An instigating ingredient added this past weekend was the disappointing jobs report released on Friday. Analysts expected 180,000 jobs—which would signal a slowdown but still relatively healthy job growth. This was, it seems, what the Federal Reserve expected last Wednesday when it decided not to cut interest rates and its chair, Jerome Powell, said, “the labor market has come into better balance.”

Instead, 114,000 jobs were created in July. This was disappointing, and some believed it signaled that the United States is headed for slower growth than forecast and even—dare one say the dreaded word—a recession. But within a day or two, most market participants had taken a deep breath, recognizing that bad weather probably had an impact, remembering that unemployment was still near historic lows, and aware that US gross domestic product growth was far outpacing that of the rest of the Group of Seven (G7).

Then Japan happened. As several financial commentators have noted, a unique mix of problems is plaguing Japanese markets. The Bank of Japan had stuck to zero interest rates during the global cycle of rate hikes but was forced to intervene last week to avoid further yen depreciation. This now means that Japanese borrowing conditions are becoming tighter as recession risks grow, making it an outlier during the coming easing cycle—just as it was during the global cycle of rate hikes. The record Nikkei index rout on Monday can also be attributed to the export-oriented nature of Japanese firms, which had benefited from the weak yen, until now.

So why then did US markets react so violently Monday? It’s not just the jobs report and it’s not just Japan. Instead, it’s the x-factor ingredient—geopolitics. Specifically, Iran’s likely imminent attack on Israel, as retribution for the assassination of Hamas political leader Ismail Haniyeh in Iranian territory.

Pricing in geopolitics is almost always an impossible task for Wall Street. Speculation about equity markets is one thing. Speculation about Ayatollah Ali Khamenei’s intentions is usually far outside traders’ field of expertise. With more uncertainty comes more fear—see the VIX index, which is essentially Wall Street’s fear gauge, below—surprisingly showing that the market is more concerned now than it was during Silicon Valley Bank’s collapse in March 2023. In fact, it’s the highest volatility reading since the COVID-19 pandemic, rivaling volatility during the global financial crisis.

What’s especially hard for markets is to navigate a geopolitical crisis intertwined with bad economic news. Individually, either one can be mitigated and hedged against. But together, the two developing at the same time create a haze that can make each situation appear more threatening than it actually is. How then do we find solid ground? Focus on the data.

The US economic data remains strong. The economy is slowing, but it is nowhere near a recession. And in fact, as the chart below shows, it could slow significantly before falling to the level of its G7 peers.

Moreover, data released Monday show that economic activity in the service sector grew more than expected. And remember that the United States is still creating new jobs, even if at a slower pace than before. Gas prices are significantly lower than two years ago at the outset of Russia’s full-scale invasion of Ukraine. So even if a crisis widens in the Middle East, a slower global economy should keep price increases in check.

Meanwhile, inflation is finally coming back down to the Federal Reserve’s target range of 2 percent. All this signals an economy that is, as long forecast, coming off its breakneck pace. The Federal Reserve should probably have acted sooner by cutting rates last week, but to jump into an emergency session as some have called for is not supported by the data right now and risks creating more panic. The economic fundamentals remain stable.

Geopolitical tensions actually present the greater risk to markets. No one knows how and when Iran will retaliate and what the fallout will be. And as I wrote in February, the relative weakness of the region’s economies means any worsening of the situation could send multiple countries into debt distress and trigger more market failures.

Still, the overwhelming likelihood is that whatever develops in the Middle East this week will be contained to the Middle East. While that may impact energy prices, it is unlikely to trigger wider global economic fallout. To be sure, nothing is guaranteed. The situation could deteriorate and the worst fears could be realized. But it is not the most likely outcome.

So in the days ahead, it’s geopolitical tensions that will likely move the markets more than the macroeconomics. Watch carefully in the coming days (or as Macbeth would say, “tomorrow, and tomorrow, and tomorrow”) as markets recognize this reality and, hopefully, cooler heads prevail.

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

Data visualizations created by Alisha Chhangani, Mrugank Bhusari, and Sophia Busch.

The post Behind the market turmoil: Why a bad jobs report and the risk of war are shaking the financial world appeared first on Atlantic Council.

While previous G20 meetings have been noteworthy for their disagreements, Brazil has emphasized substance and consensus over geopolitics during its G20 presidency. Felipe Hees, the Brazilian diplomat and sous-sherpa of this year’s G20 presidency, explained this strategy on July 25 at an Atlantic Council conference on the sidelines of the meeting. Brasília, he said, has sought to acknowledge fundamental disagreements on geopolitics between some members, and then to sidestep them entirely at the ministerial level. The big question now is: How long can this approach last?

So far, Brazilian officials have chosen to focus on economic development issues that already enjoy widespread support. Last week, this approach resulted in one of the few joint G20 ministerial-level communiqués in the past two years. Released on July 26, this communiqué displays G20 members’ alignment on launching the Global Alliance against Hunger and Poverty under the Brazilian presidency. It’s an important topic for the host country, since Brazil is the world’s leading producer of soybeans, corn, and meat, and Brazilian President Luiz Inácio Lula da Silva has emphasized his country’s role in alleviating global food insecurity. At the same time, the issue has a wider resonance. At the Atlantic Council conference, Cindy McCain, executive director of the World Food Program, emphasized that “food security is a national security issue, and it should be labeled as one.”

Climate finance and the energy transition were at the forefront in Rio last week as well. Discussions focused on how to mobilize the public and private sector in achieving climate goals. At the Atlantic Council’s conference, Renata Amaral, the Brazilian secretary for international affairs and development in the Ministry of Planning and Budget, formally called for technical assistance from multilateral development banks for catastrophic weather events, such as the floods in southern Brazil this May. Immediately following the summit, US Treasury Secretary Janet Yellen headed to Belém, the capital city of the northern Brazilian province Pará. Located near the mouth of the Amazon River, Belém was a symbolic choice for the unveiling of the US Treasury’s Amazon Region Initiative Against Illicit Finance, which is intended to help combat nature crimes.

Another issue that garnered attention last week was wealth inequality, which the Brazilian president spotlighted in his speech on June 24. “The poor have been ignored by governments and by wealthy sectors of society,” he said. Despite disagreements on whether the G20 is the right forum for the issue, it issued the first ever ministerial declaration on taxation. While Brazil’s ambition was to move the needle on a 2 percent global wealth tax, the declaration simply said that ultra-high-net-worth individuals must pay their fair share in taxes. While this fell short of Brazil’s hopes on this issue, the meetings in Rio have done more on building consensus than the past two presidencies, which have been rife with outbursts over geopolitical issues between member states.

In 2022, the then G20 president, Indonesia, saw its plan to build international cooperation for the post-pandemic recovery paralyzed by Russia’s full-scale invasion of Ukraine in February. When finance ministers and foreign ministers met in April and July of the year, officials from Russia and from the United States and Europe walked out of the room when their counterparts spoke. Ministers failed to agree on a communiqué, and negotiations on climate and education also broke down over criticisms of the war. Ahead of the leaders’ summit in November 2022, Western leaders balked at the thought of sharing a table with Russian President Vladimir Putin, who ultimately did not attend the summit. In the end, the leaders could only agree to a declaration that was a broad, noncommittal summary of approaches to addressing global challenges.

Last year, India focused its G20 presidency on depoliticizing the issue of the global supply of food, fertilizers, and fuels, as well as on addressing climate change and restoring the foundations of negotiations at the forum. Its strategy was to move geopolitics off center stage by highlighting perspectives from the “Global South,” including formally adding the African Union as a full member, and thus shaping the platform as an action and communication channel between advanced economies and emerging markets.

This was difficult. Shortly into India’s presidency, Russia and China withdrew their support for the text in the Bali statement on Ukraine. At the technical level, none of the ministerial meetings produced a joint communiqué, and New Delhi was forced to issue chairs’ statements instead. Since the leaders’ summit in New Delhi, the outbreak of war between Israel and Hamas in October 2023 has made the job of navigating geopolitical tensions all the more difficult for Brazil.

While the Russian and Chinese leaders did not attend last year’s leaders’ summit, the New Delhi Declaration was nevertheless bolder and more specific than its Bali predecessor. It set the agenda for the G20 for the years ahead but offered few specifics on how to achieve these goals.

Will Brazil’s strategy of sidestepping geopolitics work at the leaders’ summit scheduled for November 18-19 in Rio? Finance ministers and central bank governors can ignore geopolitics; presidents and prime ministers often cannot. If Brasília concludes technical negotiations on the various proposals ahead of the leaders’ summit, then consensus-building at the gathering will be easier, as geopolitics will remain just an elephant in the room.

If Brazil is successful, it can end the stalemate that the G20 has found itself in and remake it into a relevant economic coordination body—one that can adequately address the goals of its emerging market and advanced economy members. If Brazilian officials are not successful, however, the forum’s relevance may begin to wane.

It has been in the interest of the last few G20 presidencies to keep up the balancing act between the United States, China, and Russia. Moreover, it is likely that South Africa will follow this approach as it takes on its presidency in 2025. As many of the discussions in Rio noted, however, what happens in the US presidential elections this November could determine both the relevance and the tone of the G20 meetings going forward.

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

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

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With EU countries now facing greater fiscal constraints, the bloc needs to either further amend them or find a way to have more common European debt. Only then will EU member states be able to make the increases in defense spending that are necessary to bolster security on the continent and deter further aggression from Moscow.

The EU’s fiscal rules

The EU is a partial monetary union (not every state uses the euro) and is not a fiscal union. Twenty of its twenty-seven member states use the euro, but they maintain their own public accounts. The EU’s budget amounts to just 1 percent of the bloc’s entire gross domestic product (GDP). Brussels levies few taxes and spends little for the bloc, and that relatively small budget is the sum of the EU’s fiscal union. The real power of the EU resides in the supervision of the member states’ fiscal policies.

This is why some countries with high levels of debt or deficit—France, Italy, Poland (which spends 4.1 percent of its GDP on the military), and several others—might be under special supervision by the European Commission under the Excessive Debt Procedure (EDP). The EDP requires the country in question to provide a plan of fiscal consolidation that it will follow, as well as deadlines for its achievement. Countries that do not follow up on the recommendations may be fined. Of course, many EU countries are in debt, and most of them run a deficit even in good times; in bad times, they just run even bigger deficits. The European Commission will take into account additional military expenditures in the assessment, but only on military equipment, not on increasing the number of soldiers.

In 2023, the average debt-to-GDP ratio in the EU reached 82 percent, and it was even higher in the eurozone, at 89 percent (with France exceeding 110 percent and Italy going beyond 137 percent). The highest deficits were recorded in Italy (7.4 percent of GDP), Hungary (6.7 percent), and Romania (6.6 percent). Eleven EU member states had deficits higher than 3 percent of GDP. In comparison, the United States has a debt of around 123 percent of GDP and ran a deficit of 6.3 percent in 2023.

The original EU fiscal rules implemented thresholds for each country’s deficit and debt at 3 percent and 60 percent of GDP, respectively, and they required cutting national excess debt-to-GDP ratios by one-twentieth each year. These restrictive rules contributed to the eurozone’s prolonged recession from 2011 to 2013, and some rules have since been relaxed. In response to the COVID-19 pandemic, for example, the bloc activated its general escape clause, which allows for deviations from the EU’s Stability and Growth Pact in times of crisis. Moving forward, however, the rules will likely turn restrictive again, though less so than the old ones. In April 2024, EU institutions agreed on a consensual change to the fiscal framework, making the path back to a debt of 60 percent GDP and a deficit below 3 percent of GDP a matter of negotiations between each member state’s government and the European Commission.

Treat military spending differently

Some EU countries, such as France and Poland, argue for military expenditures to be treated differently, as some member states have different needs in the current geopolitical climate. Not all EU member states are in NATO; for example, Austria is neutral. But under the current EU rules, the fiscal space for military expenditures is one-size-fits-all. After Russia’s full-scale invasion of Ukraine in 2022, defense expenditures incurred that year were within the escape clause, but this does not address the underfunding of the military within the EU.

In 2024, the average military expenditures of NATO and EU members is expected to reach 2.2 percent of GDP, with a group of countries far below the threshold of 2 percent. More importantly, these are big economies with relatively large armies, such as Italy (1.49 percent of GDP), Belgium (1.3 percent), and Spain (1.28 percent). All of these countries have high levels of debt and issues with deficits. Germany is set to reach 2.12 percent of GDP on defense spending this year, but it is held back by its constitutional debt brake, which does not allow for an annual deficit higher than 0.35 percent of GDP. This has created tensions within Germany’s coalition government, since spending more on weapons might mean having to spend less on climate change mitigation and social services.

Meanwhile, the United States spends 3.38 percent of its GDP on defense. To put that into perspective, the total expenditure of all European NATO members is $380 billion, almost three times lower than that of the United States (nearly $968 billion). At the same time, Russian military spending this year is estimated to reach $140 billion, or 7.1 percent of its GDP.

Common debt

European capitals need to treat the need for a stronger military in Europe as urgent and serious, but their accountants in the finance departments are not going to make it easy. Unless Brussels changes its fiscal rules to allow for greater defense spending, common EU debt might be the only solution.

The bloc can issue EU debt outside of national fiscal rules, which it did for the first time in response to the COVID-19 pandemic. Some analysts argue for common debt for a European air defense system, which is a good starting point. EU debt funding could include spending on the further development of European defense industrial capacities. EU leaders such as former Estonian Prime Minister and future EU High Representative Kaja Kallas, French President Emmanuel Macron, and European Commissioner for Internal Market Thierry Breton have supported some version of common debt for defense purposes.

Utilizing common debt should not aim solely to expand the power of the European Commission, as some critics in various capitals fear. Instead, it should transform this measure from a temporary crisis-management tool into a standard policy instrument, enabling Europe to develop a meaningful defense industrial strategy, which has been lacking since the EU’s inception. After the failed attempt to establish a European Defence Community in the 1950s, the European project has primarily focused on economic issues. Unfortunately, it’s time to revisit that discussion.

Europeans must now prepare for a challenging geopolitical environment by investing in European defense, whether through changes in fiscal rules or by taking on more European debt.

Whichever path forward the EU chooses, it must do so quickly. There’s no time to waste.

Piotr Arak is the chief economist at VeloBank Poland.

The post The EU needs to adapt its fiscal framework to the threat of war appeared first on Atlantic Council.

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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.

One of the IMF’s tasks is indeed to deflect some of the political blame from a government that has committed to fiscal adjustment measures and faces public opposition. Even after the bill was withdrawn, however, public anger has yet to subside, fueled by killings of demonstrators and accusations of corruption and misuse of public money.

The truth is, of course, that Kenya’s decline into fiscal trouble has been entirely predictable, led by the ambitions of past leaders who followed the path of easy money. Especially during the mid-2010s, under President Uhuru Kenyatta, Kenya was looking for ways to leverage its “frontier market” status into higher growth via debt-financed investments and infrastructure projects. As a result, within a decade, Kenya’s public debt ratio almost doubled from 41 percent of gross domestic product (GDP) in 2014 to a projected 78 percent of GDP in 2024.

One prominent creditor has been China’s Export-Import Bank, which provided Kenya with $3.2 billion to build a Standard Gauge Railway (SGR) between Nairobi and the port of Mombasa—a project that has been criticized because of its weak governance and high cost but, according to recent reports, will be extended to Kenya’s western border with Uganda.

Although public investment does have an important role in raising a country’s economic fortunes, Kenyans are still waiting to see the social returns of the debt-financed investment spree. GDP growth has hovered around 5 percent since the mid-2000s, real GDP per capita has stagnated in recent years, and the poverty rate (at just below 40 percent) remains above pre-COVID-19 levels. It is no wonder that the fiscal belt-tightening now required to arrest a further run-up of public debt has met with resistance, amid legitimate questions about who benefited from the loans that ordinary Kenyans now have to repay.

Ruto, in office since 2022, carries his share of responsibility for the fiscal sins of the past, having been vice president in the previous administration and a proponent of the Chinese railway loan. His government is also dealing with droughts and the aftermath of the COVID-19 crisis, which hit Kenya and other frontier markets particularly hard, including through spillover effects from global inflation and higher interest rates. Being caught out in a weak fiscal position and facing eventual default, Kenya turned to the IMF in 2021 to help stabilize its finances, including a “multi-year fiscal consolidation effort centered on raising tax revenues and tightly controlling spending.”

The government did reasonably well under this program, which originally foresaw a steady pace of fiscal adjustment (at about 1 percentage point of GDP per year over five years) and allowed for measures to absorb its social impact. Both the primary fiscal deficit and the trade balance improved, and the shilling unwound much of its decline vis-à-vis the US dollar as Kenya surprised markets by repaying a two-billion-dollar Eurobond last month. Moreover, the program unlocked a considerable amount of concessional multilateral financing, including from the World Bank.

But the country remains in a financial hole from which it will be very difficult to climb out. One problem is that higher interest rates keep adding to Kenya’s debt dynamics, as illustrated by the hefty 10 percent interest rate on a smaller Eurobond that Kenya issued in February to meet its June payment. Therefore, despite an improvement of the primary deficit broadly in line with program targets, Kenya’s public debt is still projected to increase this year.

While the government planned to continue on its programmed adjustment path, the latest package of measures—including tax measures to offset gradual revenue slippages over the years—appears to have been the political straw that broke the camel’s back. So, what are the alternatives available to the government now?

• First, “keep calm and carry on” may be the motto of the day. The government appears to be looking for spending measures to substitute for lost revenues, but this will not be viable in the long term. Expenditure compression has its own distributional (and political) consequences, and the overall fiscal adjustment strategy will need to be balanced across revenue and spending items.
• Second, with interest payments accounting for more than a quarter of total revenue, the Kenyan government may decide to seek a debt restructuring. This is not something the IMF could impose on Kenya, unless it judged that public debt was unsustainable. However, the government went to great lengths in the past to service its debt and retain access to financial markets. It would have been cynical on the part of IMF shareholders, who routinely call for strong ownership from program countries, to force Kenya into an unwanted debt operation—as long as there was still a realistic chance of avoiding it. This now looks less assured, and it may be the only avenue left for the government.
• Third, however, the Export-Import Bank of China is the biggest bilateral lender to Kenya, holding claims worth $6.5 billion, close to two thirds of all bilateral debt. China has a special responsibility to provide debt relief, given the history of corruption and questionable economic value of the SGR project it helped finance. Kenya would have to request a debt treatment under the Group of Twenty (G20) Common Framework, which has recently become more efficient in dealing with problem cases. However, bilateral debt negotiations could still take a long time to resolve, and Kenya would risk being cut off from external financing for a considerable period.

As the government needs to chart a fresh course in this difficult environment, it is also very likely that supporters in the West will call for more money and fewer fiscal adjustment as the solution to Kenya’s problems. The Nairobi-Washington Vision, formulated during Ruto’s state visit to the United States in May, has also called for increased financial support for developing countries. The question is, where should this money come from?

• First, anyone who has looked at a financing needs table of an IMF program (for example, see Table Six here) understands that spending can either be financed by revenues, grants, or borrowing. Since grants don’t carry any interest or repayment burden, they would be ideal for a country in Kenya’s situation. But taxpayers in rich countries have shown less and less inclination to finance development aid, let alone through direct transfers or outright debt relief for poorer countries.
• Second, the IMF and other multilateral institutions have raised funds and mobilized special drawing rights (SDRs) in recent years to subsidize interest rates paid by poorer member countries, and Kenya is already benefiting from this effort. However, there are limits to this approach. Subsidies have to be either financed from donor countries’ budgets (with less and less political support) or they are generated from richer countries’ SDR holdings.
• Third, SDR-based lending works only to a limited extent. SDRs derive their value from their status as foreign exchange reserves and being exchangeable for dollars and other hard currencies held by central banks in wealthy countries. Any overuse or exposure to default risk (for example, from rising public debt in recipient countries) could compromise their reserve-asset status, which would impact both the IMF’s financing model and its capacity to lend to countries in distress.
• Fourth, could the IMF and World Bank provide larger loans? The two institutions regularly review the amounts that countries can access under various conditions. Ceilings have gone up over time, but shareholders (who carry the ultimate risk) generally require that larger loans come with stricter macroeconomic conditionality, an approach that would presumably have triggered a similar outcome for Kenya. Moreover, multilateral loans already account for more than a quarter of Kenya’s public debt. Since these loans cannot be restructured, private creditors might be more hesitant to invest in the country, because any future debt operation might need to be deeper than in similar countries with a smaller share of multilateral debt.

To sum up, Kenya’s predicament is largely homemade, albeit with help from willing external lenders. The COVID-19 crisis exacerbated a lack of fiscal discipline, eventually forcing the country to adopt a stabilization program. While meeting with some initial success, recent events have made it clear that the government’s adjustment strategy needs to change, putting a possible debt operation on the table. The IMF did its best to support an initially credible effort by the government, but it must also ask itself what could have been done to prevent the sharp increase in public debt that is at the heart of Kenya’s problems today.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF official with decades-long experience in economic crisis management and financial diplomacy.

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On June 18, IPSI nonresident senior fellow Robert Dohner published a column in the Herald Insight Collection, titled, “Why Won’t the Dollar Topple?” He discusses the growth and permanence of the dollar and argues that the huge scale of offshore US dollar credit markets has direct consequences for US monetary policy and financial stability. 

Fellow

Robert Dohner

Senior Fellow

Indo-Pacific Security Initiative Scowcroft Center for Strategy and Security

China Economy & Business

The post Dohner published by Herald Corporation on US dollar growth appeared first on Atlantic Council.

Without adequate air defenses it is futile to build new fixed capacity; without adequate power and heating, the prospects for Ukraine’s economic recovery are gloomy. While severe already, this problem will become critical in the coming winter months. 

From Ukrainian President Volodymyr Zelenskyy, who spoke at the opening session, to Ihor Terekhov, mayor of the beleaguered front line city of Kharkiv, the message was driven home: Air defense and electric power are inextricably intertwined, and both are desperately needed. 

