dominated the lending market. But as the number of private creditors multiplied, official and private creditors often clashed over the terms of restructuring. For example, official creditors tend to prefer maturity extensions while private creditors favor haircuts in exchange for early cash flows. Moreover, credit rating agencies duly downgraded countries seeking debt rescheduling and debt relief, even though such treatments would improve countries’ debt sustainability from a development perspective. Consequently, many countries are reluctant to join the Common Framework for fear of losing access to private markets.

As lenders remain in a gridlock, the IMF can play a bigger role in accelerating restructurings and staving off future debt crises. To start, the uncertainty about borrowing countries’ true ability to repay and private creditors’ willingness to grant comparable relief have held up agreement on restructuring terms. Although the IMF does not directly take part in debt negotiations itself, it is the only organization with the political legitimacy to act as a neutral advisor to both debtors and creditors. It can, for example, build on top of the IIF-OECD Debt Transparency Initiative by reconciling the debt data it receives from sovereigns with information reported by private creditors. Collaboration with the World Bank, its sister institution, is equally important as the latter produces long-term growth forecasts that inform debt sustainability analyses. As the world’s crisis lender, the IMF can also design financial incentives that would encourage greater transparency, such as the disbursement of grants or concessional loans that are conditional on borrowing countries meeting a set of disclosure requirements. Greater debt transparency has two benefits. One is that it would encourage private creditor participation in granting debt relief by reducing official creditors’ monopoly on assessing compliance with the “comparability of treatment” principle. The second is that if sovereigns can make public the terms and arrangements that were previously hidden, this would hopefully restore investor confidence and improve their credit ratings.

Moreover, the IMF should make good use of its financial firepower. As a welcome first step, it has advocated the reallocation of covid-era discretionary special drawing rights (SDRs), which amounts to almost $650 billion, to low-income countries. Cash-strapped governments could then swap SDRs with currencies to shore up their reserves and support their economic recovery. At the Summit for a New Global Financing Pact in June, the IMF’s managing director announced that the IMF has successfully rechanneled 20 percent ($100 billion) of the SDRs into trusts that would issue concessional loans to low-income countries. But to achieve a more ambitious 40 percent reallocation, the IMF must convince non-participating countries that the global public goods that arise from more foreign assistance outweigh the domestic budgetary costs. Moreover, the IMF can mobilize external sources of financing. It should work with the OECD to earmark a portion of the revenue from the global minimum corporate tax for development purposes. 

Lastly, the IMF should take advantage of the ongoing restructurings to introduce new financial instruments that better serve the needs of poor countries. Take state-contingent debt instruments, which reduce interest payment during recessions and increase payout in good times. Their popularization would not only help weak economies absorb commodity shocks but also avoid unnecessary credit downgrades due to short-term liquidity problems. Innovations often emerge out of crises. The IMF, with its extraordinary convening power, must take advantage of this opportunity to set up contractual standards that befit today’s increasingly complex debt landscape.

Bruce Shen is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

Euel Kebebew is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post How the IMF can make sovereign debt restructuring more effective appeared first on Atlantic Council.

• Robust defense: fostering a new strategic culture with commitments to high military spending, aiming for deterrence not disarmament.

• Resilience: reducing economic dependencies on rivals and deterring and defeating cyber attacks.

• Sustainability: addressing climate change as well as food and energy crises.

Though the details are specific to Germany, the National Security Strategy and its “integrated security” framework represent a shift in economic and security policymaking happening in many parts of the world. Many countries, including the United States, are trying to balance economic growth with national security. Germany’s attempt to do so shows the potential and the difficulty in balancing all these concerns. It’s hard enough to outline a strategy that addresses all three pillars—defense, resilience, and sustainability—but as Germany illustrates, it’s even harder to mobilize the financing and the domestic support to put that strategy into action.

The Strategy has tried to clarify Germany’s attitude toward China in particular. It concludes that “China is trying in various ways to remold the existing rules-based international order, is asserting a regionally dominant position with even more rigor, acting time and again counter to our interests and values…Regional stability and international security are being put under increasing pressure and human rights are being disregarded. China makes deliberate use of its economic clout to achieve political goals.”

In terms of promoting resilience, the Strategy focuses on “reducing critical dependencies in strategically relevant sectors…by means of diversification”—without mentioning the word “de-risking” which has become popular after the June 2023 G7 Summit in Hiroshima. Importantly, the German Chancellor has said that “de-risking is not a short-term project as it is mainly about decisions that need to be taken by companies” to implement the goal of diversification over a period of time. However, many German corporate leaders appear to be lukewarm if not skeptical about plans to restrict trade and investment with China—especially at present when the German economy is in a recession. For example, Mercedes-Benz CEO Ola Källenius said that “abandoning China is unthinkable for German industry”—perhaps an understandable statement as China accounts for nearly 40 percent of the company’s total car sales.

German trade with China has reached €298 billion ($328 billion) in 2022, 21 percent higher than in 2021. German FDI to China has risen by 11 percent in 2022, while US FDI to China fell by 40.6 percent in 2020-22 versus 2015-20. Consequently, German vulnerability to disruptions in the supply of several strategic and critical inputs to manufacturing appears to be increasing—not decreasing.

More generally, these differences between Germany’s government and its business sector have found echoes in the dilution of the European Commission’s proposed Approach to Enhance Economic Security released on June 20, 2023. At the European Council Summit on June 29-30, there was a back-and-forth between European Commission President Ursula von der Leyen—arguing for a robust and all-embracing de-risking approach closer to the US position—and several major countries like France, Germany, the Netherlands, and Italy trying to water it down—arguing that security matters, especially those concerning China, should reside in national capitals. In the end, the Conclusions of the European Council Summit do not refer to the economic security proposal. They only highlight the need to reduce critical dependencies in strategic areas—without naming China in this context but mentioning the US Inflation Reduction Act (perhaps reflecting the EU’s more immediate concern about the subsidies race triggered by the Act).

The National Security Strategy represents a step forward for Germany to articulate its overall security interests and its approach to protecting them. It also highlights how difficult questions of “integrated security” can be. Without agreement between politicians, business leaders, and civil society, efforts to “de-risk” or “diversify” for national security reasons will continue to face an uphill battle.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post How Germany’s security strategy incorporates economic resilience appeared first on Atlantic Council.

In 2026, Indonesia is expected to surpass Russia to become the world’s sixth largest economy (in PPP terms)—about two years earlier than if Putin’s invasion of Ukraine had never happened. (We reached that estimate by comparing the IMF’s growth projections pre- and post-invasion.)

This is not directly a sanctions story. Yes, financial sanctions and lack of access to advanced technology through export controls have significant negative long-run effects on the Russian economy. But Russia’s slide and Indonesia’s ascent are both driven in large part by the same thing: people. Russia is suffering from acute brain drain while Indonesia’s labor force is growing. In particular, Indonesia’s educated professional class is growing while Russia’s is shrinking. That contrast is what makes their soon-to-be swap on the list of the world’s largest economies notable. The world’s center of economic gravity is shifting.

In Russia, working citizens under the age of 35 now comprise less than 30 percent of the labor force, the lowest share since Russia started collecting that data twenty years ago. And here’s a statistic which should scare all Russian policymakers: from the start of the invasion to spring 2023, 86 percent of Russian emigrants are under the age of 45 and 80 percent are college educated. In the coming years, Russia’s labor supply will shrink as potential migrants view the country less favorably and as its living standards converge with other former Soviet republics, Moscow’s traditional source of migration. This, coupled with declining birth rates, means that by 2040 a declining workforce could reduce GDP growth by as much as 0.5 percent, according to projections like those by Bloomberg Economics. 

Meanwhile Indonesia’s labor force is growing, its commodity exports are booming, and its new capital is under construction. There is a reason why Xi Jinping reportedly tried so hard to bring Indonesia into the BRICS expansion this week. He knows very well where the future is heading: it’s to China’s south, not its north. 

While Russia’s workforce ages and its education levels decline, Indonesia’s continue to improve as new workers enter the labor force with strong educational backgrounds and important skills, albeit at a slower rate than the two decades prior to COVID. A growing and more prosperous labor force has also provided a strong foundation for increases in Indonesian private consumption. This is particularly important for China as it searches for new consumer markets to absorb its exports. Although Russia may be an important export market for Chinese producers for the moment, as it rushes to fill the gaps left as western companies pull out, its long-term growth prospects are stagnant at best and more likely negative. The opposite is true for Indonesia, which is still mostly on track to achieve its goal of becoming a High-Income Country by 2045.

Indonesia can see its brighter economic future ahead and its refusal so far to join the BRICS expansion speaks to its own growing confidence—and was one of the most significant and overlooked developments of last week. 

The data shows that Russia will increasingly need benefactors like China to prop up its economy while rising powers like Indonesia will have many more friends eager to do business across the islands. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economics and trade.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

The post Indonesia’s economy will surpass Russia’s sooner than expected. Here’s what that says about the global economy. appeared first on Atlantic Council.

These bilateral cross-border arrangements do not constitute a threat to the premier position of the USD—as claimed by some over-enthusiastic proponents of those schemes—since no alternative currency has been put forward that is fully convertible and freely usable by anyone anywhere. Nevertheless, they are fragmenting the global payment landscape—which creates substantial costs in terms of lost economic efficiency and risks to financial stability as part of the larger geopolitically driven fragmentation of the global economy, according to the International Monetary Fund (IMF).

It remains to be seen if the perceived benefits to those choosing to use local currencies in cross-border payments—de-risking with respect to US sanctions and the USD—can offset the costs identified by the IMF. In the meantime, here’s a review of the bilateral cross-border payment landscape, from China to India to Russia and beyond.

The RMB in bilateral cross-border payments

China’s RMB has emerged as the most advanced currency used for bilateral cross-border payments. This has been facilitated by an extensive network of bilateral currency swap agreements the People’s Bank of China (PBOC) has signed with central banks of 41 countries, totaling 3.5 trillion yuan ($480 billion at current exchange rates). The balance of funds activated from those currency swap lines reached a record $15.6 billion at the end March 2023.

As a consequence, China has been able to use the RMB to settle about half of its cross-border trade and investment transactions—surpassing the now second-ranked USD. More generally, the IMF has found that for a sample of 125 economies, the median usage of RMB in cross-border payments with China increased from 0 percent in 2014 to 20 percent in 2021; for a quarter of that sample, the RMB usage has risen to 70 percent.

Going forward, two developments are worth watching. Firstly, the RMB has only been used bilaterally—between China and another country. Recently, however, the RMB has been allowed to be used to pay a third party—for example by India to pay for oil imports from Russia; and by Argentina to pay off some of its debt from the IMF. These isolated events could herald a possible multilateralization of the international use of the RMB—a development with important implications.

Secondly, the central banks of China, Hong Kong, Thailand, and the United Arab Emirates (UAE) have collaborated in the project called mBridge sponsored by the Bank for International Settlements (BIS), to develop a multi-Central Bank Digital Currency platform to facilitate interoperability and connectivity among them. This would make the digital RMB (eCNY)—and the digital currencies of other member countries—usable for cross-border payments in a multilateral setting. Again, this is an important project to monitor.

India promotes the rupee (INR) in cross-border payments

India has recently increased its efforts to promote the use of its currency—the INR—in cross-border payments. The latest example was the agreement signed on July 15, 2023 between India and the UAE to settle their trade in INR. In fact, India has had a long history of using the INR to settle trade with South Asian countries (members of the South Asian Association for Regional Cooperation—SAARC). In 2012, the SAARC Currency Swap Facility was launched for all eight members. An Asian Clearing Union including Iran and Myanmar is scheduled to be announced soon and will facilitate INR settlements.

More generally, India has allowed banks from 22 countries to open so-called Special Vostro Rupee Accounts (SVRCs) with banks in India to carry out receipt and payment transactions vis-à-vis Indian entities for their business and individual clients in their home countries.

Since India’s share of world trade is quite small—only 1.8 percent compared to China’s 15 percent—the usage of the INR in cross-border payments will likely be less extensive than that of the RMB.

Russia forced by sanctions to use the RMB

After its invasion of Ukraine on February 24, 2022, Russia has been put under comprehensive sanctions by the United States, Europe, and other allied countries. That included the freezing of the Bank of Russia’s foreign reserves kept in Western jurisdictions and the exclusion of many Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). As a result, Russia has found it more difficult to settle international transactions in the USD or other major currencies (like the euro, British pound or the yen); and has to settle up to two-thirds of its trade and investment activities with China in RMB and rubles, according to President Vladimir Putin.

However, Russia and India have suspended efforts to settle trade in rupees and rubles, after months of negotiations. Instead, Russia has agreed to accept RMB as well as UAE dirhams from India in payments for some of its oil.

Putin signed a decree in March 2022 requiring “unfriendly” countries to pay for Russian gas in rubles. According to TASS, 54 foreign companies have opened so-called special K accounts with Gazprombank (which has not been excluded from SWIFT) to convert payments in a major currency into rubles before settling with a Russian gas exporter. If still in operation, this requirement aims to generate demand for rubles vis-à-vis major currencies and does not promote the use of rubles in cross-border payments bypassing the USD.