Ukraine’s partners appear to recognize the urgency of the situation. German Chancellor Olaf Sholz used the conference to announce that Germany will provide Ukraine with additional IRIS-T and Gepard air defense batteries. Italy confirmed plans to deliver another SAMP/T anti-missile battery. Just hours after the conference, Washington announced that it will be sending another Patriot anti-missile system to Ukraine. 

This was certainly welcome news for Kyiv. However, the breadth and intensity of Russia’s attacks will require many more such deliverables to provide some assurance of the survivability of any new or rebuilt power plants.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Another takeaway from the URC was the role of private sector investment in Ukraine’s recovery. Speaking at the conference, an IFC representative said the ratio of private sector investment to official funding for Ukraine’s reconstruction should be seven-to-one. As was acknowledged by many speakers, including US Special Representative for Ukraine Reconstruction Penny Pritzker, this will not be feasible without affordably priced political and war risk insurance, along with export credit guarantees backed by foreign governments. 

Here, too, the message seems to have reached Western capitals. The US Development Finance Corporation (DFC) announced a $300 million expansion of political risk coverage on top of the more than $1 billion of coverage already extended both prior to and since the full-scale invasion. The European Investment Bank (EIB) announced a new $1 billion lending facility, while the EBRD unveiled a planned $700 million credit for Ukrenergo on top of a total loan portfolio of $4.2 billion, and the IFC confirmed a total of $1.4 billion invested in Ukraine since the invasion. 

The export credit agencies of Denmark, Germany, Japan, and Poland all reported substantial coverage and very low default rates. Nevertheless, Rostislav Shurma, Energy Advisor to the President of Ukraine, cited continuing impediments to lending and insurance coverage. These include high pricing, short maturities, lending caps, and less than one hundred percent coverage. 

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The Berlin conference addressed a wide range of additional topics related to the idea of Ukraine’s reconstruction. Representatives of local and regional governments, civil society, and the private sector were active participants in the many lively sessions. Attendance was more than 1500, with the plenary session standing room only for those who dawdled on the way in (this writer included). 

The atmosphere in the breakout sessions was akin to a revival meeting, with frequent applause and eager participation from audience members. The photographs and displays lining the corridors dramatically illustrated the human tragedy of Russia’s brutal invasion, the resilience of the Ukrainian people, and their determined defense of their country. 

Still, the question remains whether the measures announced in Berlin will be enough to launch a sustainable recovery. They are a good start, and show a steady increase since the 2022 and 2023 URC events, but significant challenges remain. 

Many speakers referred to frozen Russian Central Bank reserves and other Russian assets, with Ukrainians urging Western governments to allow these funds to be used for Ukraine’s reconstruction. The $300 billion plus this represents would go a long way toward rebuilding much of Ukraine’s damaged and destroyed infrastructure. Unfortunately, there was no sign from Western government officials at the Berlin URC that their governments are quite ready to take that step. However, the issue remains very much on the agenda, with progress possible before the 2025 URC, to be hosted by Italy.

Edward Verona is a nonresident senior fellow at the Atlantic Council’s Eurasia Center covering Russia, Ukraine, and Eastern Europe, with a particular focus on Ukrainian reconstruction aid.

Further reading

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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Online Event Mon, June 3, 2024 • 1:00 pm ET

US Trade Representative Katherine Tai on the future for US-EU trade

An #ACFRONTPAGE Event—US Trade Representative Katherine Tai discusses how the United States and European Union should adapt the transatlantic trade relationship at the eightieth anniversary of the Bretton Woods system.

Economy & Business Europe & Eurasia European Union International Financial Institutions

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Katherine Tai
United States Trade Representative

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introductory Remarks

Mark Gitenstein
US Ambassador to the European Union

MARK GITENSTEIN: Katherine, Fred, ladies and gentlemen, to those here in the room and those joining online, thank you for being with us today. 

This week, we mark the eightieth anniversary of what General Eisenhower called, quote, “the great and noble undertaking,” unquote—the allied invasions at Normandy. D-Day marked the beginning of the end for fascism and the victory of transatlantic democracies. The men and women fighting against autocracy in Europe were fighting for values that continue to cement the transatlantic relationship today. These values were outlined by President Franklin Roosevelt and Winston Churchill in the Atlantic Charter in 1941, which laid out allied war goals and hopes for the postwar world. 

Roosevelt and Churchill proclaimed the ultimate allied goal was that, quote, “all people in all lands may live out their lives in freedom from fear and want, and with the object of securing for all improved labor standards, economic advancement, and social security,” close quote. The Atlantic Charter was a powerful vision of transformation, a postwar world free from authoritarian tyranny and secure in peaceful economic prosperity. It was also a powerful recognition that economic security is inseparable from the health of our democracies. 

Today, eighty years later, the United States and Europe sit at a similar moment of transformation. Transformation in our economic security, as Russia’s full-scale invasion of Ukraine threatens the peace of Europe. Transformation in our economy as a new generation of green technologies, and manufacturing, and computing set a new standard for our economies. And perhaps most important, a transformation in our society as anger and economic inequality, and hollowed out industrial bases, fuel rising cynicism and disillusion with our democracies. 

On both sides of the Atlantic, populist leaders with easy answers to hard problems promote a new ideology hostile to democracy, aided by authoritarian leaders eager to weaken our societies. As European Commission President Ursula von der Leyen put it, quote, “a new league of authoritarians is working in concert to tear up the international rule-based order, to redraw maps across different continents, and to stretch our democracies to the breaking point,” close quote. As US Ambassador to the EU, I’ve seen the growing resolve of leaders in the US and the EU—the two largest democratic free market systems in the world—to respond to this new challenge. 

In this context, people in Brussels and here in Washington have told me the old orthodoxy about free trade and free markets must change. Our current policies show the old system is not working for ordinary citizens on both sides of the Atlantic. 

Indeed, discontent with that system is fueling populist anger and enabling authoritarians to influence and disrupt our societies. As Jake Sullivan pointed out in his speech at Brookings last year, quote, “This moment demands that we forge a new consensus,” close quote. If we are to strengthen our democracies we must change our oldest assumptions about trade policy. We do not have a choice. 

As Katherine has said many times, trade policy is not siloed from national security. It is a key part of ensuring not just prosperity for our citizens but the health of our democracy. As Jake said, this is about making long-term investments in sectors vital to our national well-being. 

This administration has outlined bold new steps for a twenty-first century economy that broadly benefits our citizens, strengthens our democracy, and works with our partners to do the same. 

In so doing we look back to a tradition outlined by FDR and Churchill four generations ago, a recognition that by ensuring economic prosperity we inoculate our societies from the temptations of authoritarian populism that then, as now, threaten to undermine democratic societies.

It is up to us to finish the work that FDR and Churchill started to create a new vision for a transformational world, one that leads us to renew strength for democracies on both sides of the Atlantic. 

That is what Katherine and I are hard at work on together in the European Union and in reshaping and modernizing the transatlantic bond, especially as it relates to trade policy. She is my sister in arms. 

FREDERICK KEMPE: Ambassador Gitenstein, thank you so much for that. 

The great noble undertaking a similar moment of transformation, a new league of authoritarianism. 

This is really rich material, Ambassador Tai, and thank you for being with us today. Ambassador Gitenstein’s remarks underscored what we’ve been trying to say at the Atlantic Council for a long time. We had Brian Deese here from the White House introducing the new industrial policy. We had, you know, Secretary Janet Yellen here from Treasury where she introduced the term friendshoring.

And a lot of this conversation is taking place here because from the very beginning we’ve seen geoeconomics and geopolitics as inseparable. They are two sides of the same coin. 

I want to greet some people who are here from our board: Kostas Pantazopoulos, George Lund, Ankit Desai, and Chris Fetzer. We have the Swedish and the Austrian and the Greek ambassadors here.

If I’ve missed any of you it is not meant to be a slight of your country or your board membership. But thank you for being here. 

Before I dive in I want to endeavor to get as many questions from the audience as possible both from our in-person group—and you’ll see a microphone over there. When I start calling for questions you can line up there on your left side of the—my right side of the room.

And from the audience online I’ve got that in front of me and you can put your question at AskAC.org. So AskAC.org.

And so my first question—let’s anchor this in history—we, the Atlantic Council, have been calling this a fourth inflection point period—at the end of World War I period, end of World War II, end of the Cold War and now, hopefully, at some point at the end of the war in Ukraine, et cetera.

We all know that we got a lot of things tragically wrong at the end of World War I. Ended up with fascism, millions of dead, the Holocaust, World War II. And at the end of World War II we got things more right than wrong building the institutions that serve us today, staying in places where we might have come home at a different time in history, working with our previous adversaries Japan and Germany to build a new world order.

So let’s start there. You wrote about that connection last week, and if you haven’t read this piece in the Financial Times it’s really—a really remarkable, powerful piece that invoked the Atlantic Charter. I think some were surprised by that connection. Some might be surprised why we’re talking to you a few days ahead of D-Day, I guess less surprising a few days ahead of the eightieth anniversary of Bretton Woods. But how does trade fit in with national security? And when you look at these other inflection points in history, how in your mind does trade tie with our shared history with our allies, which we didn’t get so perfectly after World War I, better after World War II, and right now up for grabs?

KATHERINE TAI: Well, thank you so much, Fred, and it’s wonderful to be here with you. And I want to thank Ambassador Gitenstein, my very good friend Mark, my brother in arms. That’s really a compliment. We have been working hard together on the transatlantic relationship.

I couldn’t be more pleased to be here with you, Fred, at the Atlantic Council. And the way that you’ve set up this question really reflects what a wonderful organization you run here and with the history, but provide context for this particular conversation and where we are today in the history that’s unfolding and being written every single day.

I am the trade representative. And to your point, it may be odd to be having this particular conversation on the eve of the D-Day eightieth anniversary and Bretton Woods, but I think that your introduction really does a better job than I could in making the case that as history unfolds, that everything is connected—that economics is connected to politics, which is connected to national security, which is connected to the relationship between countries, which is connected to the relationship between people and citizens with their governments.

And so to look at where we are today, and to assess the successes and the shortcomings of where we’ve come from, I think one of the successes is, undoubtedly, if you look at the World Bank data on GDP, growth, over these last several decades, you see the numbers going up and up and up around the world. But certainly, as of today, there is a sense of anxiety and insecurity and a lack of confidence that seems to be going through every economy here, in Europe, and around the world. So what’s going on?

To your question about how economics is connected to national security, what I would say is if we go back to, say—let’s just pick a date in the beginning era that you’ve identified—1933, Franklin Delano Roosevelt takes office as president of the United States. And it’s the spring of 1933 when German democracy comes to an end in that post-World War I period and fascism has risen and taken over.

FREDERICK KEMPE: And people forget this. March 1933, Hitler and Roosevelt both come to power within days of each other.

KATHERINE TAI: That’s right.

FREDERICK KEMPE: Yeah.

KATHERINE TAI: That’s right. And FDR has absorbed and has lived through the years of the Great Depression coming into the 1930s, and what is very much on his mind is that connection between economic depravation and the willingness of people in times and circumstances of despair to give up their freedoms and to abandon their democracy. And so you see FDR lead in the establishment of his New Deal policies. Over the course of his terms in office, you see as we go through—we go through the 1930s, we enter into World War II, he takes us out of World War II, that the approach that he’s taken—which is really to address the economic security of working people—that he starts to internationalize that through the Atlantic Charter and through the principles that are then applied to the negotiation of the Bretton Woods institutions. The original vision for trade in the Bretton Woods institutions went above and beyond the General Agreement on Tariffs and Trade, the GATT, which is what ended up making it across the finish line. The original vision to pair with the World Bank and the IMF was an International Trade Organization, the ITO charter, that had tariff pieces that were coupled with enforceable and meaningful worker standards based on a goal of full employment for all members, environmental equities, and also antimonopoly provisions—to address the fact that it’s not just the private sector companies that can behave as monopolies and distort economic opportunity, but entire countries. At the time you will also think about in the 1940s coming out of World War II the creation and the rise of the Soviet Union on the eastern front of Europe. 

So it’s through that lens that we are looking at the particular challenges that we’re facing today, and examining the tools and the means for accomplishing the goals that we need to set out for ourselves. Those goals are actually very similar if not the same goals that we had in the 1930s and the 1940s, that were embodied by the ITO charter combined with the Truman doctrine and the Marshall Plan. And it was based on a partnership and a collaboration between the United States and Europe across the Atlantic to build a world based on economic opportunity, fair competition, and democracy. 

FREDERICK KEMPE: What a rich opening. So, as you wrote in your piece, and I’ll quote this, the stakes are high. Quote: “The stakes are high. As Oxford historian Patricia Clavin has documented, democracies failed to find common ground on international economic issues in the 1930s, with devastating consequences.” To what extent do you think we’ve properly viewed and understood the dangers now? Do you think the dangers are as sharp as they were in the 1930s? And to what extent have we done enough thus far? 

KATHERINE TAI: I think absolutely. Now, I wasn’t around in the 1930s. But I think that this is an intergenerational project. For those who do remember the times of FDR, and the immediate legacy of the New Deal policies, those who remember World War II, those who have come through those years, I think that there is a collective project for us to properly put what we’re experiencing today in this historical context. And to remind ourselves of what helped us to succeed the first time around, where we may have gone off track—because I have a little bit of a diagnosis here to share with you—and how to get ourselves back on track. 

Because I think that for those leaders in the United States and in Europe who experienced the significant trauma and tragedy of the world wars, that what they won through those experiences was a depth of wisdom that even for us, having gone through the years of COVID, going through the Russian invasion of Ukraine, I think would really benefit from tapping into. And I think that it is that more holistic approach to domestic and international economic and security principles that can be very helpful to us on a transatlantic basis for imagining the bringing about of yet another new world order, as you’ve described in your introduction, that can correct for where we went wrong, but also harness the elements where we were successful. 

FREDERICK KEMPE: It’s really interesting. Because you’re really speaking to a danger we have right now, which is a deficit of that kind of memory because, of course, even Joe Biden was two years old at the end of World War II. And so the memory we have of what goes wrong, those who forget history are condemned to repeat it. We all know that. This is a year of elections across the world. You’ve also brought up the connection between trade and democracy. Could you explain that to us? 

And more than 50 percent of humanity is voting this year, representing nearly two-thirds of global GDP. And the ambassador in his opening talked about and quoted Ursula von der Leyen on a new league of authoritarianism. As something of a student of the 1930s, I look at the relationship with Hitler, Mussolini, the Japanese, not nearly as close as the relationship is right now of Putin, Xi, North Korea, Iran, interestingly enough. So talk about what role trade plays in this contest of democracy and autocracy. 

KATHERINE TAI: Wonderful. So here’s where I’ll get into a bit of our diagnosis in terms of where our successes have come up short. And I think that what I would do is go back to that original vision for the ITO charter. Understand that it was more than just the GATT. And imagine what would have happened if the ITO charter had made it across the finish line. Now, one historical note, the ITO charter in full didn’t succeed. And it was one Senator Taft who really put the spoke in the—spoke in the wheel. And was the same Senator Taft who had rolled back a lot of the New Deal worker protections that FDR had put into place. 

Now, what was left on the cutting room floor? The enforceable, meaningful labor standards, the environmental standards, and then also the antimonopoly rules. So instead, what you ended up with was a tariff program and a program of trade liberalization standing on its own, without the safeguards addressing the interests of working people, of the planet, and of ensuring a healthy and vital amount of economic opportunity that could happen within economies and between economies. 

So, over time what you have found is this era and this version of globalization, fueled only by a pursuit of trade liberalization, and the limits of what that trade liberalization has been able to accomplish. Now, I think it’s created a lot of efficiencies. It’s maximized on a lot of revenue, minimized on a lot of costs. But it’s incurred a different set of costs. One, when you look at the geopolitical, geoeconomic perspective—let’s look at supply chains. How incredibly fragile we now realize they are, how much concentration is reflected in certain supply chains in terms of single source, single country, single region supply, the leverage of certain regions, certain countries in dominating entire sectors or entire portions and links in a supply chain, and the kind of geopolitical tension that that’s fueling. So that’s one example. 

Another example is a shortcoming of this version of globalization, that is based only on economic liberalization, tariff liberalization, what we might call as a laissez-faire or neoliberal system, resulting in a competition between countries and jurisdictions that’s built on pitting our workers against each other, pitting our middle classes against each other, creating this kind of a zero-sum competition for economic and industrial growth opportunity. And the real question before us now is how do we move towards a future and a different form of globalization that preserves some of the positives of what we’ve experienced, while correcting for what is turning out to be a very unsustainable pathway on a geopolitical, geostrategic level, as well as on a human and a planetary level?

FREDERICK KEMPE: I’m going to come back to that, because I’m interested in what kind of trade agreements fit into that. But let me come back to that. Let’s shift first to our Bretton Woods 2.0 Project, where we’re thinking about what are the next eighty years going to look like. As you’re talking in really broad strokes about a fascinating, quote/unquote, “new consensus,” are the current institutions fit to purpose, from climate change, supply chain vulnerability that you talked about, nonmarket economy policies, labor rights? And so do the rules of the road, including those at the WTO, need to be changed? Do the institutions need to be changed?

KATHERINE TAI: I think they need to be—they need to be well-loved. And like those that you love a lot, they need to be improved—and supported in growing and realizing their full potential, which may require some revamping and some education and investment.

So, you know, all of the Bretton Woods institutions and the UN itself, they’re all showing their age. The world today versus the world when they were created is very, very different. Now, that doesn’t—

FREDERICK KEMPE: And let’s not forget Bretton Woods was drawn up during the war as the war was unfolding.

KATHERINE TAI: That’s right. That’s right.

FREDERICK KEMPE: This is a very different time, eighty years older. Yeah.

KATHERINE TAI: It is—it is a very different time. And the balance of powers is also very different. And also, the modern era is also different. You know, look at the urgency that we feel around climate and the impacts that we are starting to see on a—on a seasonal basis with respect to what’s happening on the planet. But then, also, the technological change that’s happening—which, by the way, there’s—there have been technological advancements all through history. And I think what we’re going through may echo some of what we’ve experienced before, but the pace of change and the type of change I think is—feels rather unique.

Now, in light of all of this, I think that these institutions still absolutely have an important role to play, if not an even more important role to play today than they did in the past. But certainly in terms of the detail and in terms of the specifics of the architecture of these institutions and the substance of the texts—the legal texts that hold them together, I think they absolutely need a lot of love and revisitation.

FREDERICK KEMPE: I think in the parlance of our day it’s called tough love. But where would you start? What would be your highest priority in taking this on?

KATHERINE TAI: So I’m the trade representative, so it’s—they say if you’ve got a hammer, then everything looks like a nail, sort of. So, you know, as the trade representative, I’m always going to start with the trade conversation.

But again, I think I’ll just bring this back, which is the trade conversation today is really imperiled if we only consider that we can talk about trade. Where I started this conversation was acknowledging, as is implied in your introduction, that everything is connected. And so I think that where you need to start is the breaking out of the siloization of policy, of institutions, so breaking down those silos and connecting the conversation. Which is why, as the trade representative, I’m really so delighted to be sitting here on the stage with you, not being a trade expert but being expert in so many other things.

Where to start? I think that we’ve already started in the Biden administration. And it’s the Biden administration’s approach to economics which is also, if you listen to President Biden talk, very much married up with his vision for America’s role in the world. So we start with a really robust and real program of investing in the United States, whether that’s through infrastructure, where we had mostly been coasting on the significant investments that were made during the Eisenhower administration; investing in ourselves and our infrastructure; investing in our industries, the CHIPS and Science Act; investing in our industrial growth and the industries of the future, the Inflation Reduction Act. Those types of investments, paired up with our trade program—which includes our tariff programs, where we’ve taken actions recently to ensure that the tariffs and the investments can work together to reinvigorate American industrial growth, manufacturing capacity—all right, so that’s one piece.

The second piece, investing in our people—and that’s our people as workers—empowering them, educating them. In trade as well, we talk about building out our middle classes, finding ways not to pit our workers against each other. In the US-Mexico-Canada Agreement, we’ve got a mechanism where that’s exactly what we’re doing. We’re working with Mexico to scrutinize individual facilities where we have reason to believe that worker rights of freedom of association and collective bargaining are being denied, and ensuring that Mexican workers can exercise the rights guaranteed to them by Mexican law and by the agreement itself. To this day, we have directly benefited more than thirty thousand workers in Mexico. By empowering those workers, we are helping to even the playing field with American workers.

And then I’d say the third piece of this is looking at the entire economic ecosystem here at home and also in the world context, and ensuring that there is broad-based, healthy economic competition—that there is economic opportunity that we are creating across the economy; that our commitment to taking on monopolies and recognizing that monopolies don’t just manifest as companies but also as countries. Taking us back to that FDR understanding, that postwar understanding, that one of the major challenges we would be facing is with the Soviet Union and the communist world, with those state-command economies having to compete against entire economies all at once. All of those pieces coming together in our trade policy as well, and understanding that taking on a foreign monopoly is about being consistent. You have to enforce competition here at home while you are also enforcing competition and opportunities around the world.

FREDERICK KEMPE: Fascinating. I’m going to ask—and this is really disciplining myself because I have a hundred questions I’d like to ask—I’m going to ask two more questions: one on digital trade, one on Europe. I’m sure in the Q&A we’ll get to some more on China as well. And then I’m going to turn to the audience. So I’ll look to this and I’ll look to this, and I already see a few coming in here.

So FDR didn’t need to deal with digital trade. Bretton Woods didn’t have to deal with digital trade. You’ve seen some significant shifts in US digital trade policy, including withdrawing proposals for digital trade chapters focusing on things like free flow of data in institutions like the WTO. One of the questions we got in from the audience was: What are you doing on the promote side of the trade agenda, particularly on digital and AI issues, where there is a hunger from many of our trading partners to align with the US? And this partner said that there is a perception of a US withdrawal on digital trade over the last year in Europe, Southeast Asia, Latin America, and Africa, where China continues to announce new projects on cross-border data transfers and AI partnerships. So that’s a big, broad question, but it’s really: What’s your view of where digital trade policy fits in here? And then what’s your answer to these criticisms?

KATHERINE TAI: Great. OK. So when we started negotiating things in this digital arena, we called them e-commerce provisions. And I think that the first e-commerce chapter dates back to Singapore, which we’re just celebrating the twentieth anniversary of the Singapore Free Trade Agreement. Now, if you think back to 2004 and you think back to what e-commerce was, in 2004 I think Amazon was still mostly just an online bookseller. So what we were doing in our trade agreements was—through a very traditional approach to traditional trade transactions of goods moving across borders, we were looking at what could you do in a trade agreement to help to ensure the facilitation of those traditional types of transactions. And that’s really how we thought about data flows—that, you know, the data that flows in an e-commerce transaction is the stuff that helps to facilitate the transaction: the information that needs to be sent from one place, maybe across a border, to another place; the economic information, the payments information; and then how to get it back—how to get the good across the border.

Fast forward twenty years. It’s 2024. When we’re talking about data, it’s not just about the bits and bytes that help to facilitate a traditional goods transaction anymore; data is the game itself. And that couldn’t have been more clear than with the advent of ChatGPT-4 a couple months ago, where suddenly people are wowed by, you know, please—I think there was an exercise for us where we were—we were asked to put prompts into ChatGPT-4. And so there were a number of us in the administration, and I said, oh, I know, I know; how about ask the generative AI to write a poem about Bidenomics in the style of e.e. cummings. And any of you who pay for ChatGPT-4 and the paid service, go ahead and try it. What comes out is kind of amazing and maybe even a little bit beautiful. It’s very, very eerie, right?

And so that started a lot of, I don’t know, just this incredible curiosity about what the heck is this thing and how was it made? And it turns out that it had—it had fed on basically all the data that has been created and was put out there in the internet since the beginning of the internet and maybe even before with, you know, published works, right? That is then processed through incredibly powerful computers that only a couple of companies are powerful and rich enough to have access to. 

And in the context of this awareness about data—and then you can get over to the data brokers and how much of your data you’re generating every day that’s available for others to buy and sell. And for those who are buying it, real questions about what they’re using it for. We start to realize that, wow, as we break out of our trade silo, we’re appreciating that our traditional approach to what we’re now calling digital trade actually has implications for so much more. Isn’t it time for us to hit pause on this, come back, reconnect with all of the other policy silos, break them down, talk to our Congress, talk to our industry, the bigs and also the littles, right? The companies and also the workers. The platforms, and also the creative content producers. And try to get our arms around what is actually happening here, and what is in the public interest?

Because that is not the question that has informed the proposals that we’ve developed over time. So what I would say is for all of those who are yearning for a leadership from the executive branch and USTR to tell everybody else what the answer is, my argument is the real leadership is in stepping back and saying: This is not an answer that is going to come from USTR alone. And that if that’s what you’re looking for, is the USTR-led answer to how we should be regulating tech and data, that is not going to be the right answer. This is, again, a project for our collective wisdom. And it’s only once we’ve achieved that wisdom—first here in the United States, and then with our trading partners—are we actually going to be assured of any kind of success that the world order we’re creating, that has rules for digital trade and technology, is going to support economic opportunity for working people and democracy. 

FREDERICK KEMPE: But, in short, hit pause at the moment on digital trade policy. Is that?

KATHERINE TAI: Pull back provisions that we already know are not fit for the times. And then engage, and learn, and talk to each other—including in forums like this—and put out the question, how should we be approaching this? And I’d say that, number one, it’s a domestic policy issue first. Before we bring it to the international realm, we’ve got to figure out what works for the United States. Also, what works for our democracy? At this moment in time, with all these elections going on and the amount of disinformation and active interference that’s happening through information systems that are being created by data and these distributional platforms, it is a really important time to be asking what is a pro-democracy approach to regulating technology?

FREDERICK KEMPE: So anyone in the audience who would like to see the Atlantic Council’s AI Code of Ethics in the voice of Shakespeare, I can send it to you—which I’ve worked on here. 

So quick, quick question on Europe. And then I’ve got a couple of questions here. And we’ll see if anyone stands up by the microphone. It’s a big question. I’m going to ask for a short answer. Which is, the overall status of US-European trade relationship. There’s tension over the Inflation Reduction Act still. There’s some frictions in US-EU trade left unresolved—steel and aluminum tariffs. One question here is, after an election, would that be something one could move on to? Some criticism of TTC that’s been long on tech but short on trade. What’s happening with the Europe-US relationship, the transatlantic relationship, that you’re happy with? What is you’re looking at and you’re saying, not very happy with that?

KATHERIEN TAI: OK. Great. So I know we’re right on the cusp of the eightieth anniversary of D-Day, which is really incredibly significant. In my service as US trade representative, we’re also coming on the third anniversary of President Biden’s first US-EU summit. So it happened in mid-June of 2021. It was the first summit he engaged in outside of the United States. He stopped in Cornwall for the G7 leaders meeting on his way to Brussels to meet with President von der Leyen and President Michel. And it was in the lead-up to that summit meeting that EVP Valdis Dombrovskis and I sat down and negotiated a truce on Boeing-Airbus. At that time, a seventeen-year-old set of disputes that really contributed to the breakdown of dispute settlement in Geneva, but also just a longstanding, very bitterly fought trade dispute between the United States and the EU. 

And we were gathered together at the summit waiting for the three presidents to emerge from their session, and getting to know each other. And EVP Dombrovskis and I were together with Secretary Raimondo and EVP Vestager. And Dombrovskis and I were feeling very good about what we had accomplished in creating space for the United States and the EU to come together to think about how we can be more strategic on large civil aircraft. And I asked—I remember, I asked that group of four. And I said, it’s really so important that we find a way to turn down the temperature between the United States and the EU, Washington and Brussels, and really focus on the fact that we have shared challenges, and we have a lot of shared and common values and principles. 

So how do we bring those values and principles to bear on working on those shared challenges together? And I said, you know, it’s something that’s really important for us to be able to communicate to everybody else. What do you think—how do we describe what’s at stake? And I think this goes to the conclusion in my FT op-ed also, which is the stakes are high. So what exactly are the stakes? And so, you know, we’re kicking around some ideas in terms of how do you message this, how do you communicate this? And it was Valdis who said, well, I think it’s—I think it’s very simple. What’s at stake is the free world. And I remember at the time having two slightly in tension reactions. 

One of them is, wow, he’s right. That is very simple and direct. It is the free world that’s at stake. But my second reaction was, oh, but, you know, “free world?” There’s such overtones of the Cold War that are baked into that. And I really hope that that’s not where we are. And, of course, many things have happened in the last three years, including the brutal and unjustified invasion of Russia into Ukraine, and so many other things that have happened. So many more complexities introduced into geopolitics. So many increased tensions on democracies here at home and abroad. 

And I look back on that conversation with Valdis Dombrovskis, a Latvian executive vice president of the European Commission, and I just marvel at how apt his suggestion remains today—even more apt than three years ago. That what is at stake is the free world. And so I think that what is going well is that that is where we started our relationship in June of 2021. What could use work is every single day in every engagement that we have in trade and otherwise, reminding ourselves that that is what is at stake.

FREDERICK KEMPE: Thank you. Thank you for that. 

So I’m going to turn to a colleague, David Wessel, formerly of the Wall Street Journal where we worked together, but now you can introduce yourself for the other—

DAVID WESSEL: David Wessel, at Brookings.

Ambassador, I wondered if you could tell us where your views overlap with those of Bob Lighthizer and where your views differ.

KATHERINE TAI: Well, thank you for asking about views, because I think early on I had been asked where he and I differ. And I like to say that I’m younger and better looking. But in terms of—Bob is a very nice-looking guy.

FREDERICK KEMPE: I think there may be a consensus in the audience.

KATHERINE TAI: So I am objectively younger. Where are—where our views are similar and where I find—where I find an alliance with Bob is a commitment to the fact that we have to change our approach to trade, that the world is significantly different, and that the benefits here in the United States are not inclusive enough. Those are my words, and that’s in my—very much my democratic vocabulary.

But I think that one of the really important and not foregone conclusions in the trade community internationally is that we do need to change. From my perspective, it’s that we need to evolve the way we do trade. And you can’t do that by yourself; you have to build that collective and that community to do it together. And I think that basing that community on a community of democracies is really important.

In terms of where our views are different, I hope that that’s obvious. And if it’s not, I would definitely take some feedback on how I can make that more obvious.

FREDERICK KEMPE: You want to throw out one example where it’s different? Maybe deal with China. Where do you think you’re the same or different on China?

KATHERINE TAI: On China, I think we share a lot of the same diagnoses. You know, I think one of the ways where Bob and I are most obviously different, again, is in rhetoric—although, you know, Bob inside the room versus Bob outside the room can be different, just like for all of us.

FREDERICK KEMPE: Yeah.

KATHERINE TAI: But you know, I think that one aspect of the Biden administration’s approach—and this very much reflects President Biden’s just innate internationalism—is this point of view that you have to build partnerships.

FREDERICK KEMPE: Yeah. So I saw a friend up a second ago. I was going to take the last two questions, and do them really quickly, and then come to a quick round. Is that all right with you?

KATHERINE TAI: Yeah. Absolutely.

FREDERICK KEMPE: Let’s do that. Please.

DAVID METZNER: Yes. Thank you, Fred. David Metzner with ACG Analytics.

I’d like to pull on the China string a little bit more. At the end of World War II, of course, China was an ally. China was in all the multinational organizations. Took a different turn in 1949. How do we think about China in the transatlantic context, particularly in trade? Europe will be releasing its report on electric vehicles, I think, in three weeks. We have—we just put tariffs on Chinese vehicles recently, I think, of roughly 95 percent. So how do we effectuate everything we want to do and strengthen the transatlantic relationship with China sort of orbiting outside and operating with capitalism with Chinese characteristics? So how do we—how do we think as transatlanticists on China?

FREDERICK KEMPE: That’s a great question, and we’ll pick up the last question. I think part of the answer to this question is also where do we differ transatlantically with regard to China, but—

FRANCES BURWELL: Fran Burwell, Atlantic Council and McLarty Associates.

You’ve spoken a lot about communities of democracy and shared values. You’ve also spoken a lot about institutions. Even the best of friends don’t always get on and agree on everything. So as you think about how the institutions should be reformed, what’s the role of the dispute resolution mechanism? How do you see that moving forward? What is the role of that in your new world of institutions? Thank you.

KATHERINE TAI: Great. OK. So let me try to distill those.

FREDERICK KEMPE: Please. Over to you.

KATHERINE TAI: So the question of China really I think deserves a whole separate session unto itself.

FREDERICK KEMPE: I know.

KATHERINE TAI: But let me put it this way. I think I—I actually think that the way you put the question about China is incredibly gentle. Capitalism with Chinese characteristics, actually, I’m not—or, I haven’t heard that term used in many, many years. At this point, I think it’s less diplomatic than just sort of ahistorical.

The China that we’re dealing with now, the PRC, is not a democracy. It’s not a capitalist, market-based economy. And so I think what might be useful in terms of shorthand in thinking about how we coexist and how we adapt to a world economy where the PRC has such an incredibly large footprint may go to revisiting how the negotiators and the founders of that post-World War II system and the ITO Charter thought about the possibility that the ITO Charter could have Soviet participation. At the beginning, it was—it was a possibility that the Soviet Union would be a member of the ITO Charter and I think that that’s where the labor standards, the environmental protections, the antimonopoly provisions really come in. 

So a lot more to say there, but let me just highlight that. 

On the second question, you’re absolutely right. I would say, you know, friends, when you’re different economies, different political entities, you’re never going to agree on everything, just like human friends don’t agree on everything. 

But there is a really important basis of mutual respect that you have to start from. I think that that question was really about the dispute settlement reform exercise at the WTO. We are entirely committed to the reform and the tough love that it’s going to take to reinforce the WTO and its role in the in the world economy. 

The dispute settlement system is one part of that. I think what I’d like to reflect on is the dispute settlement system that we had. The status quo ante was the same dispute settlement system that let or incentivized us to continue fighting for almost twenty years about state support for Boeing and Airbus that caused us to fight each other and pick at each other, their enormous cases, while the PRC built up its own civil—large civil aircraft industry under our noses.

And I think that that is really worth reflecting on, again, everything being connected, for us to think about dispute settlement in an organization like the WTO and how it doesn’t just become a giant litigation forum that you throw money and lawyers at to make a point against each other, to levy tariffs on each other, but how it can be a dispute settlement function that actually helps you resolve disputes with your friends and your competitors, who sometimes are the same alike. 

And that is a lot of what is informing our approach to dispute settlements reform at the WTO, which is how can it more effectively facilitate the resolution of disputes between significant trading partners and to prevent this ossification and political entrenchment that we have seen with our friends in the EU have—not just in this case. It had been many cases prevented us from coming together and focusing on things that really matter. 

FREDERICK KEMPE: Thank you so much for that. I think the work of our China Pathfinder Project and the GeoEconomics Center really underscores some of the things you’re saying.

What a rich conversation this has been. Thank you so much. 

I want to salute Josh Lipsky and his GeoEconomics team and the remarkable work they’re doing including the hosting of this event. Ambassador Dan Fried for playing the role that he’s done in bringing you to us, Ambassador Tai.

And I want to thank you for elevating this conversation on trade not just in the context of the anniversary of D-Day and the anniversary of Bretton Woods agreement, but in the context of the contest for the global future. So thank you so much, Ambassador Tai.

KATHERINE TAI: Thank you so much, Fred. Thanks to all of you.

Watch the full event

The post US Trade Representative Katherine Tai on modernizing the transatlantic partnership appeared first on Atlantic Council.

On Thursday, May 23, 2024, Senior Fellow Pepe Zhang of the Adrienne Arsht Latin America Center gave testimony before the US-China Economic and Security Review Commission in a hearing on key economic strategies for leveling the US-China playing field in trade, investment, and technology. Below is a written version of his testimony.

Summary

At the Commission’s request, this testimony evaluates US economic engagement with Latin America and the Caribbean (LAC)—taking into account competition and comparison with Chinese efforts, where applicable—and provides recommendations for improvement. Specifically:

• Section I: The testimony provides an overview of China’s rise in LAC’s economic context
• Section II: It then describes recent US economic engagement—with an emphasis on the Americas Partnership for Economic Prosperity (APEP)—as well as regional reception and needs across three areas:
  • Greater US policy attention
  • More US resources
  • Enhanced policy continuity
• Section III: Based on the above, the testimony prescribes three policy tools and pathways to enhance US economic engagement with the region, related in particular to supply chains:
  • Trade policy: tariff, nontariff, and complementary measures
  • Industrial policy that induces self-sustaining and whole-of-ecosystem supply chain enhancements
  • Development policy: financial and nonfinancial development assistance and cooperation
• Section IV: In conclusion, it distills the preceding analysis into nine recommendations to the Commission and congressional and other stakeholders across three levels:
  • Policy level: Recommendations regarding trade policy, industrial policy, and development policy tools
  • Resource level: Recommendations to unlock more resources for specific US government agencies and efforts and multilateral development organizations
  • Strategic level: Strategic recommendations to ensure US policy attention, resources, and continuity towards LAC

I. The rise of China in regional economic context

The Latin American and Caribbean region (LAC) has registered on average a modest 2-2.5 percent annual growth rate over the past thirty years, among the slowest in the world. To varying degrees, most countries in the region saw considerable improvements in monetary and fiscal policymaking. But, they continue to face structural challenges such as limited productivity gains, socioeconomic inequality, and low levels of foreign investment. In the same period, the lack of significant new domestic growth drivers—coupled with waves of trade liberalization efforts around the world and several regional economies’ growing export success—prompted LAC efforts to enhance and diversify economic engagement with international partners.

Against this backdrop, China swiftly emerged as a key economic player in LAC, especially in South America, across four main areas: trade, foreign direct investment (FDI), official lending, and infrastructure development.¹

1. Trade

Trade represents the most significant area of Chinese economic engagement with LAC. The dramatic expansion in bilateral trade underscores the growing economic interdependence between these two regions. Over the past twenty-five years, trade between China and LAC has multiplied over twenty times to nearly $500 billion in 2023. China has become by far the largest trading partner for countries like Chile, Peru, and Brazil, accounting for over 30-40 percent of their total exports. By comparison, this is three to four times higher than China’s share of total US, German, or European Union (EU) exports (less than 10 percent).

Trade flows remain robust in the other direction as well. LAC consumers increasingly favor Chinese goods and services, including high value-add technology products such as cell phones and automobiles or services like TikTok. One important caveat on China-LAC trade is that sizable differences exist across LAC subregions: South America (mostly commodity exporters) is much more dependent on trade with China than Central America, Mexico, and the Caribbean (Figure 1).

Figure 1: China’s participation in LAC subregions’ trade in 2005, 2020, and 2035 (projected, in percent) ²

2. Investment

While Chinese investment cratered globally starting 2016, particularly in major markets like the EU and the United States, it has shown smaller decline and relative resilience in LAC. This is attributable to at least two regional factors: still-attractive assets and valuations and a friendlier regulatory environment for Chinese investors (compared to heightened scrutiny in advanced economies).

Brazil is the largest recipient of Chinese investment in LAC, and China is Brazil’s top investor. In 2021, Brazil received a record $5.9 billion in Chinese FDI, surpassing the $4.7 billion China invested in the United States in the same year—remarkable considering that the Brazilian economy is one tenth the size of the United States’. In terms of sectors, Chinese FDI and mergers and acquisitions in the region traditionally concentrated in energy, mineral, and utilities, but have been diversifying into new areas such as ICT and manufacturing.

3. Lending

Chinese official lending to LAC peaked between 2007 and 2016, averaging more than ten billion dollars annually. But it has since declined significantly as part of a global retrenchment in Chinese government lending overseas. As Beijing’s cautiousness continues, new activities in this space will likely involve renegotiations and restructurings of existing loans rather than new disbursements. Venezuela, which represents less than 5 percent of regional GDP, has been the top recipient (approximately 40 percent of stock) of Chinese official lending to LAC.

4. Infrastructure development

Chinese construction firms have actively participated in LAC’s infrastructure development through public tenders, winning numerous high-profile projects and at times outcompeting US and European firms. The visible, tangible nature of infrastructure projects (roads, ports, stadiums, hospitals, etc.) contributes to China’s growing economic presence in the region. As well, they help to alleviate excess capacity in China’s domestic industrial and construction sectors.

China’s economic engagement is generally seen as a growth driver and therefore well-received by regional stakeholders. For some South American nations, trade flows and business cycles have already become more aligned and synchronized with China’s than with traditional partners’ including the Group of Seven (G7) economies (Figures 2 & 3). Such strong economic linkages have potential implications for the effectiveness of US policy. For instance, the United States may find it increasingly challenging to leverage certain geoeconomic tools (e.g., US-led coordination of multilateral sanctions) against China in the region. In general, most LAC countries already avoid being caught up or publicly choosing sides in the US-China competition.

Figure 2: Major trading partners’ participation in LAC Trade from 2000 to 2035 (projected) ³

Figure 3: G7 vs. Chinese growth impact on and correlation with LAC economies ⁴

Note: Placement above the forty-five-degree line indicates a country’s growth is more responsive to China than to the G7.
SA stands for South America. MCC stands for Mexico, Central America, and the Caribbean.

II. Recent US economic engagement and regional reception

1. Recent US economic engagement including APEP

Despite China’s growing economic footprint in South America, the United States remains LAC’s most important economic partner in aggregate terms. LAC trades more with the United States than it does with any other country on the back of stronger-than-ever commercial ties between the United States and Mexico. In 2023, the size of US-Mexico trade alone (approximately $800 billion) far exceeded the size of China’s trade with the entire LAC region (approximately $500 billion). The United States also maintains an expansive, outsize network of existing trade agreements in the hemisphere, boasting twelve free trade agreement (FTA) partners in it (and only eight outside). Additionally, the United States is consistently the largest foreign investor in the region, followed by Spain. The potential for investment and collaboration in strategic and emerging sectors is significant: three out of the seven countries eligible for US government support through the International Technology Security and Innovation (ITSI) fund—created under the 2022 CHIPS Act to strengthen semiconductor and telecommunications supply chains—are located in LAC.

With a handful of ideological exceptions, countries in the region largely welcome pragmatic international economic engagement including with the United States. The latest flagship US regional economic policy initiative is APEP, announced by the Biden administration in June 2022 during the Ninth Summit of the Americas in Los Angeles. APEP’s four main priorities are to foster regional competitiveness, resilience, shared prosperity, and inclusive and sustainable investment in LAC. It currently has twelve members: Barbados, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, the United States, and Uruguay.

APEP is structured around three tracks (foreign affairs, finance, and trade), with respective working groups led by individual countries. The working groups cover a wide range of topics, with the initially established ones addressing eight: entrepreneurship, digital workforce development, clean hydrogen, rule of law, sustainable health infrastructure, sustainable food production, water and basic sanitation, and space. Notable announcements so far include a USAID Entrepreneurship Accelerator with initial support from Canada and Uruguay, digital technology workforce development including the first APEP Semiconductor Workforce Symposium held in Costa Rica, and innovative development finance cooperation with the Inter-American Development Bank on climate and migration issues. ⁵

A significant component of APEP is its focus on hemispheric trade and supply chain resilience. In particular, the first APEP trade ministers’ meeting in March 2024 emphasized three key priorities: trade facilitation and digitalization of customs procedures; conducting a gap analysis of critical value and supply chains; and trade for the benefit of small and medium-sized enterprises and underserved communities. Sector-wise, APEP has initially targeted energy, semiconductors, and medical supplies as priority sectors, largely consistent with the four product categories identified by the Biden administration’s Executive Order 14017, as well as broader US interagency efforts on friendshoring/nearshoring.

2. Regional reception

APEP and other efforts of US economic engagement are generally well received in LAC. But they can be improved in three ways from a regional perspective:

a. Policy attention

A main criticism of US foreign policy towards LAC over the past two decades is that Washington has overlooked the region to accommodate priorities elsewhere. More recently, the symbolism of hosting two highest-level hemispheric political events in the United States (the 2022 Summit of the Americas and the 2023 APEP Leaders’ Summit) helped to mitigate such perception to some extent. But systematically shoring up US commitment to the region will demand a strategic rethink of what is at stake.