ASEAN local currency cross-border payments in a multilateral setting

The ASEAN Summit in May 2023 in Indonesia agreed to promote regional connectivity and local currency transactions (LCT). A Local Currency Transactions Framework will be developed to implement the LCT plan.

Earlier, Thailand and Malaysia agreed to launch the Local Currency Settlement Framework (LCSF) in March 2016—allowing businesses in either country to source baht or ringgit from banks in their home country to settle bilateral trade transactions. In 2018, Indonesia joined the LCSF which was expanded to cover investment transactions as well.

More recently, the central banks of Indonesia, Malaysia, Singapore, and Thailand have implemented a contactless QR-code-based local currency payment system for residents in those countries—payments can be made in the local currency from the digital wallet of the sender in one country and received in the local currency of another country with the exchange carried out through the central banks involved, without using the USD or RMB as an intermediary. The Philippines is expected to join the scheme soon. This arrangement is expected to promote financial inclusion since many people remain unbanked in this region.

The BRICS local currency payment project

The BRICS Summit held August 22-24, 2023 in Johannesburg has agreed to promote the accelerated use of local currencies in cross-border payments among member countries—now being expanded to six new members. Institutional building blocks for this have been under development, such as the BRICS Interbank Cooperation Mechanism (to facilitate cross-border payments in local currencies among banks in the group) and BRICS Pay (a digital payment platform in local currencies). Countries in the group have already had bilateral agreements to use local currencies for cross-border payments.

Weighing the costs

Arrangements to use local currencies to settle bilateral trade and investment transactions have proliferated recently. ASEAN has pioneered the development of a plurilateral local currency cross-border payment system—involving more than two countries. These efforts will likely be broadened in the future as the technology to do so can be disseminated to other countries which want to use their currencies in international transactions.

The growing use of a variety of local currencies in cross-border settlements has so far made only a small dent in the pervasive use of the USD in global payments and does not (yet) represent a serious challenge to the USD’s premier role. Nevertheless, the local currency trend has led to a fragmentation of the global payment landscape with identifiable costs—which together with the overall economic fragmentation could take up to seven percentage points off the global output.

It will take time to weigh the perceived benefits versus the costs of using local currencies in cross-border settlements. If the benefits are seen to outweigh the costs, such efforts will intensify at scale. Otherwise, they will basically be driven by geopolitical calculations—and mainly used to de-risk countries’ exposures to US sanctions and the international effects of US economic management.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Nearing the first year of his latest term, Brazilian president Lula da Silva has solidified an eyebrow-raising foreign policy meant to restore Brazil’s standing on the world stage. Whether it be his refusal to arm Ukraine against Russia, efforts to normalize relations with Venezuela’s Nicolás Maduro, or the decision to authorize the docking of Iranian naval ships, Lula has signaled a willingness to break convention in pursuit of “the creation of a multipolar world”—a far cry from the isolationist approach of his predecessor, Jair Bolsonaro. However, as much friction as these one-off encounters have generated, the brunt of Brazil’s current strategy lies in its empowered relationship with China and economic initiatives across Latin America. Combined, these factors have the potential to not only cement Brazil as a powerbroker in the region but also to upend the role of Bretton Woods Institutions (BWIs) when international polarization is at an all-time high. If BWIs fail to adapt to this changing landscape, they risk diminishing relevance and influence, paving the way for alternative financial institutions to dominate the global economy.

Since outpacing the United States as Brazil’s largest trading partner in 2009, China has invested more than $36 billion towards projects related to the country’s infrastructure, utilities, and natural resources. These investments transformed Brazil into a cornerstone of China’s engagement with Latin America—all while the momentum surrounding BRICS affirmed the country’s influence over the global economy. Even as Bolsonaro’s presidency chilled Brazil’s diplomatic ties, Chinese investments totaled $20 billion over the span of his administration. Although the United States has maintained a dominant financial presence in Brazil, with annual investment inflows surpassing $60 billion for the past decade, the acceleration of China’s investment signifies a strategic evolution in a bilateral relationship once defined by trade alone.

Lula made this evolution clear during his long-anticipated trip to Beijing this April, signing agreements with President Xi Jinping to bolster bilateral efforts in trade, innovation, and social development. Specifically, the state visit culminated in commitments to promote mutual investments in infrastructure, energy, and agriculture, to facilitate scientific and technological exchanges, and to deepen collaboration in the digital economy. On the heels of renewed negotiations over a free trade agreement between Brazilian-backed Mercosur, the South American trading bloc, and the European Union, Xi expressed interest in engaging with the bloc to deepen China’s ties with the rest of Latin America.

The most consequential moment of the visit came when Lula shared the spotlight with protégée-turned-successor Dilma Rousseff during her inauguration as president of the New Development Bank (NDB). Describing the multilateral bank as a tool to “finance infrastructure, sustainable development, as well as social and digital inclusion,” Rousseff framed the NDB as an alternative to BWIs for emerging economies that “respects and reaffirms the sovereignty of each country.” Less willing to parse his words, Lula hailed the bank for its potential to free countries from “submission to traditional financial institutions,” comments that resonate with the $822 million he has secured from the NDB since taking office.

As Brazil maneuvers the international stage with its “multipolar” approach, the rest of Latin America is also witnessing a rise of leftist administrations, a phenomenon known as the Second Pink Tide. For BWIs, the implications are two-fold. First, these governments have expressed more interest in diversifying their trade and financing options, including beyond the current geopolitical fault lines. Second, while remaining interested in multilateralism, many Latin American leaders have voiced frustration with BWIs due to their governance structure and lack of country-specific policy flexibility. For BWIs to remain relevant and effective in this changing scenario, they must do three things:

Flexible lending protocols: The traction gained by institutions like the NDB highlights the allure of financial organizations that offer terms acknowledging the unique challenges of each member country. Recognizing the economic dynamism of countries like Brazil, BWIs ought to introduce countercyclical lending. Such a system would tie loan repayments to a country’s GDP performance or export earnings, serving as a buffer against economic volatility. This would not only make loan portfolios more resilient, but also enhance the role of BWIs as stabilizers in the global economy.

Collaborative financing: Brazil’s burgeoning relationship with China and stake in the NDB signal its move towards diversified financial sources. BWIs should respond in kind by creating instruments that pool resources. For instance, the World Bank and the NDB could jointly finance sustainable infrastructure projects in the region, combining their expertise and financial resources. Likewise, financial packages that combine grants, equity, concessional loans, and non-concessional financing would allow BWIs to cater to the specific needs of countries. Beyond direct financing, sharing data and analytical tools would foster a deeper understanding of market trends, risks, and opportunities—enhancing the predictive power and response time of these institutions.

Overhaul of Governance Structures: The power dynamics of BWIs, primarily determined by economic contributions, have historically favored high-income countries. To account for the rise of emerging economies like Brazil, China, and India, BWIs should recalibrate voting rights to allow these countries more significant influence over decisions. Similarly, leadership roles within BWIs have traditionally come from the internal deliberations of their respective Executive Boards. To foster trust and global collaboration, leadership positions should be open to candidates from a broader range of member countries, ensuring representation from different regions and economies.

With Brazil embracing multipolarity and deepening its alliances with global powers, the landscape of international finance is poised for a seismic shift. The onset of the Second Pink Tide across Latin America emphasizes the region’s turn to diversified economic partnerships and departure from the conventions of BWIs. For these institutions to remain impactful, they must adapt—prioritizing flexible lending protocols, promoting collaborative financing, and ensuring more inclusive governance. Only by acknowledging and addressing the evolving attitudes of countries like Brazil can BWIs hope to sustain their relevance in an ever-changing global order.

Jack Tapay-Cueva is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

David Dong is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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China’s economic woes go well beyond slow growth or a need for stimulus. The most prominent headwind facing the Chinese domestic economy remains its property sector, which began showing cracks in August 2021. Despite efforts from Beijing, issues have persisted and are once again intensifying. After five months of stable growth, new home prices declined 0.1 percent in June from the previous month. Despite falling prices, year-over-year growth in sales by floor space also fell a precipitous 14 percent in June. Falling prices and sales continue to eat away at developers’ finances. Total funds raised by developers sank nearly 22 percent in June from last year. The reverberations of property sector weakness on the broader economy cannot be overstated. Real estate and related industries contribute an estimated 30 percent of China’s GDP—about twice its share in the United States.

After just three months of expansion following the removal of zero-COVID, Chinese manufacturing fell back into contraction. In July, China’s official PMI returned a reading below 50, denoting a decline in activity for the fourth month in a row. China’s Caixin Manufacturing PMI— which focuses on smaller private firms and export-related businesses—also fell into contraction in July. Weaker Caixin PMI numbers are the result of a decline in both supply and demand with its indexes for both new orders and output also falling into contractionary territory. Chinese manufacturing weakness can also be seen in industrial production growth data which decelerated to 3.7 percent year-on-year in July, below the consensus forecast of 4.3 percent. The root of much of this manufacturing malaise sits within a slowing global economy decreasing demand for Chinese exports.

Even if the property crisis can be contained, the Chinese economy is struggling to match younger workers with jobs. In June, youth unemployment reached a new record of 21.3 percent. Little reprieve is in sight. Beijing has warned unemployment may worsen as new graduates begin their job hunt. A range of cyclical and structural factors are driving this unemployment surge. Zero-COVID was particularly damaging to service industries like restaurants and retail,  sectors that hire many young people. Crackdowns on the education, technology, and property sectors have also harmed job prospects. More broadly, in 2022 Chinese GDP growth fell below target to a dismal 3 percent reducing hiring across the economy. Finally, China has more college graduates now than ever before, with many reluctant to take factory jobs, which is causing mismatches in its labor market. All these mounting pressures have led the China’s National Bureau of Statistics to make the suprising announcement it will stop publishing data on youth unemployment after June.

In July, China returned to outright deflation with producer and consumer prices simultaneously falling for the first time since November 2020. While in sharp contrast to the rest of the world, which is struggling to control rising prices, China’s idiosyncratic price pressures are indicative of larger issues within its economy. The prolonged property slump has dented confidence and reduced consumer spending. This coupled with declining global energy commodity prices, a price war among car manufacturers, falling pork prices, and price cuts by consumer goods companies to reduce the excess stock accumulated over the pandemic have all contributed to deflationary pressures. 

As China experiences a reversal in many key domestic indicators following the end of its post-COVID boom, it has received little support for its external economic environment. A slowing global economy and deteriorating geopolitical relations have made the rest of the world far more reluctant to engage with the Chinese economy. 

Chinese exports, a traditional engine of the Chinese economy, plunged 14.5 percent year on year, deepening the 12.4 percent drop its economy experienced in June. Imports also fell just over 12 percent after a 6.8 percent decline in June. While the steep drop is partially a result of base effects from a surge in exports during the summer of 2022 after Shanghai lifted its prolonged zero-COVID lockdown, it is also indicative of falling external demand. Such weakness will likely continue into the fall as the manufacturing PMIs for many of China’s key trading partners such as the US, the EU, and Japan signal contractions. Trade policies designed to de-risk supply chains championed by the west such as “Friendshoring” or “China plus one” add new structural challenges to China’s reliance on export-oriented manufacturing. Declines in imports also point to sluggish domestic demand.

Revisiting China’s Macro Story

While an extended downturn in any one of these indicators would be a cause for concern for economic policy makers in Zhongnanhai, taken together they point to serious, structural issues within China’s economy that go well beyond the cyclical problem caused by COVID. As we discuss in the most recent version of China Pathfinder, a research project we publish in partnership with Rhodium Group tracking the trajectory of the Chinese economy, these signs of weakness and comments from officials acknowledging these problems, may imply a shift in China’s macroeconomic growth model with a return to market reforms. Emblematic of a possible shift, Pathfinder notes that in “June 2023, Qiushi, a leading Communist Party journal, published President Xi Jinping’s March 2022 speech to Central Party School cadres, in which he touched upon the need for economic restructuring. He warned against relying on old growth drivers like excessive borrowing for construction, reckless investment, and scaling up projects.” While actions by Beijing have yet to match this change in rhetoric, slowing GDP growth may yet force China to return to a market-oriented reform path.

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economics and trade.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The Chinese economy’s moment of macro weakness—in charts appeared first on Atlantic Council.

Market participants, on the other hand, largely viewed the downgrading as not adding any new information to the body of facts markets have already incorporated in asset prices. In their view, the impact of the rating move was negligible. With a touch of complacency, many observers also claimed that the rating decision’s effects would be limited because the rest of the world simply does not have many alternatives to US Treasury securities as high-quality liquid assets to satisfy their reserves, collateral, and investment needs.

Missing the bigger picture

Both reactions miss the bigger picture. The downgrading decision is another warning sign, and the only question is why it took twelve years for Fitch to follow the move by S&P to remove the AAA rating on US long-term debt. Neither the complacency of markets nor the forced optimism of officials reflects the seriousness of the rating agencies’ concerns.