The US economy has much to gain, buoyed by a more prosperous and stable neighboring region. And it has even more to lose in an economically unstable Western Hemisphere, with secondary effects such as migration challenges already impacting US domestic politics.

In terms of nearshoring/friendshoring, LAC offers several valuable advantages that the United States would do well to leverage and reinforce, in an era of global supply chain reshuffling and heightened geopolitical uncertainty:

• geographic proximity;
• competitive wages;
• an overwhelming majority of democratic, peaceful, and friendly states (albeit imperfect);
• a diverse group of governments and companies interested in working with the United States, from the manufacturing powerhouse in Mexico, to dynamic small open economies with proven macroeconomic and sectoral successes such as the Dominican Republic, and South American commodity exporters that are increasingly influencing global food security, energy, and climate transition agendas. ⁶

b. Resources

Another key regional observation regarding US economic engagement concerns the need for more concrete follow-up actions and adequate resource allocation. This is often considered a byproduct of insufficient US policy attention described above. For instance, APEP experienced a perceived hiatus between being announced during the 2022 Summit of the Americas and regaining momentum around the 2023 APEP Leaders’ Summit. Since the Leaders’ Summit, however, countries have quickly ramped up technical work and senior officials’ meetings, with a view to achieve tangible progress ahead of the second APEP Leaders’ Summit, to be held in Costa Rica in 2025.

With respect to resources, members have understandably expressed interest in accessing economic opportunities, US investment, and financial support through APEP. For the time being, a substantial part of such support will likely be mobilized through innovative partnerships, including with different US government agencies, extra-regional allies, APEP members themselves, the Inter-American Development Bank especially its private sector arm IDB Invest, and potential resources from the recently introduced Americas Trade and Investment Act (Americas Act). Going forward, a clearer definition of APEP’s governance structure, membership criteria, and pathways to resources can more effectively unleash opportunities for the benefit of APEP members.

c. Policy continuity

Economic and political relations between the United States and LAC risk becoming more unpredictable amidst electoral cycles across the Americas, including the upcoming 2024 US presidential election. Potential elections-induced policy shifts, if more drastic than normal, could undermine US interests. For instance, as regional partners grapple to navigate and reconcile different US administrations’ flagship LAC policy initiatives, they do not face similar struggles with China and its Belt & Road Initiative.

In this context, the Americas Act recently introduced by Senators Bill Cassidy (R-LA) and Michael Bennet (D-CO) alongside Representatives Maria Elvira Salazar (R-FL), Adriano Espaillat (D-NY), and Mike Gallagher (R-WI) brings about a remarkable opportunity to ensure long-term US policy continuity and coherence in LAC. This bipartisan and bicameral legislative effort proposes a comprehensive vision for US economic partnership with the region, underpinned by trade, investment, and supply chain integration, as well as significant new resources. Moreover, in a rare and much-needed display of legislative-executive coordination, the Americas Act built a bridge to the Biden administration’s efforts by fast-tracking APEP members’ eligibility for Americas Act resources. ⁷

III. Tools and pathways for future enhancements

To bolster economic integration between the United States and LAC with a focus on supply chain integration, it is vital to better utilize, innovate, and explain specific US policy tools to regional partners. At a high level, such tools should play to the unique strengths—and take into account the limits—of the US economy, US government, and their hemispheric ties. Where possible, they should be complemented by targeted capacity building that fosters stronger, self-sustaining local economies in LAC, as well as a more symbiotic economic relationship with the United States. Specifically, such tools may span across three interconnected areas: (a) trade policy; (b) industrial policy; and (c) development policy.

1. Trade policy

Trade policy instruments include both tariff and nontariff measures.

• Tariff: The scope for using traditional trade agreement/tariff instruments is limited, due to ongoing domestic backlash against expanding foreign access to the US market. In the absence of new FTA negotiations, the United States and hemispheric partners are focusing recent efforts on making the most out of the existing US trade toolbox and network. Some examples are legislative measures that aim to surgically insert smaller economies (such as Uruguay, Ecuador, and Costa Rica) through existing preferential trade arrangements, while creating pathways towards eventual bilateral FTAs in some cases.
• Nontariff: More can and should be done in the realm of nontariff measures, such as harmonizing hemispheric regulatory and phytosanitary standards, streamlining customs procedures, and improving connectivity infrastructure. These measures help to reduce the cost and time of intraregional trade flows, thus boosting the efficiency and competitiveness of hemispheric production and exports. Here, the United States can play a leadership role, facilitated by its existing FTAs with twelve countries in the region.

Greater interoperability—tariff and nontariff—among US trade ties with hemispheric partners is a practical way to advance the regional economic integration agenda in LAC, which has stalled in recent decades due to political polarization within and across countries. With intra-regional trade representing only 20 percent of LAC’s total trade (the lowest and slowest-growing of all world regions), nearshoring—or regionalized supply chains—in the Americas cannot meet its full potential. ⁸

• Complementary coordination measures and special considerations may include modernizing policies and regulations to better address digital trade, intellectual property, and labor standards concerns; accumulation of rules of origin for strategic sectors and products; an ambitious plan towards eventual interoperability with FTAs in the region currently not involving the United States; an inclusive focus on integrating smaller, dynamic economies (many of which are strong US allies) that may otherwise face hurdles to enter regional/global supply chains, due not only to price but scale competition vis-à-vis Asia, etc.

2. Industrial policy

Beyond conventional trade tools, enhanced industrial policy is needed to strengthen productive capabilities and integration within the Western Hemisphere. Well-designed tools (US policies, incentives, investments, and signaling) in this area should focus not on creating one-off success stories but inducing self-sustaining and whole-of-ecosystem supply chain enhancements.

• Whole-of-ecosystem: One of the main advantages of China/Asia-based manufacturing today is its complete, sophisticated supply ecosystems, where a wide range of specializations and suppliers are available along entire value chains upstream and downstream. If the ultimate US policy objective is to replicate these ecosystems in the Western Hemisphere, policymakers can extract helpful lessons from Asia’s flying-geese-paradigm industrialization. In this paradigm, Japan as a “leading goose” invested in, shared knowledge about, and induced industrial upgrading in the rest of Asia. By doing so, it made Japanese/Asian exports more cost-competitive, while creating positive spillover effects that led to self-sustaining regional supply chains and additional comparative advantages. The United States—and by extension, the North American free trade area—should serve as a similar leading goose in the Western Hemisphere.

However, the whole-of-ecosystem approach may prove challenging or take considerable time and investment to materialize in certain sectors/products, e.g., when regional partners or the United States itself does not possess the specializations or technologies needed. In these cases, collaboration with trusted extra-regional allies and surgical interventions to tackle skills gaps or supply chain chokeholds can help to accelerate the process.

• Self-sustaining: Public sector investment and assistance through the Inflation Reduction Act (IRA) and the CHIPS Act are a first step in the right direction to push supply chains into the region (“push factors”). Efficient coordination with regional partners is important for financial, capacity, and competitiveness reasons. Many regional governments, while interested, may have limited fiscal space to develop these supply chains independently or have limited technical/industrial capabilities to qualify for US support (or learn how to qualify).

Creating US interagency roadmaps for hemispheric supply chain development, with private sector input, will be vital to building such capabilities in LAC to pull/attract investments (a key “pull factor”) and ensuring long-lasting success. Importantly, the roadmaps must also introduce a healthy degree of domestic competition, possibly through a sunset provision. Some of LAC’s unsuccessful industrialization attempts in the last century—characterized by import-substitution industrialization as opposed to East Asia’s export-oriented industrialization—generated uncompetitive firms and resource misallocation, offering a cautionary tale.

A US strategy designed to advance supply chain push and pull factors should also include local workforce development (a key element of APEP) and infrastructure development (from logistical to energy conditions necessary to ensure export competitiveness); synergy with US-led sector-specific initiatives (such as the Minerals Security Partnership); bilateral high-level dialogue mechanisms (similar to the US-Mexico High-level Dialogue, the US-Guatemala High-Level Dialogue, etc.); US support of regional initiatives such as the Alliance for Development in Democracy (ADD) Business Council’s Supply Chain Working Group, etc.

3. Development policy

Development policy tools increase supply chain competitiveness and broader economic resilience in LAC by nurturing additional pull factors conducive to nearshoring, such as project bankability, macroeconomic stability, physical infrastructure, skills and productivity, and disaster preparedness and response. ⁹ The United States has several unique tools at its disposal, both financial and nonfinancial, to support regional economic development.

• Financial: The most direct financial instruments of the US development toolbox are provided by US agencies such as USAID, DFC, USTDA, and EXIM. With varied priorities and operations, they can offer financing to advance US commercial and foreign policy interests while supporting local development needs. A growing focus and challenge for some of these agencies is to mobilize the private sector. For instance, on the investment side, although US companies have successfully led the United States to overtake the EU as LAC’s number one foreign investor, opportunities exist to unlock additional private sector investment if the agencies are authorized to more easily and substantially mitigate certain country and project risks.

The Washington-based international financial institutions (IFIs) are another distinctive asset for US development and foreign policy in LAC. For example, the COVID-19 pandemic demonstrated once again that these organizations are more willing and capable—than their Chinese policy bank counterparts—to provide counter-cyclical support to LAC countries in need. Such support took place through the IMF’s liquidity or macro stabilization programs, as well as development operations from the IDB or the World Bank that directly boosted governments’ recovery and growth efforts, improved public infrastructure, health services, or skills training, or indirectly freed up additional fiscal resources for development. Though often underappreciated, the IFIs’ close coordination with the US Department of Treasury (their largest shareholder) contributes to hemispheric economic stability and development.

• Nonfinancial: Numerous US agencies drive development in LAC through a wide array of nonfinancial assistance and cooperation, including training programs organized or contracted by the Departments of Commerce, Treasury, State, Energy, and others. These programs build capacity among LAC public sector, private sector, and civil society beneficiaries, covering specific technical issues such as commercial laws, government procurement, independent journalism, illicit finance, etc.

Additional examples include the Department of Defense and US Southern Command (SOUTHCOM)’s security cooperation with countries affected by rising crime and violence, or their operational support for natural disaster preparedness and response in small, disaster-prone Caribbean Island states. While these efforts may not be economically focused by design, they generate immense economic value, by protecting lives, jobs, supply chains, the investment climate, and government balance sheets. They also foster goodwill. The fact that the US remains the region’s partner of choice in these noneconomic areas reflects the multi-dimensional, symbiotic nature of the US-LAC relationship. Hemispheric policymakers would do well to further explore these areas as complementary pathways toward greater economic integration.

IV. Recommendations

In summary, and with the Commission’s mandate in mind, I propose the following nine recommendations to advance US interest and leverage US strengths in topics covered by this testimony on three levels: The policy level, resource level, and strategy level.

Policy level
In coordination with the executive branch, Congress can help innovate and utilize US policy tools across three interconnected areas:

1. Trade Policy: Use tariff, nontariff, and complementary measures to strengthen hemispheric trade and integration under US leadership, without resorting to politically thorny market access issues. A key element here is to leverage the United States’ existing preferential trade agreements with twelve regional partners, as well as their resulting economic linkages and technical interoperability.
2. Industrial Policy: Nurture nearshoring push factors (US policies and incentives) and pull factors (regional competitiveness conditions) to build self-sustaining, whole-of-ecosystem productive capacity in LAC for certain sectors/products/supply chain segments. This includes formulating time-bound, US interagency roadmaps for hemispheric supply chain development, in coordination with regional partners and the private sector.
3. Development Policy: Enhance financial and nonfinancial (technical/operational) assistance from various US government agencies and Washington-based international financial institutions to strengthen economic development, resilience, and nearshoring pull factors in LAC. The goal is to create more competitive regional economies as well as more symbiotic economic partnerships with the United States.
   
   Resource level
   Congress can unlock resources pivotal to implementing and supporting the policy-level recommendations above, for example:
   
4. Increase resources to deploy more foreign service, development, commercial officers in ways that (a) advance US foreign policy and commercial interests in LAC across the trade, industrial, and development policy areas outlined above, including through APEP-related initiatives; (b) supporting regional development needs and capacity building; (c) deepen regionalized China expertise and capability, particularly through the Department of State’s Regional China Officers program.
5. Increase resources for public diplomacy efforts that better specify and highlight the value of positive US economic engagement in LAC. This includes measurable impact of US policy actions recommended above, as well as nongovernmental US accomplishments and facts, e.g., the United States consistently remains by far the region’s largest investor and trading partner in aggregate terms.
6. Optimize budgetary or financing rules for organizations like DFC and EXIM so they can meet the growing and evolving needs of the beneficiaries, expanding progress made in the Better Utilization of Investments Leading to Development Act of 2018 (“BUILD Act”).
7. Approve/Allocate resources to DC-headquartered international financial organizations—including the Inter-American Development Bank Group and the World Bank Group—for future capital increases and replenishments. These organizations are well-positioned to provide high-quality, impact-driven development assistance to LAC. Additionally, they can complement bilateral US efforts, as evidenced by the recently announced IDB Invest-DFC co-financing framework.
   
   Strategic level
   Through its legislative, policy, financial, and oversight authority, Congress can play a key role in guiding the strategic direction of US foreign policy towards LAC, in particular:
   
8. Draw more attention and resources to LAC. The US government including Congress must work to recalibrate regional perceptions of US neglect and advocate for a more active role for the United States in leading hemispheric economic integration. LAC has much to offer as a reliable partner in an evolving global context, and it is in US national interest that this neighboring region realizes its full potential. The recently introduced Americas Trade and Investment Act (“Americas Act”) is a promising endeavor in this regard.
9. Ensure coherence of US economic engagement with LAC. At a time when domestic political polarization across the region and in the United States is making hemispheric relations less stable and effective, Congress can play a key role in informing a high-level, bipartisan, and coherent US strategy towards LAC that better transcends electoral cycles. Recent executive-legislative efforts to connect APEP and the Americas Act are an encouraging signal in this regard.

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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.

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In March 2024, China’s Premier Li Qiang capped off a bumpy first quarter by cancelling a traditional annual press conference to talk about the government’s plans for the coming year. But in many ways, China’s policy measures spoke for themselves. The year-to-date story has been one of harried effort to support a faltering stock market, ramp up exports to make up for domestic demand, and double-down on high-tech sectors with subsidies and other innovation funding. The most important policy document of China’s economic year, the Government Work Report, promised state guidance and fiscal expansion but did not address the structural problems that have impaired Beijing from doing that in the past several years.

We identify some positive policy developments compatible with global market norms this quarter, including in financial system development and direct investment openness. New data security guidelines provided some reassurance to skittish foreign investors after years of uncertainty on the scope of data rules. Beijing pledged once again to ease the business environment and level the competitive playing field for foreign firms, this time through twenty-four measures and a charm offensive with foreign CEOs at the China Development Forum. And despite uncertainty, foreign portfolio investors took advantage of premium China bond returns, even as direct investment stalled.

These policy strategies were mostly familiar. In most of the areas monitored under the Pathfinder framework, there was either no market convergence or active backsliding. There was little to no public discussion of the structural and systemic factors weighing on the economic outlook, low productivity, foreign concerns over overcapacity or exchange rate risks. This paucity of needed debate fanned the flame of discussions in G7 capitals about the need to coordinate collective trade defense. While a few signs of the end of the property correction are showing up, suggesting a cyclical stabilization with the next several quarters, the longer-term headwinds to sustainable growth will mount until meaningful market reforms are implemented.

Read the full issue brief below

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Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

The China Pathfinder project examines whether China’s economy is converging or diverging with the world’s leading open market economies.

China Digital Policy

Issue Brief Feb 5, 2024

China Pathfinder update: Lack of policy solutions in second half of 2023 belies official data

By GeoEconomics Center and Rhodium Group

Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems and an unprecedented drop in foreign direct investment was stark.

China Economy & Business

Econographics Dec 11, 2023

China’s manufacturing overcapacity threatens global green goods trade

By Niels Graham

Chinese lending is exacerbating a growing glut in its green manufacturing sector. Beijing is increasingly looking abroad to absorb excess capacity. This may have devastating effects for the global trading system as economies move to protect their own domestic industry.

China Economy & Business

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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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Catalyzing climate financing through the Green Climate Fund

Mafalda Duarte, executive director of the Green Climate Fund (GCF), gave a succinct overview of the GCF’s role and its work in mobilizing and implementing climate financing in the Middle East and North Africa (MENA) and across the globe. 

She explained that the GCF functions as the main financial mechanism of the United Nations Framework Convention on Climate Change, bringing some $14 billion in resources to more than 250 adaptation and mitigation projects in 129 developing countries. Under its mandate and the direction of its board, the GCF prioritizes assisting the world’s most climate-vulnerable countries.

Duarte emphasized the inclusivity of the GCF’s work, noting that adequate climate financing requires partnerships with national governments, international organizations, and the global private sector. Partnering with a vast network of organizations, including the IMF and World Bank, gives the GCF access to a large-scale and flexible resource pool. She listed advisory services, project preparation, loans, equity, guarantees, and results-based payments as some tools that the GCF can leverage.

She also mentioned that roughly $1 billion of the fund’s $14 billion is earmarked for projects in the MENA region specifically in this funding cycle. She specifically highlighted the GCF’s work on renewable energy projects, given the region’s potential to harness solar and wind power and the potential cost savings on infrastructure construction offered by economies of scale. 

Duarte concluded with her own hopes for the GCF’s mission, saying that “it’s important to honor what we have been asked to do, but it’s important to take it one step further…with a particular focus on expanding efforts targeting the most vulnerable.”

An optimistic outlook on Egypt’s economic reforms

Rami Aboulnaga, deputy governor of the Central Bank of Egypt, shared an upbeat assessment of his country’s economic reforms. 

To halt further devaluation of the Egyptian pound, which recently reached seventy pounds against the US dollar at black-market rates, Aboulnaga emphasized the importance of restoring investor confidence. “The keyword is confidence,” he said. “I think the issue we are trying to grapple with is shoring up confidence.” Aboulnaga highlighted that speculation drives the parallel market and underscored reforms’ success in addressing this issue.

In terms of diversifying foreign exchange reserves and compensating for lost revenues, Aboulnaga outlined the bank’s efforts to enhance competitiveness and rectify structural imbalances. He also emphasized measures to ensure dollar availability through a flexible exchange rate. Despite regional geopolitical volatility, Aboulnaga noted a resurgence in tourism and an increase in remittances, which he cited as helping mitigate other challenges.

Aboulnaga stressed the importance of maintaining momentum to achieve and sustain stability as the core of government economic reforms. These measures aim to build resilience in the economy rather than generate short-term gains. Addressing inflation and debt reduction, which he described as top priorities for the Central Bank of Egypt, is crucial for protecting vulnerable communities. The bank is actively working to increase transparency in markets to make fluctuations more predictable.

Concerning the private sector, the structural reforms aim to cultivate a neutral environment and 

establish a level playing field for investors, thus enhancing business competitiveness. The market will be closely regulated, but not controlled.

Moving from stabilization to reform in the Egyptian economy

H. E. Rania al-Mashat, Egypt’s minister of international cooperation, led a discussion centered on macroeconomic stabilization, economic reform, and leveraging concessional funding to promote economic growth in Egypt.

She emphasized the significance of the past two months in terms of macroeconomic stabilization. According to her, recent actions toward a flexible exchange rate, fiscal consolidation, and collaboration with the IMF have provided Egypt with the opportunity to address the deeper challenge of structural reform.

This structural reform, as outlined by Mashat, revolves around three main pillars: stabilizing Egypt’s macro-fiscal landscape, enhancing the country’s business environment, and supporting the green transition. She stressed the importance of relationships with multilateral development banks and other partners in facilitating these reform programs, emphasizing that they must be country-led to ensure success.

Furthermore, Mashat highlighted the necessity of building long-standing relationships based on transparency and trust to access additional concessional finance. She emphasized the importance of accountability for every dollar received through concessional finance, ensuring alignment with the national strategy. Egypt has been able to utilize concessional finance to implement assistance programs for the country’s most vulnerable, such as Takaful and Karama, addressing both economic and social needs simultaneously.

Conflict resilience and economic integration in the MENA region

Jihad Azour, IMF director of the Middle East and Central Asia, concluded the MENA portion of the Atlantic Council’s IMF/World Bank Week by providing an evenhanded examination of the region’s economic outlook. Azour emphasized the region’s positive developments, with most inflation returning to historical averages, increased growth from non-oil sectors in the Gulf, and efforts to transition toward renewable energy. At the same time, he said issues regarding geopolitical instability and debt remain persistent challenges for MENA countries.

On geopolitical tensions and their economic impact, Azour said that “the war in Gaza is having a devastating impact on the Palestinian economy and a relatively large impact on neighboring countries” and beyond. Disruptions in the Red Sea have also affected the region. One-third of global container shipping goes through the Suez Canal, and more than one-third of oil and gas come from the region, so the Houthis’ attacks in the Red Sea are creating uncertainty regarding the waterway’s trade. Fortunately, explained Azour, recent shocks like the COVID pandemic and the war in Ukraine have helped the market and supply chain adapt to major disruptions and shifts in oil supply.

Like conflict, Azour said, debt is a major concern in regional growth, citing Jordan and Egypt’s 90-percent debt-to-gross domestic product (GDP) ratios and Lebanon’s ratio surpassing 100 percent. He explained that long-term solutions to the debt crisis require predictable macroeconomic frameworks to restore investors’ confidence in the economy. 

While debt and conflict are continuing challenges for the region, Azour assessed the Gulf as a source of optimism for MENA’s economic prospects. He noted that the Gulf’s policy and reform-driven approach to transformation has been successful in reducing reliance on oil while positioning Gulf Cooperation Council (GCC) countries, including the United Arab Emirates and Saudi Arabia, to seize on the potential of artificial intelligence. Azour explained that this economic success has allowed the GCC to lead the way in both regional and global integration, which could boost all of MENA’s economic potential under a tempered and incremental approach to greater regional integration. With sustainable long-term reforms, this progress could translate to greater economic spillover effects in the broader region.

JP Reppeto and Charles Johnson are Young Global professional in the Atlantic Council’s Middle East programs

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It starts with Draghi’s forthcoming report on EU competitiveness, at the request of European Commission President Ursula von der Leyen, to be published after the June 6-9 elections for the European Parliament. According to a source close to Draghi, who shared early details on condition of anonymity, the report will likely include a frank appraisal of Europe’s weaknesses. Brussels should pay close attention, and lawmakers should elevate Draghi to be the next European Council president to help make his report’s prescriptions for a more integrated and competitive EU a reality.

Time to compete

The most important things that happen in the world don’t happen in Europe; this is especially true regarding the economy and technological innovation. Draghi is strongly convinced of this, and the competitiveness report will likely dive into Europe’s limited creative and productive capacities.

Draghi is set to deliver a cold, hard dose of reality: Right now, Europe lacks both the resources and the will to compete with the rest of the world, especially considering the capacity of the United States and China to stimulate the economy through government spending. But the report will also likely highlight the fact that Europe has tremendous opportunities to correct for these shortcomings.

One reform that the document will promote is the establishment of interconnections between national production systems, with a view toward creating a single European system of integrated continental supply chains—an ambitious aim, to say the least. “The geopolitical, economic model upon which Europe has rested since the end of the second world war is gone. The European Union has to become a state,” Draghi said at the end of November. His vision for Europe entails the establishment of public debt, fiscal policy, and defense as the pillars of the new EU. He is also convinced that the EU needs five hundred billion euros per year to lead environmental and digital transitions and to provide social protection to its citizens.

As Draghi said in Washington in February, European countries will require “more investment even at the cost of higher public deficits to stimulate growth and fight inequality without forgetting the importance of raising productivity and to assign a new role of budgetary policy that reaches where monetary policy alone cannot reach.”

Draghi is widely regarded as, above all, a defender of European interests and an Atlanticist. As Italian prime minister, he was a key player in aligning Europe with Ukraine. Moreover, he personally developed the system of sanctions placed on Russia’s central bank. This demonstrates a strong track record for defending the EU’s freedom and democracy against any threats.

Draghi’s vision could be the source of inspiration for a government program for the EU for the next five years. And Europe needs his engagement to realize these aims.

The next Council president?

How might Draghi engage with the European institutions? Many observers in Brussels and across the continent think that he could be the next president of the European Council. Even though this institutional office is often criticized for being largely symbolic and lacking a cabinet, it’s the person that makes the office. The president sets the agenda of the Council and could be more than an honest broker between national leaders. A president with Draghi’s vision could truly lead. For example, as European Council president, Draghi would be able to start the process of reforming the EU’s founding treaties by proposing items in formal and informal discussions, as well as crafting plans to realize the policies he will suggest in his report. As he said in Brussels at the High-level Conference on the European Pillar of Social Rights on April 16, “we will need a renewed partnership among member states—a re-defining of our union that is no less ambitious than what the founding fathers did seventy years ago with the creation of the European Coal and Steel Community.”

The problem is that, for now, Draghi has said publicly that he is not interested in assuming any European office, and no political leaders are asking him to get involved.

The campaign for European Council president will start after the elections in June. The new balance of power between the European parties will be determined, together with their agreement on who will hold the main European offices. Three parties that are likely to contend for a leading role in the EU institutions are the European People’s Party (EPP), the Socialists and Democrats (S&D), and Renew Europe (Liberals).

The EPP is expected to be the largest group in the European Parliament. Draghi has a strong influence on the EPP’s leader, von der Leyen, who could ask him at the very least to go on with his work on competitiveness. However, the EPP—mainly the northern European members—are not too keen on the idea of “good debt” that Draghi proposes.

S&D is likely to nominate former Portuguese Prime Minister Antonio Costa as president of the European Council, but he might not be proposed by his country, in which case the nomination would not move forward. During the Socialist Congress in Rome, one of the main leaders, secretary of the Italian Democratic Party Elly Schlein, publicly supported Draghi’s plan to spend five hundred billion euros per year for environmental and digital transitions. And the former Italian prime minister is highly respected by two other influential S&D members: Spanish Prime Minister Pedro Sánchez and German Chancellor Olaf Scholz.

In addition, Draghi has a strong relationship with French President Emmanuel Macron, the leading voice of the Renew Europe group. According to a source close to Macron, his support for Draghi will depend on the outcome of French president’s talks with other European leaders after June 9. The sense is that Macron considers von der Leyen a good choice for a second term as commission president, despite the two campaigning against one another and having disagreements on specific issues. And if von der Leyen backs Draghi, that will bring Macron along, too.

Concerning the other parties, it looks like it will be difficult for the Conservatives and Reformists Party (ECR) to enter into a coalition together with the Socialists. But ECR leader and Italian Prime Minister Giorgia Meloni already has a strong relationship with von der Leyen, and proposing the pro-European Draghi for president of the European Council might be a way to strengthen her accountability with EU partners. Whatever happens after June 9, Europe will need, to paraphrase a quote often attributed to Henry Kissinger, a leader able to carry the European Union from where it is to where it has not been. Draghi could provide that kind of leadership as president of the European Council.

Mario De Pizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center. He is currently a journalist at TG1, Italy’s flagship television newscast program produced by RAI, Italy’s national public broadcasting company.

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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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Below are his prepared remarks.

The Middle East – North Africa (MENA) has emerged as an important strategic region for the People’s Republic of China (PRC), with a significant expansion of its interests and presence across the region. However, at this stage China remains primarily an economic actor there, with growing political and diplomatic engagement and little in the way of a security role. This economics-first approach has contributed to improved public perceptions of China across MENA; public polling data from the Arab Barometer consistently shows positive views of China as an external actor, with respondents from 8 out of 9 countries perceiving China more favorably than the US. At the same time, its modest involvement in regional political and security affairs, evident in its minimal response to Houthi strikes on maritime shipping, underscores its reluctance to play a more meaningful role in MENA, which has no doubt been recognized by governments that expected a more robust response given Beijing’s outsized economic presence.

This highlights an important point about how MENA features in the PRC’s broader strategic objectives. It is first and foremost a region where China buys energy, sells goods, and wins construction infrastructure contracts. These economic interests have not required a corresponding political or security role, and Chinese leaders have not indicated that they will do so; they benefit significantly from the US security architecture that underpins the region’s fragile status quo. China works closely with US allies and partners in MENA, especially the Gulf Cooperation Council states and Egypt, and in many regards Beijing’s interests in the Middle East have been consistent with those of the US.

At the same time, MENA has to be considered as part of a larger global strategy under which US- China interests diverge substantially. China’s more assertive foreign policy since the global financial crisis started under the leadership of Hu Jintao and has intensified under Xi Jinping. The 2017 US National Security Strategy identified China as a great power competitor, and the rivalry is playing out in MENA as elsewhere. Beijing has rolled out new global initiatives – the Global Development Initiative (GDI), Global Security Initiative (GSI), and Global Civilization Initiative (GCI), discussed below – to present itself as a leader of the Global South, using a state-centered alternative to Western liberalism.

In this effort, the MENA is a region where China aims to establish a normative consensus consistent with Beijing’s preferences. As a result, we see several examples of PRC leaders promoting narratives that the US is unreliable, or that its presence in the region exacerbates tensions and conflict. After a January 2022 meeting with MENA officials, for example, Chinese Foreign Minister Wang Yi said the Middle East “is suffering from long-existing unrest and conflicts due to foreign interventions…We believe the people of the Middle East are the masters of the Middle East. There is no ‘power vacuum,’ and there is no need of ‘patriarchy from outside.’” Whereas in the preceding two decades the PRC rarely overtly challenged the US position in MENA, it has become a regular feature as Chinese leaders exploit pressure points between the US and regional actors in order to differentiate itself from the US and to create friction between Washington and its MENA partners and allies. This has been especially present in Chinese messaging since the October 7, 2023 Hamas attack on Israel, as PRC leaders have consistently used the crisis to undermine the US and present itself as a more reliable partner to the Arab world.

China’s diplomatic activities in the Middle East

While it has not been widely recognized, China has developed a deep, broad and systematic approach to diplomatic engagement across MENA. It uses a range of bilateral and multilateral diplomatic tools, and these have been complemented in recent years with international organizations where Beijing has significant influence. It also has appointed special envoys for region-specific issues.

At the bilateral level, China has diplomatic relations with all regional countries. Several of these are enhanced by strategic partnerships, which are mechanisms to coordinate on regional and international affairs. Five MENA countries – Algeria, Egypt, Iran, Saudi Arabia, and the UAE – have been elevated to comprehensive strategic partners, the top level in China’s hierarchy of diplomatic relations. This results in the “full pursuit of cooperation and development on regional and international affairs.” To be considered for this level of partnership a country has to be seen as a major regional actor that also provides added value, such as Egypt’s control of Suez, or Saudi’s leadership role in global Islam and energy markets. Therefore, when assessing China’s diplomatic efforts in MENA, these countries (Algeria to a lesser extent) are the load-bearing pillars of Beijing’s approach. They see more official visits, attract more investment, do more contracting, and generally support a wider range of China’s interests in the region. That China has comprehensive strategic partnerships with both Saudi Arabia and Iran means there are more frequent bilateral high-level meetings, no doubt contributing to China’s role in the Saudi-Iran rapprochement.

At the multilateral level, China uses the China Arab States Cooperation Forum, which includes all Arab League members, and the Forum on China Africa Cooperation, which includes nine Arab League members. These forums present China with regular ministerial-level meetings where they map out cooperation priorities. They also have several sub-ministerial level issue-specific working groups. The result is a relatively deep level of diplomatic engagement.

China has appointed special envoys for the Middle East, the Horn of African Affairs, and the Syrian Issue, all of which were designed to present the PRC as an actor with influence and interest in these issues, although the impact of each has been marginal.

Finally, two international organizations where China plays an influential role, BRICS and the Shanghai Cooperation Organization Forum, have admitted Middle Eastern states as members in recent years. BRICS expanded for the first time in 2023 to include Saudi Arabia, Egypt, Iran, the UAE, and Ethiopia, giving the organization a presence in MENA and the Horn. The SCO admitted Iran as a full member in 2023, a position it has coveted since 2005. Other MENA participants in the SCO are Bahrain, Egypt, Kuwait, Qatar, Saudi Arabia, and the UAE, all of which are dialogue partners. This does not make them SCO members; it is a position for countries that wish to participate in discussions with SCO members on specific issues that they have applied to join as dialogue partners. It could eventually result in full membership but that does not appear to be on the horizon for any Middle Eastern dialogue partners for now.

All in all, Chinese diplomacy has been highly active and quite successful laying the groundwork for a deeper presence in the Middle East.

China’s involvement in MENA conflict mediation

China’s efforts to position itself as a conflict mediator is part of a larger strategy, embedded in the GSI, to present the PRC as a leading global actor. As a 2023 report from MERICS cautioned, “China’s current mediation push seems to be largely a reflection of its geopolitical competition with the United States and its ambition to expand its global influence at the expense of the West.” In MENA as elsewhere, the results have been mixed. The Saudi-Iran rapprochement is an example of a low cost ‘win’ for China. It has been well documented that much of the negotiation that led to the March 2023 announcements in Beijing had been done through Iraqi and Omani efforts. China’s involvement appears to be as a great power sponsor that was broached during Xi Jinping’s December 2022 summit in Riyadh and further discussed during President Ebrahim Raisi’s visit to Beijing in February 2023. Given China’s comprehensive strategic partnerships with the Saudis and Iranians, it has significant diplomatic relations with both countries and was therefore the only major power that could play such a role. However, it has to be stressed that most of the groundwork had been laid before China’s involvement, and that the rapprochement itself was the result of domestic political and economic pressures within Saudi and Iran.

Given this highly publicized diplomatic ‘win’, Chinese analysis promoted a narrative of a “wave of reconciliation” in the Middle East as a result of Beijing’s efforts. Ding Long, a Middle East expert at Shanghai International Studies University, described China’s mediation diplomacy, guided by the GSI, as driving events in the Middle East in the wake or the Saudi-Iran deal:

Within a month since then, the Saudi-Iran rapprochement is like a key that opens the door to peace in this region. The warring parties in Yemen took a critical step toward a political solution; Bahrain and other Arab countries have restored diplomatic relations with Iran; Saudi Arabia and other Arab powers are interacting more frequently with Syria. A wave of reconciliation is also encouraging more joint efforts between China and the Middle East in pursuing peace.

Shortly after the Saudi-Iran deal, the PRC announced that it was willing to wade into the Israel- Palestine conflict during a June 2023 visit from Palestinian President Mahmoud Abbas. Immediately following this, Israeli Prime Minister Benjamin Netanyahu announced that he had accepted an invitation to Beijing for October; for obvious reasons the visit did not happen. China’s response to the Hamas attack, discussed below, has negated any prior work towards being a mediator on the issue; its relationship with Israel has been deeply damaged at this point and it is hard to see how Beijing could play a constructive role negotiating between the two. The March 2024 meeting in Doha between Chinese ambassador Wang Kejian and Hamas official Ismail Haniyeh further cements this. Any role China can play would be in support of Palestine and highly partisan.

In any case, just over a year after Beijing’s first successful foray into Middle East diplomacy, the region is less stable that it has been in recent memory, and China’s efforts at mediation have had little tangible impact. It has little influence on Iran or its non-state partners of Hamas, the Houthis, or Hezbollah, and is not seen as credible by Israel. Generally, its response to events since the Hamas attack have made China look very transactional and self-interested in the region, rather than a responsible extra- regional power with substantial Middle East interests.

A point worth considering on this topic is that China is a relative newcomer to Middle East political diplomacy. As described above, it is primarily an economic actor in the region, and despite its special envoys, cooperation forums, and strategic partnerships, it does not have the depth of regional specialization that the US or European countries do, given their longstanding involvement in MENA. As China develops a deeper pool of MENA talent this will change, but it is early days. Its area studies programs in universities and think tanks are not nearly as developed as their US counterparts, making for a much shallower pool of expertise.

China’s response to the Hamas attack on Israel

The Hamas attack on Israel had significant repercussions for China’s approach to the MENA and resulted in a more blatantly realpolitik approach to the Israel-Palestine conflict. China’s ambition to play a role in resolving this conflict was based largely on the ‘peace-through-development’ framework of the GDI/GSI. The attack demonstrated the need for a more robust response, but in the wake of the attack the limits of Beijing’s normative approach were evident. Since then, China has not pursued a mediator role, siding firmly with Palestine while frequently condemning Israel and the US. Pointedly, it did not blame Hamas for the attack and has seemingly made the ‘one man’s terrorist is another man’s freedom fighter’ argument; during International Court of Justice hearings Ma Xinmin, a legal advisor for the Chinese Ministry of Foreign Affairs, argued that Palestinian acts of violence against Israelis are legitimate “use of force to resist foreign oppression and to complete the establishment of the Palestinian state.”

A point worth considering is that within China, the Israel-Palestine conflict resonates differently than it does in the US and other Western liberal democracies. The demographic composition of the West with large immigrant populations means that there are significant Jewish, Muslim, Christian and Arab communities for whom the Israel – Palestine conflict is a major issue that animates voters, NGOs, and lobbyists. Democratic leaders are expected to have positions that represent their constituents, and Middle East policy has to try to thread the needle of interests and values in a manner that balances citizens’ often deeply held convictions. In China, religious minorities – especially of the Abrahamic faiths – are comparatively insignificant in the demography, and the immigrant population from the Middle East is virtually non-existent. The Party has increased repression against Muslims, Jews, and Christians during the Xi Jinping era, making overt political action from them incredibly costly. This, combined with the fact that China has an authoritarian government, means the issue if Israel and Palestine does not mobilize Chinese citizens like it does in the US, and the government is less concerned with being responsive to citizens’ concerns. It is, therefore, a purely geopolitical issue. The CCP can use its policy in the region to advance its own interests while challenging the US and its Western allies without the additional consideration of managing domestic pressures. Its messaging on the war in Gaza is therefore more about China presenting itself as an alternative to the US as a global leader than it is about the war itself.

China’s global initiatives and international order

At this point China’s three global initiatives (GDI, GSI, GCI) are following the same early-stage trajectory of the Belt and Road Initiative (BRI). When it was announced in 2013 there was little understanding or awareness of it outside of China, and within China ministries, agencies and municipalities spent most of 2014 and 2015 incorporating the BRI into their missions. The 2015 white paper on the BRI and the 2017 Belt and Road Forum enhanced its global profile. The GDI, GSI, and GCI have been appearing in joint communiques across MENA and are cited by local actors as useful contributions from China, but they do not appear to be widely understood yet, nor do many local governments seem to be aware of them. It is likely that the GSI first came to a wider audience when then-Foreign Minister Qin Gang described the Saudi -Iran rapprochement as “a case of best practice for promoting the Global Security Initiative.”

However, the normative framework of these initiatives has appeal for regional governments. Whereas liberal norms of global governance focus on democracy, free markets, human rights, and international institutions, China’s trio of initiatives promote sovereignty, territorial integrity, self-determination, and noninterference in the domestic affairs of states. Essentially, it rejects the universalism of liberal norms and promotes a statist vision instead. For governments and societies long frustrated by the inconsistent promotion of liberal values from the west, or by those that reject liberalism altogether, China’s model is attractive.

The impact of China’s global initiative and the BRI should also be considered as a consequence of a global order transition. During the Cold War, bipolarity meant governments in need of development assistance could turn either to the West or the Soviets. The end of the Cold War meant the developing world was limited to Western institutions underpinned by liberal values that imposed conditions, often inconsistent with local norms. The emergence of China and its global initiatives provides alternatives, and that Beijing presents these initiatives in contrast to liberal institutions is appealing to many governments in the Middle East.

The issue of Xinjiang

The CCP identified its ‘core interests’ in a 2011 white paper, “China’s Peaceful Development”. These core interests are state sovereignty, national security, territorial integrity, national reunification, maintenance of its political system and social stability, and maintaining safeguards for sustainable economic and social development. Importantly, all of these are domestic concerns. In practical terms, anything another country does to undermine these – especially including support for independence movements in Xinjiang, Tibet, Hong Kong and Taiwan – will damage the relationship. The CCP faces numerous challenges from issues of domestic governance, and pressure from within is the most significant threat to its continued rule. When foreign governments apply pressure on Beijing on domestic issues there is pushback, typically in the form of coercive economic statecraft.

All of this is to say that Middle Eastern governments have shown no inclination to speak or act on the issue of repression of Uyghurs or other Muslim minorities in China. No regional government wants to jeopardize a bilateral relationship with one of its most important trading partners on an issue that few feel is relevant to their own core interests of building sustainable economies and improving governance in the face of significant domestic pressures. Engagement with China is largely seen as an opportunity for regional governments to address these challenges, and China’s own experience of development since the Reform Era began in 1978 is perceived as a model for this.

Another consideration here is that Beijing frames its repression of Uyghurs as a response to a conservative religious ideology that promotes separatism and has used terrorism in an attempt to establish an independent state. In doing so, it addresses a concern for many Middle Eastern governments, most of which are deeply concerned about the spread of political Islam in their own countries. As such, the issue is less about any notion of pan-Islamic solidarity than it is about challenges to the state from an ideology seen with deep hostility from regional governments.

Policy Recommendations

• Provide explicit support for MENA countries in their development programs.
• Encourage more investment into MENA from private US companies.
• Improved messaging on what the US does in the region beyond the realm of security.
• Improved messaging on how MENA features in US interests and policy.
• Enhance public diplomacy – bring more MENA students to US on training and education programs.
• Draw upon the narratives of other extra-regional allies and partners that have interests in MENA and have also had challenges in dealing with China. They can help with the messaging – what have their experiences with China been? What issues should MENA countries be considering?
• Where possible, align approaches to MENA with US allies to provide a greater range of investment, development, and trade options.

Jonathan Fulton is a nonresident senior fellow with the Atlantic Council. He is also an associate professor of political science at Zayed University in Abu Dhabi. Follow him on Twitter: @jonathandfulton.

The post China’s Strategic Objectives in the Middle East appeared first on Atlantic Council.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Ambassador Robert Zoellick, former President of the World Bank, former US Deputy Secretary of State, and former US Trade Representative: The REPO Act achieves elegant justice by using Russia’s own money to help Ukraine resist Putin’s brutal aggression. The REPO Act represents a rare combination: sound policy, good politics, and ethical values. Why would any American oppose that combination?

In a war of attrition, economic support is as vital as arms and ammunition. The REPO Act creates an opportunity for the Biden administration to press Europeans to use the assets of the Russian government to help Ukraine survive economically.

Philip Zelikow, Botha-Chan Senior Fellow at Stanford University’s Hoover Institution and former Counselor of the US Department of State: At this decisive hour in Ukraine’s war for survival, the REPO Act can finally start to mobilize the financial firepower that can help turn the tide. Enormous sums sit idle, helping no one. They will go back to the aggressor, or they will help the victims. The time has come to choose.

Some of the best international lawyers in the world have looked hard at this question. They find the REPO Act’s approach to be sound. And those who have actually analyzed the financial repercussions find positives, not negatives. So, the way is clear to act.

Jeffrey Sonnenfeld, Lester Crown Professor of Leadership Practice, Yale School of Management: It is well past time to pass the REPO Act and stop dithering over the seizure of Russia’s $300 billion in foreign exchange reserves. Ukraine desperately needs these funds: some estimates are that the costs of Ukrainian reconstruction will run easily over $500 billion, not to mention the continued heavy costs of resisting Russian aggression. The direct destruction attributed Russia’s cruel unprovoked invasion of this peaceful sovereign nation is worth well in excess of these assets. It’s impossible to see how Ukraine would possibly fund its massive reconstruction burden without a reparation payment, with the cost and risks prohibitive to both the private sector and western governments. Only the REPO Act can ensure justice prevails

Eurasia Center events

Online Event Thu, August 15, 2024 • 9:00 am ET

Ukraine’s advance in Kursk: What’s next and implications

Conflict Russia Security & Defense Ukraine

Elina Ribakova, Nonresident Senior Fellow at the Peterson Institute for International Economics: It is a brave and principled act by the US Congress. It ensures that those who do not abide by the rules of the global financial architecture and economic cooperation should not be entitled to enjoy its benefits.