Both agencies basically used similar reasoning to support their rating decisions: the US fiscal decision-making process has become increasingly dysfunctional as the Republican Party has been willing to use the debt ceiling as a political tool, holding the US sovereign credit quality hostage in order to realize its agenda, instead of following well-established Congressional procedures. The fact that the two parties have managed time and again to reach compromises at the last minute to diffuse artificial government debt crises, after forcing the Treasury to resort to “extraordinary measures” to avoid default, does not mean that the US has re-established a normal and predictable process of managing its fiscal affairs. Until recently, the question of a possible technical default even for a few days by the US had never been raised. The repeated use of debt ceiling stalemates and threats of default have turned such a dysfunctional and irresponsible governance practice into a “new normal”—not consistent with the prudent conduct expected of a AAA sovereign borrower. In fact, another budget wrangling and potential government shutdown is looming: Republicans are looking to use similar debt-limit tactics to get their way as Congress has to pass twelve annual appropriation bills for the government to function in the new fiscal year starting October 1.

Moreover, the important problem of high public debt—cited by both agencies—has worsened noticeably over the past decade. The debt/GDP ratio has increased by 25 percentage points, from 93 percent in 2011 to 118 percent in 2023. And with interest rates at decades-highs, the government’s interest payments have ballooned to almost $1 trillion in 2023 from a bit more than $400 billion in 2011. And they are starting to crowd out other important spending, including for physical and social infrastructures as well as national defense.

What is needed from Congress is not brinkmanship over the debt ceiling, but a credible medium-term fiscal framework to bring the US budget trajectory down to a sustainable level.

Downgrading the banks

Following on the heel of the Fitch’s decision, on August 7 Moody’s downgraded ten US regional banks, put six other lenders including some large banks on notice that they are under review and could be downgraded, and assigned a negative outlook for eleven other banks. The bank downgrading has clearly upset a revived sense of comfort by investors. They’d seemed relieved that the spring’s regional banking turmoil was over, bank deposit outflow had subsided, and 23 large banks had passed stress tests and been certified by the Fed as “having sufficient capital to absorb more than $540 billion in losses and continue to lend to households and businesses under stressful conditions.” Moody’s action has re-focused market attention to the fact that even though deposit outflow has stopped, there are other causes for concern:

• The mix of deposits has changed, with less interest-free deposits and more interest-paying deposits and funding, pinching banks’ income streams.

• More credit losses are a possibility, especially in the commercial real estate sector.

• Loan demands by households and businesses remain lackluster and could decline if the US gets into a recession later this year/early next year as many still expect.

Financial markets have reacted more negatively to the bank downgrading news, with shares of regional banks suffering the most.

The downgrading will raise funding costs of many regional banks, possibly leading them to be more cautious in extending credit, thus adding to the headwinds against the still tentative US recovery.

More important than the near-term credit outlook for banks is the seriously intractable problem of a steady deterioration of the credit quality of all US borrowers from the government to banks and non-financial corporations—as their debt has increased to very high levels. Indeed, there are only two US corporate borrowers left with a AAA rating (Microsoft and Johnson&Johnson) amid a sustained migration of corporate ratings from the A-AAA ranges to BBB+ and below. In particular, 29 percent of corporate borrowers are rated B- or below—in other words junk bonds with high risk of default!

Deteriorating credit quality increases fragility

As the credit quality of US borrowers continues to deteriorate, their fragility has increased—meaning they will find it more difficult to withstand and deal with adversities including high interest rates, slow growth with or without recessions, and a variety of global shocks such as pandemics and geopolitical events. Under the circumstances, they and the US economy in general increasingly rely on the Fed as the rescuer-of-last resort when—not if—the next major financial crisis occurs. However, a repeat of the post-global financial crisis dose of zero interest rates and quantitative easing may be less potent and create worse aftereffects than the last time around—as the US economy will have been burdened with much higher debt levels.

In short, the two downgrading actions by Fitch and Moody’s should be viewed as much-needed warnings for the US public and private sectors to put their fiscal houses in order so as to better navigate the stormy weather ahead. Unfortunately, political polarization will likely hamper efforts to do what is needed.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Two credit downgrades in the US are a much-needed warning  appeared first on Atlantic Council.

Roaring tourism and demand for services, luxury goods, and other light manufactures are fueling the continent’s economic resilience. That means that countries that are more oriented towards these sectors, like France and Southern Europe’s major economies, have reaped the lion’s share of European economic growth. If we weight economic growth projections by each country’s share of European GDP, Spain, Italy, and France will likely be the largest contributors to the EU’s growth in 2023. This is despite the Italian economy’s surprise contraction in the last quarter, which partially reflects the one-off effects of curbing its ‘Superbonus’ tax exemption program. In its July World Economic Outlook update, the IMF upgraded Italy and Spain’s growth forecasts by 0.4 percentage points and 1 percentage points, respectively.

On the other hand, Europe’s traditional juggernaut has become its laggard. Germany’s economy, which is more dependent on heavy manufacturing exports than its peers, faces an uncertain global trade environment, worker shortages, and rising subsidies in the US and China. The IMF forecasts a 0.3% contraction this year.

Regional inversion

Ten years ago, the map would have nearly been reversed, with Germany leading European growth and Southern Europe in dire straits. The 2008 financial crisis hit Southern Europe hard; after the collapse of asset bubbles prompted governments to increase stimulus spending, the resulting debt loads triggered a balance-of-payments crisis. To resolve their debt crises, these countries took austerity measures like painful cutbacks on government spending, largely at the behest of their northern neighbors. 

Moreover, the region’s industry mix was unfavorable for years after the financial crisis. Resilient demand, especially from Asia, for essential industrial goods pulled Germany out of recession quickly, while tourism and other services sectors were slower to rebound as households pulled back on spending. While France’s economic experience was not as extreme, its recovery was also hampered by an economy dependent on services, tourism, and luxury goods.

Meanwhile in the South, poor consumer confidence and austerity contributed to a vicious cycle of contraction, amounting to a “lost decade” for growth. For instance, Italy’s GDP growth underperformed the EU average every year between 2008 and 2020.

Back to the future

How did Southern Europe bounce back? Some factors, like the strength of the services sector and a rebound in tourism, are more recent. Although Russia’s invasion of Ukraine drove up energy prices in all European countries, France, Spain, Italy were among the least affected countries. In 2021, Russian imports accounted for 6%, 9% and 23% of French, Spanish, and Italian fuel consumption, respectively, compared to 31% of German consumption. Southern European countries also received an outsized proportion (47%) of EU recovery funds from the pandemic. 

Structural factors have also helped, particularly in Southern Europe. Austerity programs have ended, and many of the region’s most indebted countries have improved public finances. Greek bonds, for example, are now one upgrade away from being ‘investment grade’–a far cry from the early 2010s, when Greece was placed in ‘selective default.’ 

These improvements offer optimism that Southern Europe may be turning a page on its “lost decade.” It may be hard to imagine now, but rapid regional economic growth was once the norm before economic crises (starting with Italy in the 1990s) set the region back. From 1971 to 1990, nominal economic growth averaged 3.3% per year in Spain and 3.1% in Italy, compared to 2.6% in Germany and Britain. That might not sound like much, but sustained growth meant that Southern Europe was quickly catching up to its northern peers. In 1980, GDP per capita in Italy and Spain were 72% and 53% of Europe’s three largest economies (an average of Germany, France, and the United Kingdom, weighted by population). By the end of the decade, those figures were 98% and 62% respectively. Indeed, Italians of a certain generation still remember ‘il sorpasso,’ the point in 1987 when Italy’s economy surpassed Britain’s in size (in spite of its smaller population).

It is too soon to say whether Southern Europe is back on this trajectory, but the economic winds may be shifting. Ten years ago, Northern Europe could dictate its solutions to the sovereign debt crisis because Southern Europe needed a bailout. Now, southern capitals may call for a more balanced debate on Europe’s economic future.

Sophia Busch is a Program Assistant for the Atlantic Council GeoEconomics Center.

Phillip Meng is a consultant for the Atlantic Council GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Southern Europe is the continent’s new economic growth engine appeared first on Atlantic Council.

In 2022, year-over-year growth of bilateral trade volumes was 29 percent, totaling over $20 billion:

From South Korea’s perspective, growing engagement in Africa is part of what President Yoon Suk-Yeol calls becoming a “global pivotal state.” It helps to diversify supply chains, expand in new markets, and enhance Seoul’s soft power. In its latest bid to expand ties this month, the Yoon administration unveiled the K-Ricebelt initiative to boost rice production in eight African states. 

Meanwhile, Yoon will host African heads of state and heads of government in a “Korea-Africa Special Summit” next year. While South Korea hosts a number of ministerial-level summits—including Korea-African Union Policy Consultation Meetings and the Seoul Dialogue on Africa—the upcoming event will add leader-level engagement to the mix. In this sense, South Korea is following neighbors like China, which has organized the leader-level Forum on China-Africa Cooperation since 2000.

Alternatives to Beijing?

Booming trade between South Korea and Africa is only one example of a broader pattern. While China has historically accounted for the largest share of trade growth between Africa and Asia, trade has also grown rapidly with other major economies in Asia. India has emerged as a particularly important partner. Since 2000, India-Africa trade has grown more than twenty-fold to over $97 billion in bilateral trading volumes, now exceeding that with the United States.

African trade patterns with these other partners are similar. As is the case for China, countries like India and South Korea mostly import raw materials (especially fuels and commodities) from Africa, while exporting more manufactured goods. But there are key differences. Unlike with China, these trade relationships with Africa are also considerably more balanced. Africa’s $47 billion trade deficit with China in 2022 (16.7 percent of total trade volume) far exceeded its $4.5 billion (4.6 percent) and $1.7 billion (9.6 percent) deficits with India and South Korea, respectively.

Moreover, these partners may become more important to African economies if Chinese engagement ebbs. There are some warning signs. First, China’s fragile economic recovery from the COVID-19 pandemic has dampened demand for imports: African imports fell by 11.8 percent year-over-year in the first four months of 2023. In the longer term, slowing economic growth and demographic stagnation will likely reduce Chinese demand for African commodities. Second, China has scaled back development lending amid increasingly unsustainable debt loads in Africa. That means fewer infrastructure projects to increase economic connectivity. If this month’s China-Africa Economic and Trade Expo is any guide, these headwinds are already weighing on the dealmaking environment. The $10.3 billion in deals at the Expo was less than half the volume of those signed in 2021.

China remains Africa’s largest trading partner by far in terms of total volume. But there is pressure on that relationship. If Beijing steps back, other parts of Asia are ready to go. 

Phillip Meng is a consultant with the GeoEconomics Center.

Mondrita Rashid contributed research to this piece.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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There was hope things would go better. Last month’s debt restructuring deal with Zambia, along with the launch of the Global Sovereign Debt Roundtable (GSDR) by the International Monetary Fund (IMF) and World Bank (WB), made it seem like progress was being made toward a new set of sovereign debt restructuring principles. As US Treasury Secretary Janet Yellen stated prior to the meeting, “We should apply the principles we agreed to in Zambia’s case to other cases instead of starting from zero every time… And we must go faster.”

Now, in the wake of a meeting without tangible progress, the Zambia deal looks a little different.

There is more to the Zambia deal than meets the eye

The $6.3 billion debt restructuring agreement with Zambia and its official bilateral creditors—organized in an Official Creditor Committee—was announced at last month’s Paris New Global Finance Summit. It is useful for the country, providing it with some debt servicing relief and unlocking a $188 million disbursement from the $1.3 billion IMF Zambia program. However, the deal largely reflects China’s preferences and is less than optimal for Zambia, for several reasons.

• There is no reduction in the principal amount of the debt, but maturity dates have been extended to 2043, resulting in an average extension of more than twelve years. China has long insisted on re-profiling (of maturities and interest rates) but no principal haircuts. As a result, Zambia’s public debt/GDP ratio is unchanged from 110.8 percent in 2022.
• The interest rate on the restructured debt will be reduced to 1 percent; thereafter the rate will rise to a maximum of 2.5 percent in a base case scenario. If Zambia’s debt carrying capacity is upgraded by the IMF/WB from weak (at present) to medium, the interest rate will increase to a maximum of 4 percent, and the final maturity date brought forward to 2038 (not 2043). In their September 2022 Debt Sustainability Analysis, the IMF/WB have concluded that Zambia was close to the medium threshold. For comparison, the average interest rate on Zambia’s public debt to China is estimated to be 2.9 percent.
• In the base case scenario, with a three-year grace period for principal repayment, the present value (PV) of Zambia’s public debt being restructured has been reduced by 40 percent, assuming a 5 percent discount rate. This is shy of the 49 percent PV reduction sought by Zambia in October 2022 and less than the 50 percent PV haircuts usually granted to low-income countries in debt crisis.
• The $1.75 billion of claims insured by China’s Sinosure (including loans made by China Development Bank) will be re-classified as commercial creditor claims, not official lending as insisted by Western countries until now. This is also in line with China’s long-standing arguments.
• Consistent with the terms outlined above, each creditor country will bilaterally conclude a final restructuring agreement with Zambia—another of China’s preferences. It doesn’t matter much if such bilateral final agreements are transparent. If not, there could be suspicions of side deals beyond those agreed to, serving to erode mutual trust necessary to make progress in other cases.
• The agreement with official bilateral creditors will be contingent upon Zambia securing a comparable deal with its private sector creditors, in particular the holders of $3 billion in international bonds as part of the $6.8 billion private sector external debt. The term “contingent” is ambiguous and it’s not clear how it will be interpreted. This could delay the implementation of the official bilateral deal until a private sector deal is in place. Traditionally, a Paris Club restructuring deal is implemented right away, subject to the requirement that the debtor country seeks to obtain comparable relief from its private sector creditors.