Ambassador Daniel Fried, Weiser Family Distinguished Fellow at the Atlantic Council and former State Department Coordinator for Sanctions Policy: Having started a war of aggression and national extermination against Ukraine, Russia should pay for the consequences. The REPO Act provides authority to the U.S. Government to use the Russian sovereign assets that it immobilized at the start of the full Russian invasion of Ukraine in February 2022 to benefit Ukraine. The purpose is the right one. Passage will strengthen efforts to build international support for taking more Russian sovereign assets to help Ukraine resist and rebuild.

Anders Åslund, Senior Fellow at the Stockholm Free World Forum: The REPO Act is an important precedent. It makes clear that military might is not right, but that Russia has to pay war reparations for all the damage it causes through military aggression. It shows the way forward for Europe so that it does the same. A violator of so many international laws must not have its property protected from due compensation. Ukraine needs huge funds for reconstruction and Russia must pay.

John E. Herbst is senior director of the Atlantic Council’s Eurasia Center and served for thirty-one years as a foreign service officer in the US Department of State, retiring at the rank of career minister. He was US ambassador to Ukraine from 2003 to 2006.

Further reading

Issue Brief Aug 23, 2023

The case for seizing Putin regime assets

By Kristina Hook and Yonah Diamond

A coordinated asset-seizure program connected to Russian aggression and atrocities can build international consensus—increasing the effectiveness of economic responses to Russia’s war, eighteen months in.

Economic Sanctions International Financial Institutions

UkraineAlert Feb 23, 2024

Making Russia pay for the invasion of Ukraine

By Paul Grod

Using frozen Russian assets to fund Ukraine’s resistance and recovery is morally justified and would also ease the financial burden on Western economies, writes Paul Grod.

Conflict Economic Sanctions

UkraineAlert May 6, 2022

Making Putin pay: Russia must finance the rebuilding of post-war Ukraine

By Kira Rudik

Making Putin pay: Russian assets currently frozen in the West could potentially be used to finance the rebuilding of post-war Ukraine but this will require both creativity and political will from Western leaders.

Conflict Economic Sanctions

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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In partnership with the Policy Center for the New South, the Africa Center is proud to present a joint report, “The Reform of the Global Financial Architecture: Toward a System that Delivers for the South,” by Otaviano Canuto, Hafez Ghanem, Youssef El Jai, and Stéphane Le Bouder.

This report issues specific and urgent calls for reform, including more representative global governance, increasing the World Bank’s operational and financial capacity, prioritizing programs that would integrate Africa into the global economy, connecting the continent’s critical infrastructure and trade routes, and increasing participation and collaboration with bilateral public and private lenders and investors, such as China, sovereign wealth funds, and multinationals.

2024 marks eighty years of the Bretton Woods system. It is crucial to implement extensive reforms and substantial policies to support African nations’ efforts and maximize their chances to unleash their immense economic potential.

These recommendations presented during the 2024 IMF-World Bank Spring Meetings reflect the urgency of both operational and more inclusive reforms for the African continent.

About the authors

Otaviano Canuto
Senior Fellow
Policy Center for the New South

Biography

Otaviano Canuto is a senior fellow at the Policy Center for the New South, principal at the Center for Macroeconomics and Development and a nonresident fellow at the Brookings Institute. Canuto is also a former vice president and executive director at the World Bank, executive director at the International Monetary Fund and vice president at the Inter-American Development Bank. He was also deputy minister for international affairs at Brazil’s Ministry of Finance, as well as professor of economics at University of São Paulo (USP) and University of Campinas (UNICAMP).

Hafez Ghanem
Senior Fellow
Policy Center for the New South

Biography

Hafez Ghanem holds a PhD in economics from the University of California, Davis and is a senior fellow at the Policy Center for the New South. Ghanem is a development expert with a large number of academic publications, and more than forty years’ experience in policy analysis, project formulation and supervision, and management of multinational institutions.  He has worked in more than forty countries in Africa, Europe and Central Asia, the Middle East and North Africa, and South East Asia.

Youssef El Jai
Economist
Policy Center for the New South

Biography

Youssef El Jai works at the Policy Center for the New South as an economist. He joined the center in 2019 after earning a master’s degree in Analysis and Policy in Economics from the Paris School of Economics and the Magistère d’Economie from the Sorbonne.

Stéphane Le Bouder
Nonresident Senior Fellow
Africa Center

Biography

Stéphane Le Bouder is a nonresident senior fellow at the Atlantic Council’s Africa Center and the chief operating officer of MiDA Advisors, a global advisory firm specializing in facilitating institutional investments and trade in Africa and other emerging markets.

The Africa Center works to promote dynamic geopolitical partnerships with African states and to redirect US and European policy priorities toward strengthening security and bolstering economic growth and prosperity on the continent.

Learn more

Report Apr 3, 2024

The case for African social infrastructure

By Tom Koch

Investment in African social infrastructure can be defined as African real estate that serves an essential societal purpose.

Africa Economy & Business

Report Mar 3, 2023

Critical connectivity: Reducing the price of data in African markets

By Aubrey Hruby

This report analyzes the current state of the digital transformation in Africa and outlines how affordable and accessible data is imperative for further development.

Africa Digital Policy

Issue Brief Oct 9, 2023

Reimagining Africa’s role in revitalizing the global economy

By Amin Mohseni-Cheraghlou

The African continent potential to revitalize the world economy and reverse the downward trend in global growth. However, for this to materialize, it needs substantial investments in its physical and social infrastructure.

Africa China

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The second half of the twentieth century experienced significant economic integration. International trade, cross-border migration, capital flows, and technological diffusion increased per capita incomes across countries and reduced global poverty.1 However, events such as the global financial crisis of 2007 to 2009, Brexit, and the COVID-19 pandemic—all against the backdrop of escalating great power rivalry and tensions between the United States and China—have demonstrated the rise of geoeconomic fragmentation (GEF). Since the 2022 Russian invasion of Ukraine, a growing numberof world leaders have addressed the impacts of GEF on global energy and agricultural markets. For one, higher and increasingly volatile food and energy prices have made it increasingly difficult for developing nations to prioritize environmental concerns and implement sustainable development initiatives.

The International Monetary Fund (IMF) describes GEF as a pattern of “policy-driven reversal of global economic integration” that threatens capital flows to low-income countries, hinders innovation in emerging markets, and discourages cooperation on international crises. Stemming from the prioritization of national security objectives, GEF takes the form of policies that reduce reliance on other countries by incentivizing domestic production and employment. In our increasingly fragmented world, nations have focused on reshoring essential goods and supply chains, including minerals crucial for green technologies, semiconductors, and military hardware due to concerns over national security and geopolitical motives. These transformations are in direct opposition to the founding principles of the Bretton Woods institutions (BWIs)—the International Monetary Fund, the World Bank, and the World Trade Organization (WTO)— which collectively seek to promote free trade, globalization, unified and competitive exchange rates, and the reorientation of public expenditures to achieve reductions in global poverty and increased economic prosperity for developing nations.

The costs of GEF are far-reaching and include higher import prices, segmented markets, diminished access to technology and labor, reduced productivity, and lower living standards. A June 2023 article in the IMF’s Finance & Development magazine points to diminished output in a scenario where countries must align with either a US-EU as 2.3 percent of global gross domestic product (GDP). Advanced economies and emerging markets could face permanent losses of between 2 percent and 3 percent, while low-income countries are at risk of losing more than 4 percent of their GDP. These losses could deepen risks of debt crises, exacerbate social instability, and increase food insecurity. The most vulnerable nations, heavily dependent on the imports and exports of key commodities, will find it particularly costly to adapt to new suppliers under fragmented trade conditions. Moreover, a 2023 IMF paper with a comprehensive analysis of GEF and its potential effects on the future of multilateralism found that increasing international trade restrictions could lead to a long-term decline of up to 7 percent in global economic output, or approximately US$7.4 trillion. Building on these findings, an October 2023 IMF blog, titled “Geoeconomic Fragmentation Threatens Food Security and Clean Energy Transition,” argued that disruptions in the global trade of goods induced the spike in inflation experienced globally in 2022, heightened food insecurity in lower-income nations, and contributed to a deceleration in global economic growth. In addition, GEF is posing a threat to food security and the clean energy transition, namely by impacting the trade of essential minerals and agricultural goods, according to the blog co-authors.

GEF also risks short-circuiting the multilateralism needed to coordinate climate change mitigation and sustainable development in the years to come. An IMF policy report, titled “Geo-Economic Fragmentation and the Future of Multilateralism,” noted signs of GEF including:

• Formation of regional economic blocs.
• Declivities in cross-border capital flows.
• Prioritization of resilient supply chains over and above efficiency.
• Growing income inequality.
• Rising geopolitical tensions.
• Increasing discontent associated with a free trade system.

Among the goals of the BWIs is to achieve global net-zero emissions by 2050; however, GEF has limited these organizations’ abilities to work with governments, businesses, civil society organizations, and other stakeholders to mobilize resources and accelerate the transition to a low-carbon economy. Policymakers and scholars have raised growing concerns, suggesting that increased GEF will have implications for sustainable development outcomes. However, there remains a paucity of research on the impact of GEF on net-zero targets specifically. This report builds on previous scholarly work to examine the impacts of GEF on the ability of nation states to attain their net-zero targets to combat climate change.

In conclusion, the paper calls for a democratized governance structure in the BWIs, emphasizing the need for reevaluating quota allocations and diversifying leadership roles. By addressing these foundational challenges, the BWIs can navigate the complexities of today’s global economic landscape more effectively, fostering trust, representation, and robust leadership. The authors also argue persuasively that BWI reform can not only reinforce the legitimacy of the IMF and World Bank but also indirectly help the soft and hard power of the states most hesitant to reform the international monetary system.

Shirin Hakim is a Senior Fellow at the Center for Middle East and Global Order and a former Bretton Woods 2.0 Fellow with the GeoEconomics Center.

Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads 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.

Learn more

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But central bank governors and finance ministers who met in Washington this week grappled with more than the question of when their countries will be “landing” after a period of high inflation: They also looked to manage how their countries recover, aiming for a soft landing that avoids recession.

With so much at stake, we dispatched our experts to IMF and World Bank headquarters in Foggy Bottom to decode the institutions’ plans to navigate the turbulence of the global economy.

• Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

• This week in one word: Clarity

• Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

• The Polish finance minister on his country’s “U-turn” toward European values

• See day five analysis

Watch all our conversations with central bank governors, finance ministers, and experts

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

This week, the world’s finance ministers and central bankers came together in force for the first time since the “Marrakesh miracle,” that was the annual meetings last year—at least in the words of former IMF Managing Director Christine Lagarde—which finally resulted in progress on quota reform and a debt restructuring deal for Zambia.

But I doubt this week will go down in history as the “Washington wonder.” Tepid global growth, difficulty recovering from the pandemic (among developing countries), US-China competition (with Washington’s threat of new tariffs), and war cast a long shadow. Still, the officials were able to make real progress on both sides of 19th Street.

Yesterday, my colleague Martin outlined the IMF’s successes: The Fund adjusted its lending policy, allowing it to step in to support countries in debt distress, and called attention to the risks of large fiscal deficits.

But there are, after all, two sides to 19th Street. And on the World Bank side, countries including the United States, Japan, and the United Kingdom pledged $11 billion for some of the Bank’s guarantee instruments, which make its programs less risky—and more attractive—for private investors. The added firepower complements restructuring within the Bank to streamline the guarantee system. Hopefully, these changes will encourage private investors to fill countries’ funding needs for the green and digital transitions.

The G20 finance ministers and central bank governors also met this week, with Brazil’s Fernando Haddad giving the group homework: Find agreement on a wealth tax by the time the ministers meet again in Rio de Janeiro in July (the Atlantic Council will be there too).

Later today, as officials and their delegations start heading home, the security barriers will come down and 19th Street will open again. For the ministers, the hard work begins when they get home—and we will be watching closely to analyze whether the financial leaders make meaningful progress before the annual meetings in the fall.

This week in one word: Clarity

As the spring meetings drew to a close and leaders made their final statements, a few points became clearer.

Even though the global economy can feel hyper-interdependent at times, it is now becoming clearer just how muddled the economy is by divergence, inequality, and fragmentation. “Winners” and “losers” are seeing the economic gaps between them widen. There’s a heightened sense of uncertainty, with the threat of another political, economic, or natural shock looming.

What some may have seen as mission creep in finance—addressing energy transition challenges, the inclusion of gender and youth, and fragility—has become mission critical as macroeconomic stability and growth have become more dependent on, or disrupted by, these factors.

As a result, the timeframe for analysis—and more importantly action—has shrunk as spillovers, impacts, and risks from debt, inflation, conflict, and climate change have brought more urgency. On top of that, fiscal space has tightened, and capital flows stream away from where they are needed most. New research shows that countries in the Global South are paying out more in debt service than they are bringing in grants or loans—to the tune of fifty billion dollars. The United Nations’ annual Financing for Development report, released just before the spring meetings, reveals a more than four-trillion-dollar annual shortfall in funding to meet the Sustainable Development Goals, as I discussed this week with Assistant Secretary General Navid Hanif. 

While the World Bank and IMF have introduced reforms to optimize balance sheets, quotas, and capital adequacy to increase available financing, those changes are necessary but insufficient; that makes the World Bank announcement on Friday (that eleven countries have pledged eleven billion dollars to support the Bank’s hybrid capital and guarantee instruments) a welcome step.

Another thing that is clear after this week: the role regional multilateral development banks and international financial institutions (beyond the Bretton Woods institutions) play in addressing today’s challenges. This role isn’t new; I wrote about their role in COVID-19 response and recovery a few years ago. But there is again a need for private capital and philanthropic funding in a revamped international architecture that meets the moment.

And while more resources are key, it has become even clearer that more consideration needs to be paid to how funds are actually disbursed and delivered. As UN Undersecretary General and UNOPS Executive Director Jorge Moreira da Silva noted in our conversation, more than half of existing IDA funds have yet to be allocated. Furthermore, while analysis and policies are important, implementation matters and warrants additional attention.

Leaders across the global economy must ensure that even as they drive supply, they don’t forget about demand—from bankable projects to business environments, and from building capacity to domestic resource mobilization. This is the macro- and micro-challenge of the road ahead.

Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

On Thursday, Côte d’Ivoire’s Minister of Economy, Planning, and Development Nialé Kaba sat down with Rama Yade, senior director of the Atlantic Council’s Africa Center, to discuss the country’s economic priorities—among them, fostering sustainable growth. The two, conversing in French, spoke at an event that took place at the Atlantic Council’s IMF broadcast studio.

Côte d’Ivoire’s economy is predicted to rank fifth this year among the fastest-growing economies in Africa. Kaba said that the country would continue to make economic reforms to “enhance competitiveness, attractiveness, and economic performance.”

Kaba touched upon the IMF’s support to Côte d’Ivoire, which includes $3.5 billion under the Extended Fund Facility and Extended Credit Facility, in addition to a newly agreed upon 1.3 billion through the Resilience and Sustainability Facility. The minister also noted the importance of reform efforts at the Bretton Woods institutions, pointing to changes in how the IMF and World Bank select their leaders. “Perhaps one day the World Bank could be led by an African. After all, why not?”

Kaba also discussed topics closer to home. On Côte d’Ivoire’s agricultural sector, the minister said she’ll be looking to focus on the “local transformation of our raw materials.” Côte d’Ivoire is the world’s leading producer of cocoa, and Kaba said there is a need for investors to “settle and employ local labor.”

Touching on more global matters, Yade asked about the relationship between Côte d’Ivoire and China—specifically how a decrease in Chinese investments in Africa would affect the economy. Kaba was clear in her position that while China has been a primary investor, Côte d’Ivoire remains “strongly connected to Europe and also to the United States.”

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The Polish finance minister on his country’s “U-turn” toward European values

“Poland is back to Europe… we’ve made a ‘U-turn’ from what I call a ‘Hungarian path,’ which is out of the European values,” Andrzej Domański, minister of finance for Poland, argued at an Atlantic Council event on Friday.

Domański gave his remarks in discussing how Poland’s economy—which has proven resilient after avoiding recession in periods of mounting global economic challenges—fits within the greater European economy.

When analyzing the reasons why Poland’s economy recovered relatively quickly after the pandemic and after the initial wave of impacts from Russia’s full-scale invasion of Ukraine, Domański pointed to Poland’s economic diversification. “We don’t have one sector that would be overwhelming the whole economy. I believe this is one of the factors that is behind our resilience.”

Following that, when discussing Poland’s plan for the energy transition, Domański said that Poland can take “two obvious directions: one of them is renewables, and the second one is nuclear energy.”

Domański also discussed the ongoing priorities of the Polish government in further bolstering the economy. On the topic of security, Domański vowed that Poland “will not cut spending on defense” and that it will “will not stop helping [its] Ukrainian friends.”

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• Dispatch from IMF-World Bank Week: What will this week’s legacy be?

• Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

• Is the global financial system fit for climate change?

• The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

• “Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

• See day four analysis

Dispatch from IMF-World Bank Week: What will this week’s legacy be?

There were plenty of reasons for a dour mood to spread across the spring meetings this week.

One such reason is that higher-than-expected inflation readings in the United States dampened expectations of Federal Reserve rate cuts, driving up long-term rates around the world. The Financial Times even spoke of relegating the low-interest period of the 2010s to the dustbin of history. Countries are beginning to realize that they may not have the means to service their debt, support their aging populations, pay for the green transition, help Ukraine, and finance military rearmament all at the same time.

The dour mood was reinforced by the Israel-Iran exchange of direct attacks and Russia’s destructive air campaign in Ukraine. Higher oil prices and further supply-chain disruptions consequently topped the IMF’s downside risks to the forecast. Calls from the Biden administration to triple aluminum and steel tariffs provided a reminder of the risk of future trade conflicts and increasing economic fragmentation.

Less discussed, but similarly mood-souring, was the topic of the stronger dollar, which might have negative consequences for emerging and developing countries with growing fiscal deficits.

The International Monetary and Financial Committee chair released a statement today that was among the most bland in recent history, repeating well-known positions about the IMF’s role in the global economy and committing to the implementation of recent decisions, but falling well short of new initiatives.

But when determining this week’s legacy, there are reasons for a better mood to prevail. The IMF did propose a tweak to its debt policies, allowing the Fund to lend to countries even if they’re still in debt restructuring negotiations with big bilateral creditors (think China). The IMF also, in its World Economic Outlook, finally zeroed in on the “significant risks” that large countries’ fiscal deficits pose to the global economy. And there are signs of momentum ahead: Liechtenstein is on track to join the IMF as member number 191, in a year marking the eightieth anniversary of the Bretton Woods institutions. Whatever mood the delegates are in when they depart Washington, their work will carry on.

Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

In a discussion at the Atlantic Council on Thursday, Paolo Gentiloni, the European Commissioner for Economy, expressed a surprisingly positive outlook about the European economy, as the European Union (EU) continues to face post-pandemic and security challenges. 

In discussing the IMF’s latest World Economic Outlook, which slightly downgraded forecasts for the eurozone, the former Italian prime minister said he sees “the conditions for an acceleration of the economic activity for the second part of this year, and probably more in 2025.” His conviction rests, he said, on “better-than-expected” declining inflation, shared “strong labor markets” across the Atlantic, and an increase in purchasing power in several European countries “not impacting inflation, but consumption, which would trigger a better level of growth.” The EU’s goal was ultimately to “avoid a recession and major energy crises.”  

When assessing Europe’s economic-rebound prospects, Gentiloni urged to not “compare the impact of the Russian invasion in Ukraine, in Europe, with other parts of the world,” highlighting its disproportionate impact on “Europe and the Global South.” Russia’s invasion “disrupted part of the European business model” reliant on “cheap gas” and exports, which particularly affects Europe’s largest economy, Germany. The geopolitical risk remains “the largest risk” threatening Europe, he said, while there is no “substantial risk from a financial stability point of view” or “divergences in level of growth among different European countries.” Gentiloni said he is “quite optimistic that [Europe is] out of the most difficult part” of its “economic situation.” 

Amid the growing debate about Europe’s future competitiveness, Gentiloni said that the topic fits into wider discussions on “how the model we built the European Union [on] in the last decades should be probably transformed.” To achieve its ambitions, Europe must “find common funding” beyond the NextGenerationEU (which is expiring in 2026) to further attract private investments and complete the green transition, “avoiding the idea that slowing down or taking a different direction will solve our problems, because the global competition on clean tech is there,” Gentiloni said.  

Drawing on a quote from former European Commissioner Pascal Lamy, Gentiloni remarked how “the EU cannot be the only herbivore in a world of carnivores” and argued that the “solution is to compensate economically, socially those that are most affected and to win the battle of the cultural narratives.”

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Is the global financial system fit for climate change?

We know what the future is set to look like: By 2040, according to the Intergovernmental Panel on Climate Change, we will be living in a 1.5 degrees warmer world, with consequences that are already being predicted by science. That’ll be the case unless extraordinary action is taken.

The private sector is now waking up to this reality. Industry is beginning to recognize that climate risks raise financial risks. Homeowners are finding it harder to insure their houses. Water levels are rising, disrupting ports that play a large role in the global economy. Outdoor workers cannot work safely in heat waves, which are striking with alarming frequency.

The economic costs of inaction cannot be postponed and passed on to future generations.

There must be a new ambition for adaptation and resilience finance. Currently, progress on catalyzing investments in climate solutions is often slow and scattered, and it also often lacks scale. The solution: Redefining the economic and financial order.

To begin imagining what that new order should look like, we sat down with climate finance experts, who helped us spread our Call for Collaboration between the public and private sectors that we launched at COP28 last year. Catch up on that conversation, held on the sidelines of the IMF-World Bank Spring Meetings, below.

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The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

South African Minister of Finance Enoch Godongwana joined the Atlantic Council’s IMF Broadcast studios on Wednesday to outline his country’s economic priorities, including its vision for the Group of Twenty (G20) agenda during its presidency in 2025.

In the conversation with Atlantic Council Africa Center Senior Director Rama Yade, Godongwana said that South Africa is focused on being not the biggest economy but the strongest. “What we must focus on is that we are the most industrialized economy on the African continent, and to what extent we can build on that, to build competencies, that makes us the strongest economy on the African continent,” he said. Sharing his optimism about economic growth on the African continent, Godongwana cautioned that a slowdown in growth in South Africa’s trade partners, such as China, may lead to a spillover effect not only on South Africa’s economy but that of the South African Development Community region.

Regarding South Africa’s upcoming presidency of the G20, the minister said that South Africa is developing an agenda that will include some of Brazil’s current priorities—and others from previous presidencies—and that South Africa “will inject an African perspective into that agenda” after consultation with countries on the African continent.

Turning to South Africa’s membership and ambition within the BRICS group, the G20, and the IMF and World Bank, the minister argued that there is no tension for South Africa within these groupings, but that they have been helpful in addressing challenges that the country faces. Responding to a question about a possible BRICS currency, the minister stated that there “is no document from the BRICS that talks about a BRICS currency in our declarations.” Godongwana stated that there is a push, regionally in Southern Africa and within the BRICS, to accept local currencies and to use alternative payment systems beyond the dollar when conducting international trade. But BRICS, he said, is not about undermining the current system—but changes in the current system are needed.

Speaking during the IMF-World Bank Spring Meetings, Godongwana discussed reforms he’d like to see the Bretton Woods institutions make, including governance and funding changes at the IMF and the World Bank. The minister argued for a change in the selection of heads of the IMF and World Bank and called for non-American and non-European candidates to be considered for the top leadership positions of the organizations. Speaking to investors, Godongwana stated that he welcomed investment into South Africa and the African continent that respected countries’ sovereignty and geopolitical strategies.

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“Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

DRC Finance Minister Nicolas Kazadi joined the Atlantic Council’s IMF broadcast studios on Wednesday to outline his country’s economic priorities, including its intent to create more opportunities for investment.

Kazadi argued that “Congo is open for business” and “the mining sector specifically is driven by foreign investment.” In March this year, the Congolese government began to implement a 2017 law requiring all subcontracting companies to be majority Congolese-owned. The minister explained that while Congo encourages investment, the country wants to ensure that private investors share the prosperity with local partners and build local capacity. “We don’t even need a law for that, it is a matter of principle” to help local Congolese businesses grow, argued Kazadi.

In the mining sector, the finance minister said that Congo is looking for investments along the full energy value chain, “trying to raise awareness in our youth, support them as they invest in the ecosystem that we are trying to build in partnership with the big private sector,” he said. Kazadi said that “Congo is trying to bring more transparency along the value chain to raise the standards” to avoid situations in which products do not meet international environmental, social, or governance standards that can impact the image and business environment of the country. He said that he hoped companies working in the Congo would help charge a “local transformation of critical minerals” that would change the economy “completely,” bringing the gross domestic product “from billions to trillions,” he said.

Speaking during the IMF-World Bank Spring Meetings, Kazadi discussed Congo’s upcoming sixth review of its Extended Credit Facility program and reforms he’d like to see the Bretton Woods Institutions make, including changes to the channeling of Special Drawing Rights. He expressed a readiness to work with international financial institutions on addressing the development challenges facing his country.

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• Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

• European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

• “The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

• The Global South’s reform agenda for the IMF and World Bank

• See day three analysis

Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

IMF headquarters was abuzz today following the announcement of Managing Director KristaIina Georgieva’s new global policy agenda, outlining the economic challenges of the day and what the IMF plans to do about them.

The three priorities she chose for the Fund to tackle: rebuilding fiscal buffers, after public debt edged upward to 93 percent of GDP; reviving medium-term growth, which has deteriorated since the global financial crisis; and renewing its commitment to its members, with more quota resources to go around.

All of the above are worthwhile things to do. But, at least from where I was watching in the IMF HQ1 Atrium, Georgieva didn’t seem to mention anything about two of the most pressing issues of the day when she presented the global policy agenda this morning.

The first issue is China’s industrial overcapacity and its global impacts. The EU has launched or is expected to soon launch anti-subsidy investigations looking into Chinese electric vehicles, wind turbines, and medical devices. But the news that really spread like wildfire at the spring meetings was that, just a couple blocks away, the White House announced an investigation into China’s shipbuilding practices. President Joe Biden also called for tripling tariffs on Chinese steel and aluminum products, the starting gun for more protectionist measures to come—and a major risk to global growth.

The second issue is the divergent monetary policies being put forth by the US Federal Reserve and the European Central Bank, pushing up the dollar’s value in foreign-exchange markets. The topic did come up during the G20 press conference following the group’s meeting of finance ministers and central bank governors today. A strong dollar will undermine low-income countries’ growth prospects—something the IMF must pay attention to.

The silence on these risks to global growth shows the Fund should pay more attention to the issues at the core of its mandate to coordinate members’ economic policies as they are being shaped and implemented. Doing so early—rather than reactively helping countries deal with the fallout of poor international cooperation—would avoid negative spillovers on the global economy.

European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

On Thursday, Nadia Calviño—who this year took over as president of the European Investment Bank (EIB)—spoke to the Atlantic Council at the IMF-World Bank Spring Meetings, where she talked about the EIB’s priorities, including encouraging investment in Ukraine for reconstruction, rallying climate financing, and helping the European Union achieve its strategic priorities.

Calviño explained that the EIB is working with other multilateral institutions and with local Ukrainian partners to identify Kyiv’s rebuilding priorities—including infrastructure projects and support to small and medium-sized enterprises—to “make the most of Europe’s money.” She added that the EIB is working with the European Bank for Reconstruction and Development, the World Bank, and the United Nations Development Programme to ensure that “the experts that are on the ground are providing the most efficient service… to all of us.”

Calviño said that the EIB is proud to have garnered a reputation as “the climate bank,” with over 50 percent of its investments being in green projects and having supported the development of innovative technologies. “The green agenda is really ingrained in everything we do, inside and outside the EU,” she said. She argued that the investments being made in less-developed countries were strategic in nature and critical for Europe’s future priorities.

Calviño additionally said that there’s a sense of a “shared responsibility” across the Global North in addressing climate financing needs and deconflicting those efforts. She added that a North-South dialogue is “very important” and “needs to be accompanied by facts, not just words.”

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“The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

In the bustling IMF headquarters on Tuesday, I sat down with Ukrainian Deputy Finance Minister Olga Zykova to talk about the role of digital development in post-war reconstruction.

Ukraine had been busy taking many of its public services digital, even before the outbreak of the war in 2022. Zykova, who became deputy finance minister a few months into the war, told me that Ukrainian citizens have used technologies, such as the Diia app, to do everything from travel to access healthcare to buy war bonds for financing. She told me (and also Candace Kelly from the Stellar Development Foundation and Kay McGowan from Digital Impact Alliance, who also joined the expert panel) that she believes Ukraine’s efforts can be a successful example for other war-torn economies looking to rebuild their digital infrastructure.

The conversation then turned to the importance of open-source infrastructure, as the panelists discussed the collaborative advantages of open-source technological solutions which can provide developers the flexibility to adapt technologies to fit their needs across countries and situations.

We also discussed the need for a robust evaluation and impact assessment of the funding of these programs and the technologies themselves, to ensure that they reach their full potential. This call for robust impact metrics has been a consistent theme of this week, echoed by multilateral development banks, the private sector, and civil society.

Zykova also outlined Ukraine’s priorities for the IMF-World Bank Spring Meetings, calling for the creation of a sustained plan to equip Ukraine with the means to meet its reconstruction demands. She encouraged countries to not lose focus, even with lingering uncertainties about funding in Ukraine, and reiterated the importance of building resilient networks as the EU approaches its elections.

Reconstruction in Ukraine represents many of the existential questions ahead for the World Bank and IMF this decade—how to shore up democratic resilience, build consensus across an increasingly fracturing global order, and use technology to reduce inequality and achieve lasting prosperity.

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The Global South’s reform agenda for the IMF and World Bank

International media has until now paid little attention to statements of the Group of Twenty-Four (G24). The committee represents developing countries within the IMF and World Bank, playing a similar role to the Group of Seventy-Seven, a coalition of developing countries that comes together at UN gatherings. As Global South countries have become more vocal in their demand for reforms of the Bretton Woods institutions, the G24’s statements have become more important. The group should be considered counterparts to the Group of Seven (G7) in discussions about changes, especially in the context of the International Monetary and Financial Committee (IMFC)—an important body in the governance of the IMF.

On April 16, the G24 met and issued a communiqué summarizing the positions of developing countries on many issues on the reform agenda.

Regarding the IMF:

• The G24 welcomed the equi-proportional increase in quota but stressed the need for a quota realignment to reflect involving realities of members. (Developing countries in aggregate have increased their weight in the global economy but feel underrepresented in the Fund’s quota and voting-share distribution.)
• It urged the Fund to eliminate the surcharge on its base lending rate which has resulted in high borrowing costs to members in need of substantial IMF support.
• It proposed considering sales of IMF gold to increase the financial resources of concessional lending facilities such as the Poverty Reduction and Growth Facility.

Regarding the World Bank:

• The G24 acknowledged the Bank’s efforts in implementing the Evolution Roadmap, sponsored by the Group of Twenty to optimize its balance sheets and increase its financing capability and efficiency.
• However, the G24 cautioned that the commitment to allocate 45 percent of annual financing to climate-related projects should not be at the expense of financing for basic development challenges like combating poverty and hunger.
• It called for a capital increase for the World Bank and multilateral development banks in general—especially a strong replenishment of the resources of the International Development Association (providing grants and low-interest loans to low-income countries) in its twenty-first round of funding, which is currently underway.

In the view of many in developed countries, the demands articulated by the G24 may resemble a wish list containing many items difficult to command sufficient agreement to be adopted—for example, the quota reform. Nevertheless, developed countries should take these demands seriously and engage constructively with developing countries to find a reasonable way forward. Failure to do so would undermine the legitimacy and effectiveness of the IMF and World Bank—institutions that should play important roles in sustaining global growth and supporting less-developed countries.

• Dispatch from IMF-World Bank Week: A tale of two headquarters

• Mixed developments on sovereign debt restructuring

• The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

• Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

• Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

• Back to the basics: High turnover rates for central bank governors do not help with inflation

• Spooking the spirit of Bretton Woods

• See day two analysis

Dispatch from IMF-World Bank Week: A tale of two headquarters

In many ways, the story on day three of these spring meetings feels like a tale of two headquarters: Both style and substance differ between the boisterous World Bank on one side of 19th Street and the more buttoned-up IMF on the other.

The Bank’s atrium has been decorated with hundreds of colorful drawings by staff members’ children, depicting a “livable planet”—the newly added objective to the Bank’s vision statement. The Fund’s atrium, on the other hand, hosts an interactive “let’s grow together” board where delegates can affix stickers to the types of training and institutional strengthening they need. Both spaces strive to inspire and provoke thought, but the vibes are quite different.

Substantively, the Bank is abuzz with chatter about its “evolution,” touting progress such as a new guarantee platform, the corporate scorecard, and the series of reforms initiated last year to improve its impact. People at World Bank HQ are also energetically making the case that the Bank’s “money and knowledge” are vitally needed now, as a “great reversal” in development—explained in a new report—has resulted in one in three low-income countries becoming poorer than they were on the eve of the pandemic.

At the Fund, it’s about “resilience amid divergence” (as I discussed this afternoon with my fellow World Economic Outlook ‘decoders’ from the Atlantic Council): cautiously celebrating the fact that better-than-expected resilience in the US economy, coupled with stronger labor markets and cooling inflation in many places, is driving steady global growth. But that celebration doesn’t paper over the fact that debt, higher-for-longer interest rates, and conflict are undermining growth and impeding recovery in many developing countries.

Where Bankers, Funders, delegates, and guests seem to be speaking the same language is around “leverage” (the need to use the Bretton Woods institutions’ funding to crowd in additional financing) and “demographics” (with certain population trends raising macroeconomic and social-development pressures and opportunities, which I’ll be talking about at the IMF on Friday).

PS: If you’re wondering which of the headquarters has the better store for some spring meetings swag, it’s the World Bank’s.

Mixed developments on sovereign debt restructuring

This was a big week for those working to help vulnerable middle- and low-income countries overcome debt crises. For years now, there has been a slow-moving discussion about how to improve the framework for sovereign debt restructuring. And on that front, there has been both good news and bad news in recent days.

First, the good news: Three years or so since Zambia defaulted on its international bonds, it has just reached a restructuring deal with its bondholders which has been accepted by the official bilateral creditors. However, Zambia is not out of the woods yet. It still has to negotiate debt deals with its commercial creditors—basically international banks including many Chinese stated-owned banks such as the China Development Bank, Industrial and Commercial Bank of China, etc. It is not clear if this problem will hold up the actual implementation of the agreed debt restructuring measures—highlighting the complexity of the sovereign debt restructuring process.

The second piece of good news is that the IMF Executive Board has just approved some adjustments to the Fund’s Lending into Official Arrears (LIOA) policy—basically allowing the Fund to lend to a member in distress even though that member is in arrear in servicing its debt to an official bilateral creditor. The just-approved adjustments would give the Fund more flexibility in making use of the LIOA policy when a creditor country (i.e. China) has not been forthcoming in the restructuring process, delaying its timely conclusion. The key outstanding question is whether a low-income debtor country would be prepared to go along with the idea of activating the LIOA vis-à-vis China—especially those who have relied on China for trade and investment via the Belt and Road Initiative.

Then there’s the bad news. A piece of proposed legislation is moving through the New York State Legislature that would amend the state’s creditor and debtor law. Basically, the amendments would unilaterally impose a restructuring regime, for example compelling bondholders to accept a restructuring deal managed by an overseer appointed by the governor of the state of New York. As about half of international sovereign bonds have been issued under New York law, and the other half under English law, this legislation would, if passed and implemented, introduce a huge element of uncertainty to the sovereign bond market. It could potentially disrupt its smooth functioning and raise borrowing costs for emerging market and developing countries. And it could short circuit international efforts, such as the G20-sponsored Common Framework and the Sovereign Debt Roundtable, which are trying to develop international agreements to improve the sovereign debt restructuring framework.

All three stories highlight the complexity of debt restructuring negotiations. But the summary of the week’s news on that front: two steps forward, one step back.

The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

Spain is positioning itself as a “growth engine” in the eurozone, argued Spanish Minister of Economy, Trade, and Business Carlos Cuerpo.

He said that in 2023, Spain “grew five times the euro area average.” That, coupled with his prediction of a 20 percent drop in the country’s debt-to-GDP ratio (with respect to the peak post-pandemic), “[configures] a good way forward” for Spain, Cuerpo said, with sustainable growth likely ahead in the medium term.

Cuerpo said that Spain is hopeful about its economic prospects, as foreign direct investment has grown, indicating “confidence of world investors in the Spanish economy.”

Cuerpo spoke with GeoEconomics Center Senior Director Josh Lipsky at Atlantic Council headquarters during the IMF-World Bank Spring Meetings. They discussed Spain’s path forward utilizing NextGenerationEU funds and its role in the conceptualization of new EU fiscal rules. Cuerpo reflected on the transformation of primary themes of discussion over the EU’s fiscal rules, beginning with the green transition, pivoting to strategic autonomy, and now focusing on economic security. “There is a common denominator [within] those discussions, which is the need for investment,” he said.

Cuerpo pointed to Spanish investment in green hydrogen, semiconductors, and battery-related initiatives through the NextGenEU funds. A midterm evaluation from the European Commission found that the Spanish GDP level increased by 1.9 percentage points in 2022, when compared with a hypothetical Spanish economy without the NextGenEU funds present. “It’s not just an opportunity for the Spanish economy,” Cuerpo said. “The impact of the plan is already a reality.”

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Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

You’ve heard it before. Gross domestic product, or GDP, is not the best indicator to understand Russia’s economic performance under sanctions. Nor is the exchange rate. Yet, the IMF’s decision this week to revise Russia’s growth forecast for this year upwards to 3.2 percent after another upward revision in January is one of the most talked-about findings of the World Economic Outlook. And while the widening fiscal deficit and rapid inflation remind us that the Russian economy is still under strain, it’s important to acknowledge that, at the start of Russia’s full-scale invasion, sanctions policymakers thought they could reasonably hope to plunge Russia into a prolonged recession. And in April last year, when the IMF predicted the Russian economy would grow in 2023, most thought this was wrong, but it did indeed grow by 3 percent.

How are they pulling this off? It’s not just about oil and gas export income, though higher oil prices help. Combined disclosed and undisclosed military and domestic security spending exceeds 30 percent of GDP—and therefore represents a major boon for overall GDP figures. The Ministry of Finance had to reach into its savings more than expected at the end of 2023, taking the liquid part of the National Wealth Fund down from $150 billion to $130 billion. The weak exchange rate and labor shortages are also working together to keep inflation very high, at almost 8 percent.

It’s wrong to say the Russian economy is doing well. The problem is that it has enough resources to keep funding the war.

Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

On Monday, Pakistani Finance Minister Muhammad Aurangzeb emphasized the country’s need for structural reforms over a span of two to three years. In an Atlantic Council conversation with the South Asia Center’s Kapil Sharma, Aurangzeb outlined Pakistan’s strategy, arguing that efforts shouldn’t merely focus on financial stabilization: They should also lend focus to sustainable growth and inclusivity. 

“The crux of our strategy with the IMF involves not just temporary relief but laying the groundwork for enduring stability and economic resilience,” Aurangzeb said. He underlined the importance of understanding and implementing long-term policies that have been on the nation’s agenda for decades. The minister argued that the time for action on these reforms is now, especially with the looming end of Pakistan’s three-billion-dollar Stand-By Arrangement with the IMF, currently set for late April. 

Pakistan reportedly intends to ask for a larger and extended program from the IMF to support its economic reforms. To that end, Aurangzeb argued that when it comes to these economic reforms, Pakistan doesn’t need more policy prescriptions: It needs implementation. 

“Ensuring macroeconomic stability is not merely about stabilization; it’s fundamentally about inclusive growth and addressing climate impacts,” said Aurangzeb. He noted that the financial and structural reforms would help Pakistan mitigate the adverse effects of climate change and promote financial inclusivity, especially among vulnerable groups, including women. 

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Back to the basics: High turnover rates for central bank governors do not help with inflation

Inflation is front and center at the spring meetings. Reducing it is crucial for any inclusive growth and development strategy because, after all, inflation is a regressive tax on the poor, who lack the real assets to effectively hedge against inflation.  

While the global median headline inflation has declined to 2.8 percent in 2024 and many central banks have been successful in their fight against inflation—particularly the Federal Reserve (known as the Fed), Bank of England (BoE), and European Central Bank (ECB)—many developing and emerging economies are still suffering from high inflation rates, sometimes with rates higher than 20 percent. Several factors continue to contribute to these rates: rising energy and food prices; increasing sovereign debts; higher policy rates in the ECB, UK, and Fed (and thus larger capital inflows to these economies); and growing budget deficits—partly because of the higher cost of energy and of servicing debt due to higher interest rates.

An often ignored but equally or even more important factor is the independence and reputation of central banks. While the majority of countries suffering from inflation rates higher than 20 percent claim that their central banks are independent and their policies are not influenced or dictated by their central governments, in practice the so-called “independence” of these central banks is severely undermined by the high turnover rates of their top bosses.

Available data suggests that over the past decade, the median tenure of a central bank governor or president in the twenty economies with the highest inflation rates has been a mere two years. Over the past ten years, a number of central bank governors have come and gone: Seven in Argentina, eight in Turkey, six in Venezuela, and five in Iran. Just to put this in perspective, during the same period, the median tenure of the leadership in the Fed, ECB, BoE, and Bank of Japan has been five years, and these institutions have each changed leadership only once in the past decade.  

Such a high turnover rate for the central bank leadership is a clear sign of its lack of independence. It also severely undermines the most important asset of a central bank: its reputation and credibility. Economic actors, markets, and consumers in an economy look to the central bank and its leadership for direction on the future of the economy and directly equate high turnover in a central bank leadership to policy uncertainty, demolishing the reputation and policy credibility of a central bank. A central bank lacking reputation and credibility is like a chef without a kitchen.

In fighting inflation, it’ll be important to go back to the basics: religiously protecting the reputation and independence of central banks and aggressively rebuilding any losses on these fronts. After all, reputation is extremely hard to build but very easy to lose. And that is the most important tool a central bank has to fight inflation.

Spooking the spirit of Bretton Woods

It was supposed to be a week of multilateralism, breaking down barriers between borders, and preventing “fragmentation” (as the IMF often likes to say). But the United States had different ideas.

Following US Treasury Secretary Janet Yellen’s recent trip to China where she hammered home the risk of Chinese manufacturing overcapacity, the Biden administration today called for a tripling of tariffs on Chinese steel and aluminum. As if that wasn’t enough, the Office of the United States Trade Representative is beginning an investigation into Chinese unfair trade practices on shipbuilding and maritime logistics, per a White House announcement this morning.

Couple this with the European Union’s ongoing anti-dumping investigation on Chinese electric vehicles (as we’ll discuss with EU Commissioner for the Economy Paolo Gentiloni tomorrow), and suddenly the spirit of Bretton Woods is looking a little spooked. That’s one reason why the understated warning in the IMF’s World Economic Outlook yesterday about downside risks may already feel out of date.

• What the World Economic Outlook left out

• What should be done with Russia’s blocked reserves?

• Dispatch from IMF-World Bank Week: IMF report launches keep it dull

• The IMF warns the United States to get its fiscal house in order

• How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

• When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

• Read day one analysis

What the World Economic Outlook left out

The just-released World Economic Outlook (WEO) has a nice subtitle that sums up very well its key messages—”steady but slow: resilience and divergence.” Resilient because economic activity in advanced countries has been solid and precipitated a 0.2 percentage point upgrade in the IMF’s growth forecast, to 1.7 percent this year. Divergent because low-income countries (LICs) have had their growth estimates cut by 0.2 percentage points to 4.7 percent this year. They have absorbed most of the $3.3 trillion loss in global economic output relative to the pre-COVID trend. They’ve also built up onerous levels of debt so that many are in debt distress and now have to use more than 14 percent of their government budget to pay interest, crowding out other important and necessary expenditures.