The features mentioned above are consistent with China’s approach to dealing with its debtor countries in crisis—suggesting that Western countries and Zambia have acquiesced to China’s demands to get the deal done.

The problem with agreeing that no one size fits all

Reportedly, the G20 meeting agreed that there is no one-size-fits-all recipe for sovereign debt restructuring. That’s sensible in the sense that the specific circumstances of each debtor country should be taken into account. However, it is also consistent with China’s insistence on a case-by-case approach. This allows China to deal with debtor countries according to their strategic value to Beijing and can be used to delay rather than expedite the negotiating process.

China’s demands were also front and center in the IMF/WB launch of the Global Sovereign Debt Roundtable at their Spring meetings in April 2023. The Roundtable brought together the debtor country with all of its creditors (official bilateral, multilateral development banks and IMF, private sector creditors) to exchange views, which could inform and help actual restructuring negotiations. The IMF/WB agreed to share information more fully and more quickly with all creditors and promise to give more concessional financing, including grants to the low-income countries seeking restructuring.

This is indeed a modest step forward, especially in involving private sector creditors early on and providing them with sufficient information. If the GSDR can bring more transparency to the debt situation of the debtor country—as well as to the confidential contractual clauses in the debt owed to China—all the better! However, this is about process and has not changed the more difficult phase of reaching agreement on the scale and parameters of the debt relief—as well as how to ensure comparable burden sharing among different classes of creditors.

In short, Zambia’s debt restructuring deal and the launch of the Global Sovereign Debt Roundtable can be viewed as modest steps forward in the urgent efforts by the international community to establish a well-defined set of principles and procedures to facilitate the restructuring of sovereign debt of LVMICs—when necessary—in an efficient manner and on a timely basis. However, this goal is still far from being met, and the sovereign debt restructuring process remains unwieldy and time-consuming, deepening the crisis and ravaging the debtor country. In the meantime, the world seems to have acquiesced to China’s approach to dealing with debt crises—which is less than optimal, especially for debtor countries.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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In this edition of the Global Sanctions Dashboard, we walk you through existing sanctions against the Wagner Group, limitations around enforcing them, and what more Western allies can do to counter Wagner’s influence in Africa. Moreover, we identify gaps in beneficial ownership information as the key vulnerability in enforcing sanctions against Russia, including in the case of the oil price cap.

The Wagner Group is heavily sanctioned but keeps making money

The Wagner Group, its affiliates, and leadership are the targets of Australian, British, Canadian, European Union (EU), Japanese, and US sanctions for human rights abuses and serious crimes, among other illicit activity, and for participating in Russia’s war of aggression against Ukraine. There are proposals and discussions in play within the EU and UK governments to designate the group as a terrorist organization. The United States redesignated the Wagner Group as a transnational criminal organization in January 2023. While these types of organizational designations may appear symbolic, they pave the way for more significant sanctions and actions such as prosecution of group members and affiliates pursuant to terrorism or criminal charges, which carry significant penalties. Terrorist organization and transnational criminal organization designations also send a strong signal to foreign governments that they may want to reconsider their relationships with these groups.

Shortly after the Wagner Group’s attempted mutiny against Moscow’s military leadership, the United States issued designations targeting the Wagner Group’s illicit gold activity and affiliated entities in the Central African Republic (CAR), United Arab Emirates, and Russia, exposing Prigozhin’s network and mining operations. Concurrently, the United States issued a twenty-nine-page joint advisory on Wagner’s illicit gold trade in sub-Saharan Africa, encouraging industry participants to apply enhanced due diligence to avoid the risks potentially facilitating the violation of economic sanctions or money laundering. 

Despite sanctions and efforts to curtail the Wagner Group’s illicit activity, the group has successfully evaded financial sanctions through a series of facilitators and front companies around the world and by taking advantage of lack of beneficial ownership to obscure operations and avoid identification. The Wagner Group has made more than five billion dollars since 2017, according to a Forbes assessment, mainly from mining, illicit gold trade, and forestry business in Africa, as well as funding from the Russian state. 

The restructuring of Wagner Group’s command and control creates new opportunities in Africa

Despite the mutiny, Russia is likely to continue using the Wagner Group as an irregular or “gray zone” instrument of foreign policy and regional influence across Africa, although some rebranding and restructuring of the organization is expected. The Kremlin could change the Wagner Group’s name but will likely keep the existing security contracts with African authorities and continue using the group for disinformation operations. Reportedly, the Kremlin has already begun the “corporate takeover” of the Wagner Group, with Russian law enforcement authorities seizing computers from companies connected to Prigozhin. 

Nevertheless, the Wagner Group’s organizational restructuring in Russia will likely impact the group’s operations in Africa as the Kremlin moves to assert greater control over Wagner Group operations and personnel and demonstrate that Putin is still in power. For example, around six hundred Wagner Group mercenaries left the CAR following Prigozhin’s failed rebellion, however the reason for their departure remains unknown. Russian government officials have been traveling to Africa and the Middle East in recent weeks to reassure regimes that Wagner Group will be able to meet their existing contract requirements under new command and control. In a visit to Damascus on June 26, Russian Deputy Foreign Minister Sergei Vershinin assured Syrian President Bashar al-Assad that Wagner forces would continue operations under the control of the Kremlin. In the CAR and Mali, Russian Minister of Foreign Affairs Sergey Lavrov offered similar assurances. 

The Kremlin’s attempts to save face and assert control provide Western allies with an opportunity to counter the Wagner Group’s influence and position, particularly in African countries such as CAR and Mali. The United States and its allies can take a “demand-side economics” approach and introduce positive inducements for regimes currently contracting with the Wagner Group, such as diplomatic, economic, and security cooperation that meet the needs of African countries while swaying them away from their reliance on the Wagner Group and ultimately Russia. 

The United States could leverage its designation of the Wagner Group as a transnational criminal organization to share information with foreign partners about the Wagner Group’s criminal activity, human rights abuses, and illicit financial activity to encourage partners to open investigations within their jurisdictions and prosecute Wagner Group personnel as criminals. These prosecutions could be brought to international organizations such as Interpol, to issue Red Notices and engage law enforcement around the world to bring criminals to justice. Further, if the United Kingdom and EU designate the Wagner Group as a terrorist organization, it may deliver a reminder to African governments that terrorism remains a priority and that the West is willing to cooperate with African governments on internal national security threats. A terrorist designation would also allow the EU and United Kingdom to bring terrorism charges against Wagner Group personnel within their jurisdictions and create the ability to further sanction the group and its network, disrupting their financial activity and ability to travel.

Additionally, Western allies can seize the opportunity to raise awareness about Wagner’s lack of success in places like Mozambique and Libya, human rights abuses in African countries, and exploitation of natural resources, to emphasize that their services come at a high cost. Western countries can partner with civil society organizations and African governments to track and identify the complex ownership structures of the Wagner Group-connected companies that enable sanctions evasion, share intelligence on these companies among partners, and take steps to freeze and seize assets of the Wagner Group that run counter to the interests of African countries. 

Identifying a key vulnerability in Russia sanctions enforcement: Beneficial ownership 

The key to understanding who is behind the shell companies and complex ownership structures of companies facilitating the Wagner Group’s activity is identifying the real human beings or organizations that control shell companies. They are called “beneficial owners.” 

The Financial Action Task Force (FATF), the international body responsible for setting global anti-money laundering standards, has called on its members to implement tougher global beneficial ownership standards and give competent authorities adequate information on the true owners of companies. Several countries, including the United States and United Kingdom, have passed legislation and developed or are in the process of developing regulations to bring their countries’ anti-money laundering and countering-the-financing-of-terrorism regimes up to FATF standards on beneficial ownership. 

The FATF and the international Egmont Group of Financial Intelligence Units (FIUs) can collaborate to ensure FATF regional bodies representing African countries and FIUs across the continent have the information they need and the capacity to understand and identify the risks the Wagner Group’s activities present to their respective domestic financial systems as well as the global financial system. 

Lack of knowledge on beneficial ownership also played a key role in obstructing the enforcement of the oil price cap against Russia. The United States and Group of Seven (G7) allies imposed a sixty-dollar cap on Russian crude oil in December 2022, with the goal of keeping oil flowing out of Russia while reducing the revenue stream into Moscow. The effectiveness of the price cap strategy depends on Russian oil exporters and importers accessing maritime services, such as insurance of oil tankers, provided by G7 countries that have sanctioned Russia. If Russian oil importers and exporters want to use these maritime services, which make up 90 percent of the market, they have to comply with the price cap. In response, Moscow built up a shadow fleet of oil tankers whose real owners are unknown. 

Why Russia’s shadow fleet is so dangerous

In February 2023, Russia’s shadow fleet was worth more than two billion dollars and consisted of around six hundred vessels. The fleet includes tankers previously used for Iranian and Venezuelan oil shipments and European tankers sold to Middle Eastern and Asian owners since Russia’s invasion of Ukraine began. The tankers operate without Western insurance and are not up to Western safety standards for oil tankers. Most of them are owned by offshore companies based in countries such as Panama, the Marshall Islands, and Liberia.

A third of Russia’s shadow fleet tankers are more than fifteen years old, which poses heightened risks of oil spills and environmental disasters. Normally, tankers should be demolished when they are around fifteen years old. The average age of the shadow fleet is twelve years and many of them will surpass fifteen years in the coming years. 

Fortunately, Asian nations have strengthened monitoring and inspection of old tankers. For example, Singapore held a record thirty-three tankers for failing safety inspections. Even Chinese port authorities in Shandong province have held at least two tankers older than twenty years for safety checks. Ships under detention for safety violations will have to re-apply for certificates and it’s unclear how long it will take them to get back to the ocean, if at all. 

How to prevent the growth of the shadow fleet

Last year, the number of undisclosed buyers of tankers more than doubled compared to 2021. Buyers of most of these tankers were located outside of G7 countries or the European Union. Specifically, London-based company Gibson Shipbrokers estimates that around one hundred fuel tankers were sold to companies outside of the G7. The undisclosed buyers of European ships most likely were shell companies or individuals acting on behalf of Russian beneficial owners of the shadow fleet tankers. This development is alarming and demonstrates a common theme in the challenges associated with enforcing sanctions against Russia including the oil price cap—beneficial ownership. 

Following FATF’s recommendation to its member states on making the identities of true owners of companies available to competent authorities could make it more difficult for sanctions evaders and money launderers to facilitate transactions for sanctioned Russian companies. It could also help sellers of tankers to identify whether the ultimate benefactor is a Russian entity or an individual. In the meantime, greater information sharing between partner nations on illicit Russian financial activity and the shell companies that are involved will help close this gap in sanctions enforcement and increase global understanding of Russia’s reach.   

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a young global professional at the Atlantic Council’s GeoEconomics Center.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

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The post Global Sanctions Dashboard: Sanctions alone won’t stop the Wagner Group  appeared first on Atlantic Council.

But many questions remain about whether creditors truly are prepared to meaningfully reduce debt burdens. These issues likely will be on the table in India this week (July 14 to 18) when the Group of Twenty (G20) finance ministers and central bank governors gather to discuss debt restructuring and other global economic issues.

In Zambia, which defaulted on its debts in 2021, government creditors led by China have resolved months of jostling and agreed to a restructuring of $6.3 billion of the country’s more than $8 billion of debt. The agreement extends for 20 years the country’s debt-repayment schedule and lowers its annual interest bill to one percent until economic growth recovers. Now, the country’s private-sector lenders, who hold billions of dollars of government IOUs, are talking about writing down some of their Zambia loans, and in Ghana are writing off loans and restructuring dollar-denominated bonds. Meanwhile, both classes of creditors are deep in restructuring discussions with Sri Lanka, which has requested a 30 percent haircut on some bonds.

These settlements would pave the way for assistance from the International Monetary Fund (IMF) and provide a way forward—albeit a difficult one—for dozens of low-income countries that are in or nearing debt distress. This represents progress compared with a year ago, when China and the private sector were balking at a transparent negotiating process. But there are still many issues to address—especially how far China really is prepared to go in reducing the burden of its vast lending. Unlike previous global debt episodes, notably the Latin America debt crisis of the 1980s and debt relief to low-income countries early this century, there is unlikely to be a grand bargain this time around.

While the preliminary agreement with Zambia has been heralded as “an epochal shift in global finance,” the reality is that negotiations there and elsewhere are following a well-trodden path: first the seal of approval of an IMF rescue program (which in Zambia’s case was reached in 2022), with promises of IMF money once a debt restructuring is agreed to. Then the hard bargaining with government lenders, followed by talks with private creditors. This slow progress is a far cry from late 2020 when the G20 agreed on a restructuring process for the poorest countries called the Common Framework that briefly raised hopes of a rapid succession of debt reductions—hopes that were dashed largely because of foot-dragging by China and foreign lenders.

Before the emergence of China as a major creditor to middle and low-income countries during the lending spree that accompanied its Belt and Road Initiative, debt negotiations went through the IMF and the Paris Club of advanced-economy lenders. It was arguably a simpler world, not least because private-sector lenders’ debt exposure in developing countries was marginal. That changed after 2010, when institutional investors joined China in shoveling money out the door to what became known as “frontier economy” borrowers. Between 2007 and 2020, an unprecedented 21 African countries accessed international debt markets. Today, debtors must proceed on multiple tracks—the Paris Club, the Chinese government, China’s state banks and state-controlled commercial banks, and Western fund managers and money-center banks.

Some creditors question the true nature of the debt restructuring now on offer. For example, private sector lenders and analysts say privately it is not clear whether, in Zambia’s case, China has negotiated bilateral conditions that have been concealed from other lenders. They say that this could cast doubt on assurances that government creditors have provided to the IMF about restructuring arrangements. In addition, China’s insistence on extending debt repayments for decades conflicts with the Paris Club’s track record of providing relief in the form of reductions in principal owed. That could become an issue if China pursues its approach in countries where other governments are major creditors—for example, India and Japan in Sri Lanka. In that case, the model of the Zambia agreement could quickly become a muddle.

The private sector has arguably made significant strides in recognizing their loan losses, as the situation in Ghana illustrates. Lenders such as the big four South African banks are writing off as much as $270 million of their loan exposures, which equates to a haircut of almost 60 percent. And Standard Chartered Bank has set aside some $160 million for Ghanaian write-downs. This loan-loss recognition serves two purposes. First, it is an effort to inform shareholders about the banks’ overall sovereign exposure and the steps they are taking to reduce it. Second, by setting a floor on the losses they are prepared to absorb, they have a better negotiating hand in the restructuring conversations.

Meanwhile, bondholders are likely to face increasing pressure to restructure Eurobond issues—and accept haircuts—as the repayment schedule accelerates in the next two years.

A looming issue may be the response of Western banks and bondholders to China’s success in having some of its loans by state-controlled banks exempted from the Zambia agreement and classified as commercial lending. How those Chinese loans are treated—in Zambia and elsewhere—while the real private-sector creditors negotiate settlements will be a test of China’s willingness to accept the principle of “comparability of treatment” for all creditors, a key principle that Beijing publicly insisted upon as recently as April.

There are real-world ramifications to these nuts-and-bolts issues that extend beyond the politics of the restructuring process. The human cost of the debt crisis for poor countries has been severe. The UN estimated last year that fifty-four countries with severe debt problems represented about three percent of global gross domestic product, but accounted for more than one-half of the 600 million people worldwide living in extreme poverty. That number has risen sharply since the pandemic hit in 2020.

Debt payments by these countries siphon off resources that are desperately needed for health, education, and other social programs. Defaults and restructuring only make this scarcity worse. That points to the need for new sources of funding. The World Bank is under pressure to free up more money for grants and lending. Meanwhile, the IMF has increased funding for two trusts designed to meet the needs of low-income countries, including one created to help developing countries meet the immediate and long-term challenge of climate change and pandemics. About $100 billion of new resources come, in part, from the 2021 allocation of $650 billion of Special Drawing Rights to IMF member countries.

But demand for help is rising faster than the available resources, especially for the Poverty Reduction and Growth Trust, a perpetually underfunded IMF vehicle that subsidizes zero-interest loans to the poorest countries. As new lending to these nations from China and private creditors dries up, the World Bank and IMF will be hard-pressed to pick up the slack. Debt restructuring that merely extends repayment for decades without any forgiveness will only entrench the imbalance between needy borrowers and lenders whose priority is to recoup their capital.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

Vasuki Shastry, formerly with the IMF, Monetary Authority of Singapore, and Standard Chartered Bank, is the author of Has Asia Lost It? Dynamic Past, Turbulent Future. Follow him on Twitter: @vshastry.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Progress on debt restructuring provides a glimmer of hope for developing countries appeared first on Atlantic Council.

The completion or near completion of those measures is indeed helpful to DLICs, even if the measures fall short of what is needed—the sustainable development gap of those countries has been estimated to be $2.5 trillion per year. What the DLICs really need are concrete initiatives and the less said about grand strategy the better. Dressing those initiatives up as parts of a “new global financial architecture” risks conflating them with the geopolitical conflict centered around changing or preserving the current world order. That conflation will only make it more difficult to develop the international consensus required to adopt those measures. 

The Paris Summit showcases the potential and limits of the plurilateral approach  

The Paris Summit brought together senior representatives of about thirty-two countries, international organizations such as the World Bank (WB) and the International Monetary Fund (IMF), civil society organizations advocating debt relief and climate financing for DLICs, as well as private-sector businesses. Besides Macron, presidents and prime ministers from South Africa, Brazil, Germany, China, and a dozen or so African countries attended. The United States was represented by Treasury Secretary Janet Yellen and Special Climate Envoy John Kerry. The Summit represents an example of a plurilateral approach where a relatively small group of countries get together around a common agenda instead of the multilateral approach involving all members of the international community. Other examples include the World Trade Organization (WTO), which has been able to push through a few plurilateral trade agreements on specific issues, having failed to facilitate any round of multilateral trade liberalization since its inception in 1995; and the IMF which has recognized that working with smaller groups of like-minded countries can be a practical way forward. 

The Paris Summit exhibited the potential and limitations of the plurilateral approach. The results of the Summit were contained in the Chair’s summary of discussion, essentially reflecting participants’ appeals and statements of wishes rather than new commitments by countries. In fact the United States—a key country in any international undertaking—has been lukewarm at best about several proposals to raise funding, including worldwide taxation of CO2 emission in shipping and aviation, of financial transactions, and of fossil fuels in general. Yellen reiterated that multilateral development banks (MDBs) should try to optimize the use of their balance sheets to provide more finance to climate-related projects before asking members for more capital. 

Concrete results from the Paris Summit 

Nevertheless, the Paris Summit managed to produce two sets of results. One is a Road Map highlighting important events and meetings such as the G20 Summit in September in New Delhi and the IMF/WB annual meetings in October in Marrakech. Also noteworthy is the meeting of the 175-member International Maritime Organization in July to discuss the idea of taxing emissions from shipping, and the United Nations Summit on the Future in September 2024. The road map is useful in focusing international attention on important gatherings to push for further progress on the various commitments and initiatives already on the table. 

More useful to DLICs are announcements of the completion or near completion of previous pledges. Specifically, President Macron expressed confidence that the 2009 pledge by developed countries to spend $100 billion a year to help DLICs deal with the impacts of climate change will be fulfilled later this year. The OECD has reported that in 2020 the total amount reached $83 billion—the failure to meet this promise on time has been a disappointment for DLICs. More positively, the IMF reported that it has met its goal of asking countries with excess SDR reserves to re-channel $100 billion of the SDRs allocated in 2021 to help DLICs—with $60 billion pledged for its Resilience and Sustainability Trust (RST) and Poverty Reduction and Growth Trust (PRGT). In particular, the RST is aiming to help DLICs deal with climate change through an exception to the short-term nature of IMF lending, offering loans with a 20-year maturity and a 10-year grace period. 

The WB also outlined a toolkit that had been in the works for some time and includes offering a pause in debt repayments during extreme climate events (but only for new loans, not existing ones), providing new types of insurance for development projects (to help make those more attractive to private sector investors), and funding advance-warning emergency systems. In particular, it has announced the launching of a Private Sector Investment Lab to develop and scale up solutions to barriers to private investment in emerging markets. Progress has been reported in efforts by MDBs, especially the WB, to optimize their balance sheets according to the G20-endorsed Capital Adequacy Framework in order to be able lend $200 billion more over 10 years—with the hope of catalyzing a similar amount of investment from the private sector (which is easier said than done). 

Most concretely, after years of procrastination, the official bilateral creditor committee agreed to restructure $6.3 billion of Zambia’s bilateral debt, a portion of its total public external liabilities of more than $18 billion. The deal extends maturities of bilateral debt to 2043, with a 3-year grace period; an interest rate of 1 percent until 2037 then rising to a maximum of 2.5 percent in a baseline scenario; but up to 4 percent if Zambia’s debt/GDP ratio improves sufficiently. In the baseline scenario, the present value (PV) of the debt will be reduced by 40 percent, assuming a 5 percent discount rate. This is lower than the 50 percent PV haircut accorded to some other countries in debt crises and is insufficient to meaningfully reduce Zambia’s debt load. Nevertheless it is helpful, especially in allowing Zambia to receive a $188 million disbursement from its $1.3 billion IMF program. The deal was reached contingent on Zambia negotiating comparable agreements with its private creditors and after the multilateral development banks (MDBs) pledged to provide concessional loans and grants to DLICs in crises. 

Key takeaways  

First and foremost, the results of the Paris Summit show that it is useful to maintain pressure on governments and international organizations to deliver on their pledges and commitments to various initiatives, as well as to agree to new ones to help DLICs. Even though each of the measures is insignificant compared to the overall needs, cumulatively many of them can provide tangible support to DLICs.  

Secondly, progress on any of these initiatives requires agreement by all key countries, including China. For example, the Zambia debt restructuring deal was achieved only when China’s preferences have been honored—including no cut in the principal amount of debt, relying instead on maturity extension and low interest rates; classifying several loans including from China Development Bank as commercial, not official; and requiring other creditors including MDBs and private sector investors to participate on a comparable basis in the debt relief. Hopefully, the Zambia deal can represent a template to speed up the restructuring process for DLICs, as flagged in an earlier Atlantic Council post.  

And that leads to the last takeaway from the Paris Summit, mentioned earlier. Countries should not let debt alleviation and climate change mitigation initiatives be used as political scoring points in the geopolitical conflict between the West and China. This will make it difficult to build the consensus required to move forward in these efforts.  

Hung Tran is a nonresident senior fellow at the GeoEconomics Center, Atlantic Council, and former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Lessons from the Paris Summit for a New Global Financing Pact appeared first on Atlantic Council.

The rise of sustainable investing in the private sector

Mobilizing private sector capital to boost sustainable development and ESG priorities makes sense given the numbers. With the top 500 asset managers holding $131.7 trillion in Assets Under Management (AUM) and the combined market capitalization of the top ten global companies reaching over $10 trillion in 2022, the private sector is well-positioned to contribute. Moreover, sustainable investing, mostly in renewable energy, was the fastest growing Foreign Direct Investment (FDI) theme in 2021—with 70% directed to developing countries. Up until 2021, financial markets have also experienced large shifts toward sustainable investing, with ESG fund issuance increasing by 53% to $2.7 trillion in 2021, while the green, social, sustainable and sustainability-linked bond market rose $1 trillion, grabbing 10% of the global debt market share. Sustainable companies also issued $48 billion in new equity, while sustainable lending reached close to $717 billion in borrowing. For example, in Indonesia, companies like Pertamina Geothermal Energy are looking to issue green bonds to help grow its business but also facilitate the transition to clean energy.  

Meanwhile, multinational corporations (MNCs) are integrating sustainability metrics into their supply chains, based on the Science Based Targets Initiative (SBTI). Financial and reputational risks from poor ESG practices can negatively impact a company’s future profits and resilience, which filter down to its local value chain. Many MNCs, including, Nestle, PepsiCo, and Unilever, are working towards preventing this by establishing and adhering to SBTI targets to increase sustainable practices within their global supply chains. Others, including Starbucks, are diverting funds to support climate and water projects in developing countries in an effort to conserve or replenish 50% of the water they deplete through their operations, including the agricultural supply chain. 

Together, ESG investing and SBTI targets should contribute significantly to sustainable development and lower the cost of hitting the SDGs. However, last year revealed several barriers that threaten that potential.

Roadblocks to investing in sustainable development

Sustainable finance faced challenges in 2022 as increased global regulatory scrutiny and divergent ESG standards led to a dip in ESG investing. Reuters reported that in 2022, sustainable investments reversed course for the first time in a decade, with sustainable bond sales decreasing by 30% and green bonds down 23%. Overall, ESG performance declined by nearly 9%, as international investment in ESG, especially climate change, declined.

Varying ESG rating standards, methodology, and data sources, that are often reclassifying sustainably labelled products, contributed to lower levels of ESG investing in 2022. Several ESG labelled securities were downgraded due to criteria conflicting with both major ratings agencies, while conflicting or overly prescriptive requirements led to a decline in support for ESG related shareholder proposals and the withdrawal of several financial industry members from regional ESG alliances. With over 600 ESG data providers, globally, it is not surprising a lack of consistency and standardization leave investors confused about the true risks and rewards from sustainable finance. Recent research reported that 20 of the 50 largest global asset managers assess their sustainable finance products using four or more ESG rating providers, while the other 30 use internal models for the same purpose. Underlying biases in ratings can often exclude developing countries struggling to attract sustainable finance due to inherent country-specific risks, like fossil fuel dependence, budget constraints, and high sovereign debt from external shocks, market access, and lack of technological innovation. However, some asset managers, like Abrdn, have developed in-house ESG ratings system based on data and metrics from external sources, like the World Bank and IMF, to consider unique factors when evaluating alignment with the SDGs for companies listed in their Emerging Markets Sustainable Development Corporate Bond Fund. 

Global regulations for ESG have also complicated cross-border sustainable investing, potentially leading to an increase in compliance costs and reduction in the number of eligible sustainable funds for firms.  Although evolving European, UK, and US frameworks regulating ESG have similar objectives, the approaches towards sustainable investing vary among the jurisdictional regulations and oversight bodies, especially around labelling and reporting. This disparity has also encroached on the Asia-Pacific financial industry, where many banks are starting to require local asset managers to comply with European ESG standards despite the existence of similar local regulations.  An analysis of ESG and sustainable-labelled funds identified that less than 4% meet the standards of all three jurisdictions, while 85% do not comply with any of them.  Additionally, different jurisdictional requirements and contradicting assessments of how to measure sustainable supply chains brought an additional level of uncertainty to MNC’s ESG initiatives in FDI. Companies are starting to realize they may not have fully assessed the impact of carbon emissions on its operations in other countries, specifically in the developing market.  Streamlining allowing for flexibility in the global ESG regulatory framework will be critical to ensuring sustainable investments increase and assist with countries in meeting their ESG goals. 

A way forward

To help meet the SDGs, the World Bank recently announced the creation of a roadmap that focused on three main objectives, including increasing private sector funding, improving country-level engagement and analysis, and establishing a global taxonomy for sustainable investment tools. UN Deputy Secretary-General Amina Mohammed recently warned that “the SDGs will fail without the private sector,” because private sector actors can “invest in the transitions necessary to accelerate development progress and get the SDGs back on track.” The private sector has not only the financial capacity, but also the commitment, to fuel sustainable investing, but faces barriers to keep up the momentum. The IMF and World Bank have an incredible opportunity to address the current ESG investing challenges. The World Bank roadmap is an important first step, but more will be needed to ensure globally consistent standards and data for ESG. The potential for greenwashing or indiscriminate exclusion of countries can be avoided by working with governments and ratings providers, and by improving country-level engagement to both align metrics and to integrate unique country risks in sustainable investing and supply chains. With many firms already leveraging IMF and World Bank data, creating a formal framework will encourage the expansion and scaling up of private sector ESG financing for regions in urgent need of funding.

Nisha Narayanan is a Non-Resident Senior Fellow with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Eastern Europe was once viewed as a promising region for an expanded and pragmatic cooperation with China and it was even touted as China’s economic ‘gateway to Europe’. This was exemplified by several economic and diplomatic configurations, including the massive, infrastructure-focused Belt and Road Initiative and the ‘17+1’ format bound to increasing Chinese investment in the region. But even pre-war, it was apparent that these formats had failed to bring in a meaningful wave of Chinese investment. With the exception of Hungary, they were unsuccessful in generating results, and were reduced to a zombie mechanism, delivering an annual forum alongside failing projects. Today, the Port of Piraeus located in Greece—the format’s latest addition—is also its lone meaningful investment story.

Following these events, the CEE region increasingly turned away from China. Last year, the Baltic states exited the CEE-China ‘17+1’ cooperation mechanism. Other Eastern European countries that once favored close ties with Beijing doubled down on strengthening ties with like-minded democracies, as evidenced by the new Czech president Petr Pavel’s first diplomatic call to Taiwan, followed by a large Czech delegation being received in Taiwan in March, in defiance of China. Prague and Bucharest, moreover, banned Chinese companies from building their new nuclear plants. The CEE countries also signed a Memorandum of Understanding with the US government to restrict companies like Huawei from building its 5G infrastructure in the region.

Perhaps only Hungary remains keen on keeping Beijing close, as evidenced by last August’s announcement that Chinese Contemporary Amperex Technology Co., Limited will open its second European battery plant in Hungary, with an investment of €7.3 billion, more than three times the previous one.

Conversely, western European markets have continued to receive Chinese FDI in bulk, leaving most ‘17+1’ members behind, even when accounting for the size of their economies. Eastern Europe’s relatively lower purchasing power, as well as sparser population density may have played a role, objectively making some investments—for example into infrastructure—less profitable. In terms of structure, a lot of the investment comprises major greenfield investments by Chinese battery makers. In that way, Europe has become a key market in Beijing’s global EV expansion strategy, while Europe relies on China for imports in goods, many crucial for its climate transition.

In the eastern part of Europe, the absence of concrete outcomes in commerce and China’s Ukraine posture created a more unified and skeptical attitude of the region towards China. As China turns towards Western capitals, they should tread carefully in reformulating their China strategy. Betting on “economic pragmatism”—granting Chinese companies unfettered access to EU’s markets—like once done with natural gas dependence on Moscow may backfire, should Europe want to slap sanctions on China over Taiwan, for example. Rather, to protect EU shared security and commercial interests, EU capitals should pursue a common approach to selectively de-risk and diversify existing dependencies in strategic realms, from lithium and cobalt necessary for battery manufacturing, to inputs for manufacturing antibiotics, to semiconductors. The EU Critical Raw Materials Act, aimed to guarantee that no more than 65% of raw material should be sourced from a single country by the end of the decade, represents a meaningful step to this end. Yet, more can and should be done to forge new trade and supply links and protect EU’s domestic interests, by tightening the rules on incoming Chinese investment, among other things. Prioritizing EU long term security and economic interests is the only feasible path forward, and as a by-product can also yield a more constructive and balanced relationship with China.

Sona Muzikarova is a Bretton Woods 2.0 Fellow with the GeoEconomics Center and a political economist focused on Central and Eastern Europe.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Then, she managed to pull off a coup of sorts. By suggesting that the EU “de-risk” its relationship with China she simultaneously appeared tough on Beijing in the context of Europe and nudged the US discourse away from more hawkish talk of “decoupling.”

However, next week’s speech will prove even trickier. (As there is much at stake, squabbles over what does and doesn’t go into the EU Economic Security Strategy speech have already reached the media.) The Commission, which will author the forthcoming EU Economic Security Strategy, must tread carefully so as not to alienate member states who care deeply about their economic relations with China. Yet, it must simultaneously move toward a clearer objective for the EU-China relationship and coax its members toward a more “realpolitik” view of the world. None of that will be easy.

Europe’s economic security

It is the first time the Commission will issue a document on economic security. Its prerogatives on trade and market regulation used to not be so directly affected by geopolitics. Now, the global struggle for access to and control over strategic economic resources is defining the world’s geopolitical fault lines. So, it is right for the EU Commission to try to approach economic security as comprehensively as possible, combining strategic vision and attention to technical detail. Such an integral approach should at least allow the EU to assess emerging risks and threats to the EU’s economic security in a more systematic way.

The harsh reality in EU policy making is that process often dominates content. This is both a blessing and a curse. Economic security is about securing access to and control over strategic economic resources. What is “strategic” is of key importance to the security of the EU and its member states. While talk about economic security nowadays often focuses on high tech, such as semiconductors, it also includes being able to feed the European population, having access to natural resources, and having an industrial base and a well-educated workforce. Furthermore, it requires secure infrastructure—ports, roads, waterways, railways, telecommunications—to get the resources to their destination in the EU.

Clearly, as economic security shapes geopolitical dynamics, the EU’s understanding of it should not be limited to a set of working-level policies. An adequate approach to economic security must link the more tangible, technical aspects with higher order, strategic and geopolitical issues, which are often more abstract. One’s understanding of how economic security relates to geopolitical dynamics at the strategic level should guide and inform the more technocratic issues like investment screening, export controls, financial-economic sanctions, anti-coercion, and their associated risk assessments.

Economic security is also closely related to other dimensions of policy making, including defense policy and international finance. The EU, or its member states, depend on military power for secure access to and control over strategic economic resources. That is why European discussions about the military aspects of strategic autonomy matter to economic security. And financial geopolitics play a major part in determining the EU’s economic security, as the “real economy” is highly dependent on global finance and capital flows. It demands a constant intellectual effort to appreciate how economic security interacts with these and other policy dimensions.

Lacking a more comprehensive view, European policy makers are at risk of reacting in a fragmentary and ad hoc manner to complex economic security challenges. Sound ideas and strong knowledge form the basis for good political discussions and effective decision making on economic security. The EU Economic Security Strategy therefore needs to define the development of European knowledge and ideas about economic security as a necessary element. Member states themselves should also deepen their knowledge about economic security to help shape the Commission’s understanding.

Three hurdles to clear

To arrive at a more comprehensive approach to economic security, the European Commission will have to address at least three hurdles.

First, it will have to foster consensus about how to approach economic security among the different Directorate Generals (DGs) involved. These DGs tend to have different perspectives on the economy, some being more interventionist-minded, others being more free-market minded. Also, the Commission and the Council, constituted of the EU member states, will have to reconcile their views. Whereas the Commission tends to have the lead on economic issues, the Council’s member states have the lead on foreign and security policy. Moving ahead on economic security, at the intersection of both fields, may demand significant intra-EU diplomacy. The EU Economic Security Strategy should lead to the establishment of a European forum where the nexus of economics and security can be discussed on an ongoing basis between all relevant stakeholders.

Second, the strength of any strategy tends to depend on its clarity, or the definition of objectives and means. The Commission will thus have to combine strategic clarity with diplomatic consensus, which is a balancing act. Moreover, the Commission wants to publish the strategy document quickly, while strategic clarity tends to emerge only after time. The risk is that clarity is achieved on rather small and pre-existing technocratic issues, while the higher, more strategic issues are left ill-defined. The EU Economic Security Strategic should therefore call for long-term strategic clarity on economic security, as a compromise between diplomatic consensus in the short run and strategic clarity in the longer run.

Third, and perhaps most importantly, a comprehensive European approach to economic security requires a stronger European geopolitical or “realpolitik” reflex. The importance of economic security has been long underestimated and misunderstood in Europe as the EU policy makers did not tend to view the world in terms of power politics and national security dilemmas. An effective EU approach to economic security requires a context or culture of more strategic and geopolitical reasoning. The EU will be less at risk of an inadequate, fragmented approach if it has more access to outside, independent, and informal views, and knowledge about economic security to inform its decision making. The Commission should therefore use its Economic Security Strategy to stimulate a more thorough academic and intellectual debate about the intersection of economics, security, and geopolitics.

Good policies are based on sound ideas and strong knowledge. The EU’s Economic Security Strategy will be most relevant if it stimulates intellectual debate and strategic clarity. The Commission may operate pragmatically in the short run by seeking consensus on the more technocratic issues, while at the same time laying the groundwork for the next phase. The greatest challenge is to attune the EU’s traditional technocratic reflexes with the strategic exigencies of a geopolitical context dominated by great power competition.

Dr. Elmar Hellendoorn is a nonresident senior fellow with the GeoEconomics Center and the Europe Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post <strong>What the EU’s economic security strategy needs to achieve</strong> appeared first on Atlantic Council.

How are these growing economic ties impacting Moscow’s ability to withstand G7 sanctions and maintain its invasion of Ukraine—and where do Beijing’s interests diverge from Moscow’s? 

Below we outline six trends that have defined the two countries’ relations since the invasion of Ukraine. Russia’s access to the yuan has bolstered its wartime economy. However, when it comes to trade and financial support, Beijing has been less accommodating. 

Chinese yuan is Russia’s friendliest currency.

China is mitigating the impact of sanctions on Russia by providing Moscow an alternative currency for transactions. Chinese yuan supplanted the dollar as Russia’s most traded currency in early 2023. The switch came after the United States imposed sanctions on a few banks in Russia that were still allowed to make cross-border transactions in dollars. As the Group of Seven (G7) sanctions constrain Russian financial institutions’ ability to transact in the world’s leading reserve currencies, like dollars, euros, and yen, the yuan is arguably the only relatively stable, widely traded currency issued by a non-sanctioning authority that enables Russia to make international transactions.

Central bank currency swap lines play a major role in increasing the circulation of the yuan in the Russian economy. Although China’s capital controls make it difficult for foreigners to obtain yuan, Beijing has supported Russia’s growing yuan marketplace by backing currency swap facilities. Through these swaps, Russia and China’s central banks exchange rubles for yuan. Major Russian commercial banks then tap into their central bank’s accounts to introduce the yuan into the Russian economy. Furthermore, as China’s banks have accumulated Russian assets, they have also likely increased the amount of yuan in local circulation.

Russia’s linkages to the Chinese financial system also allow it to mobilize its currency reserves. G7 countries froze most Russian reserves held by sanctioning jurisdictions. However, Russia has been able to access its central bank reserves held in China (nearly 18 percent before the conflict), which are largely denominated in yuan. As a result, Russia has been able to use yuan-denominated reserves to conduct foreign exchange transactions to manage the value of the ruble. Moreover, Russia increased the permitted share of yuan in its National Welfare Fund up to 60 percent last year and plans on selling more yuan from the wealth fund to make up for the lost energy revenues and cover budget deficit. 

Vital trade links

Russia has compensated for lost market share in the West by exporting more energy to China. Beijing has increased spending on Russian energy from $57 billion in the year prior to the invasion to $88 billion in the year after and allowed Moscow to make up for the lost revenues in the EU market. Russian crude oil exports to China could increase even further in 2023, as China’s state-run refiners have been increasing purchases of Russian oil, and Beijing has signaled that it may allow a further ramp-up. However, China maintains informal quotas on crude oil imports to limit exposure to any individual energy exporter. These sit at 15 percent of overall imports or around two million barrels a day per country. Another component of China’s energy imports from Russia is natural gas. Natural gas is more dependent on existing infrastructure and is thus harder to rapidly increase in imports. Russia is expected to deliver 22 billion cubic meters of natural gas to China through the Power of Siberia pipeline in 2023, eventually increasing to full capacity of 38 billion cubic meters in 2027. However, even though Russia has pushed for the construction of the Power of Siberia 2 pipeline, Beijing has shown hesitation and has, in fact, negotiated a new pipeline through Central Asia. Whether Russia keeps exporting more oil or natural gas to China will depend on Beijing’s decisions on quotas or new pipelines, making Russia asymmetrically dependent on its economic partnership with China.

Russia has imported electronic equipment from China to offset the effects of export controls but is struggling with obtaining advanced technology—even from Beijing. Integrated circuit imports from China have increased from $67 billion in 2021 to $170 billion in 2022, but most electronics exports from China to Russia are made up of basic computers and transport equipment. Notably, Beijing has banned the export of advanced Loongson microprocessors. The West’s imposition of export controls on advanced semiconductors against China in October 2022 signals that Beijing will become even more protective of advanced technology and less likely to transfer them to Russia. 

China is not the only country whose trade with Russia has increased. Although Beijing has provided a lifeline to the Russian economy, countries such as India and Turkey have also expanded trade with Russia. In fact, India has become the second largest destination of Russian crude oil exports after China. Meanwhile, Central Asian and Caucasus countries’ exports of electronic equipment to Russia ballooned in 2022 and Serbia, Turkey, and Kazakhstan have provided semiconductors to Russia throughout the last year. China might be the largest economy supporting Russia but other countries’ trade relations with Russia should be as closely monitored as Beijing’s. 

Limits in the ‘no-limits’ partnership

China has generally avoided steps that could trigger secondary sanctions or that greatly increase its own strategic dependence or risk exposure to Russia. For example, Chinese banks have not become creditors to the Russian government. Likewise, China has hedged against dependence on Russian energy imports and has restricted the flow of advanced technology to Russia. The notion of a “no limits” partnership remains rhetorical for now.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Phillip Meng is a young global professional at the Atlantic Council’s GeoEconomics Center.

Jessie Yin is a young global professional at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post How is China mitigating the effects of sanctions on Russia?  appeared first on Atlantic Council.

Policymakers who recently gathered in Washington, DC for the Spring Meetings of the IMF and World Bank highlighted the need for global progress on crypto-asset regulations. G20 finance ministers and central bank governors included global regulatory development on their list of priorities, as did the International Monetary and Financial Committee. Crypto regulations were discussed throughout the meetings, including in a session focused on the future of crypto-assets. 

The meetings made two things clear. First, the need for robust, globally coordinated crypto regulations is evident. And, second, policymakers face substantial challenges achieving that goal. Following on discussions held at the Spring Meetings, we used our Cryptocurrency Regulation Tracker to identify several of the major policy dilemmas facing policymakers and regulators.

Consumer protection rules are lagging behind other forms of regulation

Consumers participating in crypto-markets are exposed to considerable risk. Theft is increasingly common. Volatility, often fueled by speculation, is a defining feature of crypto markets. And misinformation and deceptive advertising make informed investing difficult. Despite the risks that consumers face, we found that only one-third of the countries studied had rules in place to protect consumers. Other countries may have legal protections that extend to crypto market participants, though the law is often untested or ambiguous. 

Fortunately, countries that do provide consumer protections are demonstrating a diversity of approaches. India, France, and others have helped consumers make better informed decisions by requiring that advertisers disclose risks associated with crypto-investing. In South Korea, crypto-asset service providers, such as exchanges and wallets, are required to obtain an information security certificate from the Korea Internet and Security Agency, decreasing the likelihood of theft. And many countries, including Australia and Japan, have rules in place to prevent and penalize deceptive conduct and fraud. While these examples demonstrate steps some countries are taking, the safety of crypto markets requires that policymakers redouble efforts to enact consumer protection regulations. 

Regulations to prevent another FTX-style collapse are a long way off

Centralized exchanges like FTX and Binance play a critical role in the crypto ecosystem. By allowing individuals to participate in “off-chain” transactions involving crypto-assets, they dramatically reduce the barriers to entry posed by more technically complex “on-chain” transactions. The substantial gains made in market capitalization and adoption would be unlikely absent centralized exchanges.

But centralized exchanges that perform multiple functions pose risks that regulators must address. Many exchanges are not sufficiently transparent about their operations, finances, or governance, leaving investors in the dark on key matters. Some companies are taking steps to address this problem by disclosing “proof of reserves”, a transparent accounting of a company’s assets and liabilities. While more than half of the countries in the tracker have licensing or registration rules, these do not typically include disclosure requirements. 

Centralized exchanges may misuse customer funds. Unlike in traditional finance, where customer funds are subject to certain protections, centralized exchanges typically face either nonexistent or less stringent regulations. The Cryptocurrency Regulation Tracker includes only two examples of a specific requirement that crypto companies segregate customer funds, placing a firewall between customer money and proprietary trading. The European Union’s Markets in Crypto-assets framework, which became law last month, has specific rules that wall off customer funds from proprietary trading. The US Securities and Exchange Commission is considering a similar move.

In some cases, global exchanges may fall outside national or regulatory borders. This leaves policymakers incapable of performing basic oversight, as was the case with FTX in the United States. Policymakers have yet to achieve coordinated global action and are continually confounded by crypto companies that evade—intentionally or otherwise—traditional regulatory definitions. Bringing crypto activity within the regulatory perimeter remains a key challenge. 

Our research shows that more needs to be done to prevent the next FTX. Fortunately, that debacle has propelled policymakers and regulators to fill this perilous gap. 

Low- and middle-income countries lag advanced economies in regulatory development, but not in rates of crypto adoption 

The Cryptocurrency Regulation Tracker considers four categories of regulation: taxation, anti-money laundering, consumer protection, and licensing. Of the advanced economies we reviewed, 64% have regulations in each of these categories. Only 11% of the middle income countries have rules in all four categories, and none of the low-income countries do. These findings identify a clear trend: low- and middle-income countries are adopting crypto-regulations more slowly. 

Limited regulatory development, however, has not slowed adoption. In fact, our research found virtually no relationship between crypto-regulation and adoption rates. Six of the ten countries with the highest rates of adoption (according to Chainalysis) have in place either a partial or general ban on crypto-assets. It is worrying that some low- and middle-income countries, who may be vulnerable to crypto-induced shocks, have active crypto-markets with few regulations. 

The widening regulatory gap between countries is a critical challenge for international financial institutions and standard-setting bodies. Patchwork, uncoordinated global regulations present opportunities for regulatory arbitrage. Companies may consider issuing new crypto-assets from jurisdictions with few or no guidelines and selling those assets to investors around the world—even in countries where such sales are technically illegal. In the short-term, such activity could hurt consumers and facilitate illicit activity. In the longer-term, it could present a meaningful financial stability risk. 

In recent remarks at the Atlantic Council, World Bank President David Malpass urged regulators to make global standards “accessible” to countries with lower state capacity. Indeed, the International Monetary Fund, Financial Stability Board, and others must do the tough work of both establishing global standards and providing technical assistance where needed. 

Regulators around the world face multiple challenges. They must protect customers and put in place safeguards to prevent the next FTX-style collapse, all while coordinating across diverse jurisdictions. And they have a long way still to go.

To keep up with this rapidly evolving topic, follow the GeoEconomics Center’s Cryptocurrency Regulation Tracker.

Cryptocurrency Regulation Tracker

Cryptocurrencies may significantly alter financial structures and transform the next generation of money and payments. Governments around the world are looking to create regulations to prevent the harms caused by cryptocurrencies while encouraging the innovative capabilities of cryptocurrencies. We analyze how 45 countries have regulated cryptocurrency in their jurisdictions.

Greg Brownstein is a Bretton Woods 2.0 Fellow and research consultant with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post <strong>Three challenges in cryptocurrency regulation</strong> appeared first on Atlantic Council.

This shift in market sentiment has whittled away the flow of capital into China, underlining how de-risking has become a bottom-line imperative as much as a diplomatic strategy. And it does not bode well for China amid growing anxiety about the country’s economic prospects. 

China’s economy has failed to rebound as expected from Zero-Covid policies, and it faces profound structural challenges: A rapidly aging workforce and slow productivity growth; widening income inequality; and a crippling property crisis. All this adds up to a difficult straits in which local governments and many companies can’t pay their bills. Even though China doesn’t need foreign capital like it did a generation ago, foreigners’ reluctance to invest will reverberate through the economy over time. 

Fund managers—especially those with investment strategies focused on the long-term—are concerned about the political uncertainty created by Beijing’s regulatory crackdown on leading private sector conglomerates and heavy-handed pressure on Western companies. Now the Biden administration is preparing to restrict the flow of US venture capital and private equity to Chinese startups developing sensitive technologies—a step many investors worry is a harbinger of more sanctions to come. Western manufacturers are also taking first steps to leave the country, or at least to implement “China+1” strategies. 

Meanwhile, Beijing has been undertaking its own form of de-risking by imposing strict regulations that have choked off the number of Chinese companies launching initial public offerings (IPOs) in the US. China’s bureaucrats are concerned about exposing secrets supposedly contained in the vast troves of data controlled by companies seeking IPOs. Instead, the government is making it easier for these companies to list in Shanghai and Shenzhen. More IPOs have been launched in those markets over the past year than in any other market—but with less long-term, foreign capital to offset the share-price volatility that comes from China’s army of retail investors. 

The bottom line for many foreign fund managers is that the risk of investing in Chinese securities has soared over the past year and the returns have not kept up. Those returns are out of reach because of the country’s economic doldrums and anemic corporate profits. As a result, many pension funds and other large institutions have stopped buying China altogether. Instead, they are shifting capital to more promising emerging markets like India, where the economic outlook is brighter and politics less of a worry.  

The turn away from Chinese bonds is also a response to the efforts to contain US inflation. As the US Federal Reserve has raised interest rates—and China’s central bank has maintained a loose monetary policy in the face of slow growth—10-year US Treasuries have offered better yields than comparable Chinese bonds. At the same time, the renminbi has weakened against the dollar, potentially making investments in China even less profitable.  

Chinese stocks did well during the first year of Covid as China’s exporters rushed to feed the world’s demand for pandemic supplies. But after hitting peaks in early 2021, the shares popular with investors in New York and Hong Kong fell for 20 months. A key reason was Beijing’s regulatory crackdown on tech platforms like Alibaba Group and ride hailer Didi Global, which Chinese regulators forced to delist from the New York Stock Exchange immediately after a successful IPO in June 2021. Foreign investors returned to buying in late 2022 in expectation of an economic rebound as Beijing loosened its harsh Zero-Covid policies. But by Spring they had returned to selling amid disappointment with the Chinese government’s policies, skepticism about Beijing’s belated promises of support for companies that had been targeted in the crackdown, and worries about worsening US-China relations. 

This evolution is clear from the performance of the Nasdaq Golden China Index, which tracks Chinese companies listed in the US, and the Hang Seng China Enterprises Index in Hong Kong. 

The loss of confidence among US investors outweighed what might have been the salutary effect of last year’s resolution of a dispute between Washington and Beijing over the auditing standards of Chinese companies on Wall Street that had threatened to delist those firms. Trading in some of those shares also has been affected as fund managers shift their investments to some companies’ parallel listings in Hong Kong in anticipation of future delisting—another aspect of the concern about US-China tensions. By the end of March, 53 percent of Alibaba’s “tradeable” shares were registered in Hong Kong, up from 38 percent at the end of 2022.  

Some foreign fund managers remain committed to Chinese stocks, especially hedge funds. But they aren’t necessarily the stable, long-term investors the Chinese government seeks.  

Beijing is not standing idly by: It continues to provide new avenues for foreign investors, most recently opening a channel for them to hedge bond investments and licensing major Western investment banks to operate wholly-owned fund management businesses catering to domestic Chinese investors. But there is a sense among foreign firms that China will prove less profitable than they once hoped. 

Then there are the funds that specialize in early-stage investing: Venture capital (VC) and private equity investors (PE) who provide startups with seed money and help bring them to market. These investors have played a significant role in the development of many leading Chinese technology companies. For example, American VC firms and other foreign investors made 58 investments in China’s semiconductor industry from 2017 to 2020, and China-based affiliates of Silicon Valley VCs provided capital to 67 chip-related ventures in 2020 and 2021. 

But since the Biden administration began exploring restrictions on outbound investment, the pace of Chinese investments from abroad by both groups has declined. The share of VC deals in China that include non-Chinese investors dropped to 15.1 percent last year from 2021, the lowest level since 2017. Meanwhile, PE investments in China by American investors declined 76 percent to $7.02 billion last year from $28.92 billion in 2021.  

While the China affiliates of some VCs continue to raise funds, the imminent White House executive order is expected to continue cutting into this category of investment. Combined with recent Biden administration restrictions on sales to China of advanced semiconductors and cutting-edge chip-making gear, the message to all classes of investors will be clear: Putting money in China is going to become riskier, and de-risking is only going to become more commonplace. 

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

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While some of the most powerful economic institutions in the world are led by women at the moment, Calviño is unfortunately right. With Kristiana Georgieva at the International Monetary Fund, Ngozi Okonjo-Iweala at the World Trade Organization, Christine Lagarde at the European Central Bank, and Janet Yellen at the US Treasury, we’re given the impression that women are at the helm of economic policymaking. However, this success has not translated into broad representation. Structural barriers continue to prevent many women from reaching top roles in finance and economics—and the problem is more pronounced than in other areas of policymaking.

A leaky pipeline

Of the 190 member countries of the IMF, 26 have women as finance ministers and only 17 have women as central bank governors. That means just 11.3% of policymakers in those two roles are women. The average proportion of women serving as cabinet ministers globally is meaningfully higher, at 22.8%. What is it about the economic portfolio that results in such a drop off?

The reasons for this disparity can be attributed to a variety of factors, such as male-dominance in the study of economics, barriers that prevent women from being promoted, and social perceptions of women’s abilities. These structural and social barriers create a “leaky pipeline,” where small gender gaps in participation at early stages can accumulate over time to result in large disparities at the top of institutions.

Economics requires mathematics and quantitative skills. However, girls often receive the message that they are not as competent in these areas from a young age. The lower participation of women and girls in STEM-related activities is well-documented, and similar patterns are present in economics. Across major US and European academic institutions, women represent around 35% of PhD candidates in economics. Women also tend towards more social research areas such as health, education, and labor while men dominate areas like economic theory, macroeconomics, and finance—the subfields from which top policy leaders are often drawn from. There is nothing preordained about these trends in specialization. They are driven by social expectations, gender biases, and a lack of role models.

However, educational differentials don’t fully explain the disparity. After all, while the role of finance minister or central bank governor requires experience with economics, that doesn’t have to include a PhD. We can look to US Federal Reserve Chair Jerome Powell and ECB President Christine Largarde (both lawyers) as examples of such exceptions.

Women are also held back by an array of barriers to promotion in big economic and financial institutions. Men are more likely to be promoted than their female counterparts with comparable qualifications. For example, the US financial sector employs around 9 million workers, with women comprising the majority of the entry-level workforce but holding less than a fourth of the top leadership positions. Women are impacted by the “motherhood penalty” caused by gendered expectations around parenting and work. This penalty can be exacerbated by a lack of parental leave, but even when leave is available, women use it more than men and are stigmatized for it. The promotional gap makes it more difficult for women in economics and finance to achieve the caliber of resume that candidates for finance minister or central bank governors usually have.

Finally, there is an unconscious bias against women’s ability to effectively conduct economic research and policy. As a whole, both men and women rate male applicants higher for positions that require quantitative skills, and female financial advisors are punished more severely for misconduct. Surveys in the US found that when central bankers were introduced without their credentials in a media announcement, people were more likely to doubt the commitment and ability of the Federal Reserve to balance inflation and employment if a woman was the spokesperson. Another study found a correlation between countries with high inflation and a lack of female central bank governors, and suggested that women are hindered by a bias that men are more “hawkish” and therefore more committed to fighting inflation.

Not a quick fix

In 2013, after over two years without a woman sitting on its six-member Executive Board, the ECB committed to a gender diversity action plan. At the time, only 14% of senior managers were women. The ECB’s action plan includes up to 20 weeks of paid parental/adoption leave for either parent and a target of a minimum 50% women in new hires across all levels of staff. As of the end of 2022, 38% at the senior managerial level are women. While 38% is not parity, it does represent a real increase as a result of the ECB’s diversity policies.

As President Lagarde said, “Being surrounded by men is not something new, but it is something that is always disappointing.” The barriers that women face aren’t new and neither are the suggested solutions. There is no magic pill for improving gender representation. Instead, there are a myriad of policies that tackle the different aspects of the “leaky pipeline.” From improving opportunities in education, to committing to equitable hiring practices, the approach to gender equality in economics must be holistic.

Jessie Yin is a Young Global Professional with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Only 11 percent of finance ministers and central bank governors are women appeared first on Atlantic Council.

In this edition of the Global Sanctions Dashboard, we cover:

• New sanctions packages against Russia released ahead of the G7 Summit.
• How the United States is tackling export controls circumvention and what should improve moving forward.
• The enforcement and effectiveness of the oil price cap.
• The failure of the US sanctions policy towards Sudan, and how to fix it.

New sanctions packages against Russia released ahead of the G7 Summit

The Ukrainian intelligence assessment from 2022 indicated that forty out of fifty-two components recovered from the Iranian Shahed-136 drone that was downed in Ukraine last fall had been manufactured by thirteen different American companies, while the remaining twelve were made in Canada, Switzerland, Japan, Taiwan, and China. The case revealed that it was not enough to impose sanctions and export controls on Russian defense companies. Not only was Iran providing drones to Russia, but also certain entities and individuals in countries such as Switzerland and Liechtenstein have procured materials on Russia’s behalf. This is why the United States released a new sanctions package ahead of the G7 summit, targeting a much wider international network of Russia sanctions and export controls evasion. 

Finland, Switzerland, Cyprus, United Arab Emirates, India, Singapore—these are just a few locations associated with individuals and entities included in the Treasury Department’s newest designations against Russia. Entities and individuals located in these countries have aided Russia’s circumvention efforts or provided materials for Russia’s military procurement. Among the sanctioned individuals are Swiss-Italian businessman Walter Moretti and his colleagues in Germany and India, who have sold advanced technology to Russian state-owned enterprises. Liechtenstein-based Trade Initiative Establishment (TIE) and its network of two companies and four individuals have been procuring semiconductor production equipment for sanctioned Russian entities since 2012. 

Along with the United States, the United Kingdom also imposed sanctions against eighty-six individuals and entities from Russian energy, metals, financial, and military sectors who have been enhancing Russia’s capacity to wage the war. Additionally, the European Union (EU) is developing its eleventh package of sanctions which will reportedly, for the first time, target Chinese entities facilitating Russia’s evasion efforts. Coordinating the designation and enforcing processes among the G7 allies will be key in synchronizing the targeting of Russia’s evasion and procurement networks.

Export controls circumvention: How the US is tackling it and what should improve moving forward

While sanctions aim to cut entities and individuals procuring technology for the Russian military out of the global financial system, export controls are designed to prevent them from physically acquiring components. G7 allies have levied significant export controls on Russia, but enforcing export controls is easier said than done. Third countries from Russia’s close neighborhood have stepped up to fill Russia’s technology shortages caused by other countries complying with export controls. Central Asian and Caucasus countries had a significant uptick in exports of electronic components to Russia, while Turkey, Serbia, and Kazakhstan have been supplying semiconductors to Moscow. Even if exported electronic components are not designed for military application, Russians have been able to extract semiconductors and electronic components for military use even from refrigerators and dishwashers. The sudden boost in electronic equipment exports from Central Asia and the Caucasus to Russia can only be explained by Russia’s efforts of repurposing them for military use. 

In response to Russia’s efforts to obtain technology by all means possible, the US Departments of Commerce and Justice have jointly launched the Disruptive Technology Strike Force. The goal of the Strike Force is to prevent Russia and adversarial states such as China and Iran from illicitly getting their hands on advanced US technology. The Strike Force recently announced criminal charges against individuals supplying software and hardware source codes stolen from US tech companies to China. The Strike Force embodies the whole-of-government approach the United States has been taking in investigating sanctions and export controls evasion cases. The prosecutorial and investigative expertise of the Justice Department, coupled with the Treasury’s ability to identify and block the sanctions evaders from the US financial system, will amplify the impact of the Commerce Department’s export controls and enhance their investigations and enforcement.  

The US Department of Commerce has also teamed up with Treasury’s Financial Crimes Enforcement Network (FinCEN) to publish a joint supplemental alert outliniing red flags for potential Russian export controls evasion that financial institutions should watch out for and report on, consistent with their compliance reporting requirements. The red flags include but are not limited to:

• Payments for dual-use goods to companies located outside of the Global Export Controls Coalition (GECC) countries. 
• A new customer who trades in the nine Harmonized System (HS) codes, is located outside of the GECC countries and was incorporated after February 24, 2022. 
• A consumer who refuses to provide details to banks about end users or company ownership. 

Providing information to the public in the form of alerts and advisories is an effective step to increase awareness, financial institution reporting, and compliance with Western sanctions and exports controls. The Disruptive Technology Strike Force should consider issuing a multilateral advisory on export control evasion with G7 allies to bring in foreign partner perspectives, similar to the multilateral advisory issued in March on sanctions evasion by the Russian Elites, Proxies, and Oligarchs Task Force (REPO)

Regarding third-country intermediaries suspected of supplying Russia with dual-use technology, G7 allies should prioritize capacity building and encouraging political will in these countries to strengthen sanctions and customs enforcement. Building up their capacity to monitor and record what products are being exported to Russia could be the first step towards this goal. For example, Georgian authorities returned goods and vehicles destined for Russia and Belarus in 204 cases. However, registration certificates did not identify the codes of returned goods in fifty cases, and clarified that the goods were sanctioned only in seventy-one cases. Developing a system for identifying controlled goods and making the customs data easily accessible to the public could both salvage Georgia’s reputation and enhance export control enforcement against Russia.

The enforcement and effectiveness of the oil price cap

The US Department of the Treasury recently published a report analyzing the effects of the oil price cap, arguing that the novel tool has achieved its dual objective of reducing revenue for Moscow while keeping global oil prices relatively stable. A recent study by the Kyiv School of Economics Institute backs up this statement with detailed research of the Russian ports and the payments made to Russian sellers. However, Russian crude oil exports to China through the Russian Pacific port of Kozmino might be examples of transactions where the price cap approach does not hold.

In response, the Department of the Treasury warned US ship owners and flagging registries to use maritime intelligence services for detecting when tankers are disguising their port of call in Russia. Meanwhile, commodities brokers and oil traders should invoice shipping, freight, customs, and insurance costs separately, and ensure that the price of Russian oil is below 60 dollars. 

Despite China’s imports of Russian crude oil, the world average price for Russian crude oil in the first quarter of 2023 was 58.62 dollars, which supports the claim about the success of the oil price cap, at least for now. Notably, Russia’s energy revenues dropped by almost 40 percent from December 2022 to January 2023, likely in part due to the price cap combined with lower global energy prices.

Beyond Russia: The failure of US sanctions policy towards Sudan, and how to fix it.

While the world has been focused on the G7 summit, the crisis worsened in Sudan. In April 2023, President Biden issued Executive Order 14098 (EO 14098) authorizing future sanctions on foreign persons to address the situation in Sudan and to support a transition to democracy and a civilian transitional government in Sudan. The use of sanctions to support policy goals in Africa is not new. In the case of EO 14098, policymakers seek to use future sanctions on individuals responsible for threatening the peace, security, and stability of Sudan, undermining Sudan’s democratic transition, as well as committing violence against civilians or perpetuating other human rights abuses. 

Much has been written and studied about the effectiveness of sanctions programs in Africa with many programs suffering from being poorly designed, organized, implemented, or enforced. Sudan faced statutory sanctions from its designation as a State Sponsor of Terrorism from 1993 to 2020 and US Treasury sanctions from 1997 to 2017 both of which produced limited results due to ineffective enforcement and maintenance of the program. A near-total cut-off of Sudan from the US financial system pushed Sudan to develop financial ties beyond the reach of the US dollar.

Sanctions in Sudan can be useful if applied in concert with more concrete action. US policymakers must elevate Sudan on their priority list and engage their counterparts at sufficiently senior levels in the United Arab Emirates (UAE), Egypt, Saudi Arabia, Turkey, and elsewhere to encourage them to apply pressure on the Sudanese generals. This could be done by freezing and seizing their financial, business, real estate, and other assets in these relevant countries. Cutting off those links will impede the two generals’ ability to fight, resupply weapons, and pay their soldiers, which could force them back to the negotiating table.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

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At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Global Sanctions Dashboard: US and G7 allies target Russia’s evasion and procurement networks appeared first on Atlantic Council.