Unfortunately, the outlook for the LICs looks to be even worse than the WEO’s forecast, thanks to the Iranian attack on Israel over the weekend, as well as recent upticks in US inflation data.

Going forward, the heightened risk of war following Iran’s direct attack on Israel will likely keep oil prices elevated, having risen by some 12 percent since the beginning of the year. Meanwhile, higher-than-expected inflation will delay any easing by the Federal Reserve. That has caused a renewed uptick for the dollar. The combination of elevated oil prices and a strong dollar is bad for many countries, but it is particularly devastating for LICs because most LICs have to import oil—so high oil prices coupled with a depreciating currency against the dollar represent a double whammy, undermining growth. Also hurting LICs is the fact that a strong dollar increases their debt and debt servicing burdens, and it also tends to trigger capital outflow exacerbating the stress.

These two news events will push LICs even further behind in the convergence process. In short, global economic disparities will likely increase with unfavorable social implications for the world. The WEO has not paid sufficient attention to this risk.

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What should be done with Russia’s blocked reserves?

Since February 2022, Western sanctions have blocked roughly $300 billion in Russian reserves. Thanks to high interest rates, these reserves have been generating income for their custodians, the largest of which is Belgium-based company Euroclear. The question Group of Seven (G7) members will be discussing this week is how to use that interest income.

Bloomberg’s Viktoria Dendrinou and the Council on Foreign Relations’ Brad Setser joined the Atlantic Council GeoEconomics Center’s Charles Lichfield to compare the two primary proposals: 1) Tax almost all the interest income and use the windfall as a funding source for Ukraine or 2) pull forward some of the interest income stream to provide funding more quickly, maximizing its value through financial engineering.

Although the United States wants to come to an agreement by June, Dendrinou explained that things are moving more slowly on the European side due to the greater risks posed by Russian retaliation, as Europe has more assets in Russia. This adds to fears of knock-on effects on the euro’s role as a reserve currency.

Still, Setser came back with ambitious plans to generate even more interest income by actively managing the funds. “If you put this in deposit accounts and you had access to the full $300 billion,” he said, a reasonable estimate “is nine to ten billion dollars per year.”

Dendrinou and Lichfield expressed skepticism about the feasibility of doing this from a legal perspective, as it may require changing the ownership of the assets. Looking to the future, Dendrinou tentatively suggested that there’s “probably going to be some kind of financial engineering in place” by next year’s spring meetings.

Setser, on the other hand, boldly predicted that by June, the G7 will “agree to a facility that pulls forward some, not all, future interest income so that the current sum that flows to Ukraine this year is more than the three to four billion that is currently being discussed.” G7 outcomes from this week may provide some early signs about a realistic timeline for using the interest income.

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Dispatch from IMF-World Bank Week: IMF report launches keep it dull

Each year at the spring and annual meetings, participants like me count down to the launch of the IMF’s most important flagship publications—the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). The launches are typically the high point of the week, often receiving more media attention than pronouncements from the finance ministers and central bank governors that come later on.

The GFSR unveiling has always been a jargon-laden affair. While the WEO press conferences have become increasingly staid over the years, they were once known for public debate and even sarcasm.

The most memorable launch happened in the aftermath of the 1997 Asian financial crisis, when the IMF came under fire for its tough policy prescriptions. Then IMF Chief Economist Michael Mussa had firmly defended the Fund against the attacks—which especially rankled when they came from then World Bank Chief Economist Joseph Stiglitz. At the September 1998 WEO launch, Mussa declared that “those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal.”

But today’s launch events at IMF headquarters hewed to the new status quo. IMF Economic Counsellor Pierre-Olivier Gourinchas, who heads the Fund’s Research Department, offered the WEO’s case for optimism—with global growth forecast at 3.2 percent in 2024 and 2025—arguing that “the global economy remains remarkably resilient” although progress to reduce inflation has “stalled.” Notably, he called on China to address its property downturn and “lackluster” consumer demand. IMF Financial Counsellor Tobias Adrian then elaborated on the financial sector risks hanging over China at the GFSR press conference.

Mentioned only in passing were global geopolitical fragmentation, the divergence of fortune between advanced and low-income countries—the latter an important theme of this WEO—and the stalled progress in restructuring developing country debt. These uncomfortable issues were left to another day.

The IMF warns the United States to get its fiscal house in order

Unlike last year, the IMF’s World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) were not derailed by events happening a few days before publication. Last October, the Hamas terrorist attack on Israel the weekend before the Marrakesh meetings rendered the Fund’s forecasts outdated by the time they appeared.

Iran’s large-scale attack on Israel, by contrast, has not yet led markets to a fundamental reassessment of geopolitical developments, although the situation remains extremely fragile. The IMF’s spring reports therefore deliver a timely message about the factors behind a more somber medium-term outlook. With the inflation shock gradually diminishing, the Fund’s forecasters are on more solid ground assessing the challenges facing the IMF’s member countries, with fiscal pressures front and center in this year’s reports.

These are also depicted in an excellent article by Pierre-Olivier Gourinchas, the IMF’s chief economist. The degree of fiscal adjustment needed to stabilize medium-term debt ratios for many countries is striking, including the United States. The US fiscal stance is raising “short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” as Gourinchas put it. In other words, US fiscal policy poses a risk both to US disinflation and to global long-term interest rates unless the United States gets its fiscal house in order.

“Something will have to give,” concludes Gourinchas, an ominous reference to a long list of downside risks that are listed in the two reports. However, the good news is that the GFSR is less alarmist about financial sector developments this time, focusing instead on how to manage the “last mile of disinflation,” a considerable change in tone compared to the discussions only a year ago when the United States was on the verge of a major banking crisis.

As always, the IMF as a multilateral institution needs to be careful how it depicts geopolitical events, and there are well-calibrated references to commodity price developments and supply chain disruptions caused by ongoing conflicts. The reports, however, cannot elaborate on the precarious situation caused by Russia’s war in Ukraine and the ongoing conflict in the Middle East.

But these conflicts may increase pressures on government finances, including from rearmament needs, fiscal spending during an election cycle, and lower tax revenues due to mediocre growth rates. As a result, the advocated fiscal adjustment may remain elusive. Still, the IMF’s staff has done its duty by pointing out the underlying risks.

How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

In redefining its mission as striving for a world without poverty on a livable planet, the World Bank—under President Ajay Banga—has drawn attention to the need to mobilize capital resources to help developing countries close the climate action funding gap: A gap that currently amounts to the difference between the $100 billion committed annually by donor countries and the over $2.4 trillion needed per year by 2030.

It is clear that developed countries and multilateral development banks don’t have the capital resources to meet much of the investment gap. As a consequence, the Bank has put much effort into finding ways to catalyze, or crowd in, private capital by providing risk-sharing and guarantee facilities. With private institutional investors and asset managers holding more than $400 trillion of assets under management, the Bank hopes to draw in multiples of private capital to stretch its project dollars.

However, research by the Institute of International Finance has found that in recent years, multilateral development banks collectively managed to mobilize just fifteen dollars for every one hundred dollars committed—or one-fifteenth, decidedly not significantly multiplying the amount it has put up in its commitments.

While it is truly important and laudable for the Bank to find ways to catalyze private capital, it is better to be realistic about the potential outcome and impact of such efforts, so as not to set the stage for later disappointment. By presenting realizable targets—at least for the foreseeable future—the Bank can focus on the tremendous climate action investment gap that needs to be filled, continuously urging the international community to rise to the occasion to help meet the challenge before it is too late.

Of course, developing countries can help themselves by implementing structural reforms, especially in governance, to make themselves increasingly investable in the eyes of both domestic and international investors, attracting the needed investment flows.

When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

Mexico’s Secretary of Finance Rogelio Ramírez de la O joined the Atlantic Council’s studios on Monday to outline his country’s economic priorities, including its relationship with the United States.

Ramírez de la O argued that Mexico is “one of the most open economies in the world for both trade and capital,” thanks in part to the country’s exports, which are reported at over 35 percent of gross domestic product. The secretary of finance said that the country benefits from its level of openness, which he stated is comparable to certain European countries—but it’s also one that “fewer economies in Latin America have.”

Last year, Mexico surpassed China as the biggest exporter of goods to the United States. Mexico is committed to North American integration because “it’s where the core of our exports activities [lie],” Ramírez de la O argued. “This doesn’t mean that anything else comes secondary, but it comes next.” Looking ahead toward the USMCA renewal in 2026, the secretary of finance reassured members about product traceability—a demand rising from concerns over Chinese products. “We’re trading mainly and foremost North American content,” he said.

Speaking on the first day of the IMF-World Bank Spring Meetings, Ramírez de la O discussed reforms he’d like to see the Bretton Woods Institutions make, including correcting current account imbalances to revisit the world trade rules architecture and advocated for revisiting financial assistance for Latin America. He expressed readiness to engage with the Group of Twenty and multilateral development fora to define a global tax framework.

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• What’s the strategy behind this year’s smaller-scale spring meetings?

• Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

• Geopolitics is eroding the IMF’s relevance

• COVID-19’s economic impact on the poorest countries has just become clearer

• Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure
• Read preview analysis

What’s the strategy behind this year’s smaller-scale spring meetings?

The spring meetings have just gotten underway, but thus far the official events around 19th Street feel somewhat scaled down. The registration and security lines today were certainly shorter than last year. And there are notably fewer headline events, at least as far as the official World Bank side convenings are concerned.  

Perhaps it’s reflective of the Bank’s intent to bring more focus to its work—as President Ajay Banga discussed in his preview press conference. The Bank consolidated its public schedule into three days with just two “flagship events”—one on the energy transition in Africa and one on strengthening health systems. Both are decidedly linked to the International Development Association (the Bank’s concessional fund for low-income countries) whose twenty-first replenishment campaign seems to have more urgency and ambition as debt and other macroeconomic, microeconomic, and geopolitical challenges stymie recovery and growth in deeper ways.

Or perhaps it reflects an interest in putting more time into one-on-one, closed-door, dealmaking meetings—including with the private sector. Leveraging resources and mobilizing private capital is a priority for the Bank, as Anna Bjerde, managing director for operations, reiterated in our conversation this afternoon: “In a world where resources are scarce, ‘leverage’ is the name of the game,” she said.

Or perhaps it reflects the pace and impact of the “unofficial” spring meetings: The increasing number of side events with a broader array of actors around and beyond 19th Street, including our robust dual-sited slate at the Atlantic Council. These convenings are as well, if not better, placed to unpack—and discuss critically—the global geoeconomic, financial, development, and sustainability challenges and opportunities we collectively face, as well as navigate how (after eighty years) the Bretton Woods Institutions and the larger multilateral system should evolve and respond.

Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

With the IMF-World Bank Spring Meetings taking place again in Washington this year, the setting is familiar—but there’s also something strikingly new. As I walked into the World Bank’s headquarters today alongside many of the world’s finance leaders and experts, I was pleasantly surprised to see that the Bank’s mission statement, posted by the entrance, had changed: “Our dream is a world free of poverty,” had smartly been amended to add “on a livable planet.”

The new statement reflects the World Bank’s goal to evolve and to equip itself fully to deliver on its mission, which I discussed today with the Bank’s managing director of operations, Anna Bjerde.

The statement also exposes a hard truth: A world free of poverty cannot be attained or sustained in a world where carbon dioxide (CO2) emissions keep rising and climate challenges keep growing at the expense of the poorest—even as low-income populations contribute a mere 0.5 percent of global CO2 emissions, according to World Bank data.

Addressing global poverty and climate change requires more cooperation among the world’s largest economies and emitters; but the recent rise of geopolitical tensions and geoeconomic fragmentation, as our Bretton Woods 2.0 Project has pointed out, has made such cooperation much harder. This year’s spring meetings are a golden opportunity to make the case for more cooperation on addressing global challenges and reducing the rising temperature—both of the planet and its geopolitics.

This July, the Bretton Woods institutions will celebrate their eightieth anniversary, amid multifaceted perils facing the global economy and the world order. The countries present at the spring meetings must face these threats head on, so that by the time the IMF and World Bank turn one hundred, their member countries can look back with pride at the hard decisions they made to secure a livable and peaceful planet for all.

Geopolitics is eroding the IMF’s relevance

Expectations for this week’s Group of Twenty (G20) and IMF-World Bank Spring Meetings have hit a floor as the geopolitical environment continues to deteriorate. Russia and Iran are intensifying their pressure on Ukraine and Israel respectively, and political divisions in the West on the conflicts are becoming more acute. China is about to trigger another trade scuffle by throwing the (financial) weight of the state behind key industries that compete for global market share. The United States and Europe are on the defensive, fiscally stretched and riven by societal polarization that is also shaped by geopolitical adversaries.

There will be ample diplomatic squabbling over communiqué language concerning the wars in Ukraine and Gaza and the usual appeals to the spirit of multilateral cooperation—but there will also be complaints over excessive subsidies, trade restrictions, and financial sanctions. Discussions over quota reallocations will be doomed by irreconcilable geopolitical differences, and progress toward a more workable global debt architecture is likely to remain gradual, even if important work is proceeding on a technical level.

The one area where some consensus may exist is in raising funds for climate and development finance. Again, Western countries are on the defensive here, given that national development budgets have generally shrunk. Leveraging the funds of multilateral lenders, which the Western countries still dominate, remains an important way to at least partly match the financial resources that China, the Gulf countries, and increasingly India channel into building diplomatic ties with the developing world.

This also explains the selection of Kristalina Georgieva from Bulgaria to serve another term as IMF managing director. Under her leadership, the fund has expanded its toolkit to lend to developing countries, generally with fewer questions asked of loan recipients than under her predecessors, likely spelling financial trouble in the future. Already, there are demands for further reductions in the IMF’s lending rates as well as additional Special Drawing Rights (SDR) issuances.

By contrast, the Fund’s core economic work has generally received less attention. During her first tenure, the institution’s work was tailored to Georgieva’s personal areas of expertise, most of which lie in the mandate of the World Bank. The Fund was largely silent on the run-up in inflation, and its global economic messages have lacked clarity as it generally shies away from calling out countries for bad economic management.

Kenneth Rogoff, a former IMF chief economist, asked in a 2022 article why the IMF has turned into an aid agency. This question has now been answered by the majority of the IMF’s shareholders, who simply seem to prefer it that way. Whatever may be achieved during this year’s spring meetings, the mandate of the once proud institution seems to have shifted from safeguarding global financial stability to becoming a source of cheap funding for climate and development purposes.

COVID-19’s economic impact on the poorest countries has just become clearer

Four years after COVID-19 shook the global economy, the World Bank has released a report that lays out in the starkest possible terms just how devastating the pandemic was for the world’s poorest economies. In a report entitled “The Great Reversal,” the Bank details how much ground many of the world’s seventy-five least-developed countries have lost: One-half of that group is seeing its income gap with advanced economies widening, and one-third is poorer today than on the eve of the pandemic.

A key reason for the failure to regain growth momentum after COVID-19 has been sharply rising debt. In a separate report on developing country debt issued late last year, the World Bank estimated that eleven of the low-income countries were in “debt distress,” and twenty-eight were at “high risk” of distress. In 2022, the year the report analyzed, low- and middle-income countries paid $443.5 billion in debt service and $185 billion in principal repayments.

The countries assessed in “The Great Reversal” are eligible for World Bank low-interest loans and grant aid from the Bank’s International Development Association. They account for 92 percent of the world’s population living without access to affordable, nutritious food and over 70 percent of the world’s extreme poor. At the same time, their economies collectively account for only 3 percent of global output.

As central bank governors and finance ministers gather this week, the question—which they have faced at every spring and annual meeting since early 2020—will be whether they are prepared to work together to address this crisis of deepening poverty and debt. Or, will they leave town having only issued more communiqués expressing their “deep concern”?

Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure

The IMF-World Bank Spring Meetings have officially kicked off, and international financial markets have maintained fragile stability in the immediate aftermath of Iran’s large-scale attack on Israel, which included the launch of more than three hundred missiles and drones. The United States, along with several European and Middle Eastern countries, has emphasized the need to prevent further escalation. Due to the fact that Iran’s attack was less damaging than some anticipated, but with the still lingering risk of war, oil prices have given back some of the risk premiums built up last week in anticipation of Iran’s attacks, with Brent Crude sinking to just below ninety dollars a barrel—after having gained some 12 percent since the beginning of this year. In case of all-out war between Israel and Iran and disruptions of the oil flow through the Strait of Hormuz, oil prices can well exceed one hundred dollars a barrel. About a fifth of the volume of the globe’s oil consumption ships through the strait, with very few alternative routes.

Meanwhile, persistently strong inflation data in the United States has pushed market expectations for the first Fed cut later in the year, keeping the dollar strong—the greenback has appreciated by about 14 percent since the recent low in 2021. The dollar is also underpinned by safe haven flows given heightened geopolitical tension.

The combination of elevated oil prices and a strong dollar has put pressure on many countries, especially low-income countries. In particular, nearly all Group of Twenty (G20) members have seen their currencies weaken against the dollar—led by the Turkish lira and the Japanese yen, which each lost more than 8 percent since the beginning of the year. This has prevented many countries from easing monetary policies to support their economic recoveries. Watch this topic closely: The dollar’s strength, and the potential negative impact of it, could be a main topic of discussion in the G20 meeting of finance ministers and central bank governors scheduled for April 17 and 18.

• Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

• IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

• What to expect from the 2024 IMF-World Bank Spring Meetings

Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

As the world’s finance ministers and central bank governors descend on Washington this week—and snarl the city’s traffic—they seem to just want to be able to stick to the script.

It’s an understandable sentiment. The agenda is daunting, with issues such as sticky inflation, China’s struggling economy, and a rising risk of debt defaults. And, as IMF Managing Director Kristalina Georgieva made clear in her curtain-raiser speech at the Atlantic Council on Thursday, those are just the immediate problems. The medium-term challenges of job disruptions from artificial intelligence and the green energy transition can’t be ignored.

But as Iran’s large-scale attack on Israel this weekend reminded us, the ministers and governors will need to first address something else—the reality that geopolitical tensions and conflict have, as Georgieva said, “changed the playbook for global economic relations.”

Six months ago, on the eve of the IMF-World Bank annual meetings in Marrakesh, Hamas unleashed its brutal terrorist attack on Israel. The ministers spent the next five days being asked about the possible impacts on the regional and global economy, and nearly all of them demurred. As we at the Atlantic Council pointed out at the time, that was a mistake. It was clear from the start that war between Israel and Hamas would have economic repercussions. Sure enough, two months later, Houthi attacks linked to the war began disrupting major shipping routes in the Red Sea.

Now, Iran’s attack has cast a dark shadow over the spring meetings. Once again, many of the ministers will surely try to avoid addressing the potential fallout. Even if geopolitics is the last thing the ministers want to be discussing, they may not have a choice. It’s worth remembering that the Bretton Woods Institutions were created during a war to address the devastating economic toll of conflict. For the last several decades, it was often possible to keep geopolitics and economics separate—but that time is over. The sooner the ministers recognize the new reality, the more effective they can be.

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below, read more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, which touched upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

New Atlanticist

Apr 11, 2024

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

By Katherine Walla

“Making the right policy choices will define the future of the world economy,” International Monetary Fund Managing Director Kristalina Georgieva said at the Atlantic Council.

China Financial Regulation

What to expect from the 2024 IMF-World Bank Spring Meetings

Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center, breaks down the issues at the top of the agenda for the spring meetings.

The post Our experts decode policymakers’ plans for the global economy at the IMF-World Bank Spring Meetings appeared first on Atlantic Council.

The post Lipsky quoted in Bloomberg on US response to Chinese manufacturing overcapacity appeared first on Atlantic Council.

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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

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As IMF Managing Director Kristalina Georgieva said at the Atlantic Council yesterday, inflation is going down and global growth is increasing, driven by the United States and many emerging market economies. Also helping are increases in household consumption and business investment—and the easing of supply chain problems.

“We have avoided a global recession and a period of stagflation—as some had predicted,” said Georgieva. “But there are still plenty of things to worry about.”

The problem: Geopolitical risk is rising in a way that’s hard to measure, difficult to manage, and almost impossible to predict.

“Geopolitical tensions increase the risks of fragmentation of the world economy,” she said. “And, as we learned over the past few years, we operate in a world in which we must expect the unexpected.”

For example, this decade has already had a worldwide COVID-19 pandemic in 2020, a full-scale Russian invasion of Ukraine in 2022, and a Hamas terrorist attack in 2023, followed by a still-ongoing Gaza war. 

From the moderator’s seat, I asked Georgieva whether she thought this level of geopolitical volatility was the new normal. “I think we have to buckle up for more to come,” she said, “because it is a more diverse world, and it is a world in which we have seen divergence, not just in economic fortunes, but also divergence in objectives.”

So how does the IMF manage that divergence?

Georgieva replied: It does so through the quality of its analysis, through the confidence that emerges from its financial strength, and through its staff’s ability to “quickly shift gears toward what the most important priority is.”

Oh, yes, the IMF also runs “think of the unthinkable” analyses, Georgieva said. The goal of which, she explained, was to “come up with the hypothesis of something that looks, you know, absurd and impossible, and what are we going to do if the impossible becomes a reality.”

Don’t miss the entirety of Georgieva’s compelling speech and discussion, rich with graphics and charts. She shared her insights on issues ranging from how artificial intelligence could reshape economies to why China’s current economic policy course is unsustainable.

China’s leadership is aware of that unsustainability, she noted. How Beijing changes course next is of global consequence, she explained, given that the country is contributing one third of global growth this year. “China making good choices would be good for everybody.”

It starts with tackling manufacturing overcapacity, which Georgieva pointed to as a significant issue. Expect to hear much more about that in the days ahead, as Chinese exports have become a key off-the-agenda topic for the ministers to debate next week.

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter: @FredKempe.

This edition is part of Frederick Kempe’s Inflection Points Today newsletter, a column of quick-hit insights on a world in transition. To receive this newsletter throughout the week, sign up here.

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Online Event Thu, April 11, 2024 • 9:00 am ET

IMF Managing Director Kristalina Georgieva on the state of the global economy

AN #ACFRONTPAGE EVENT– IMF Managing Director Kristalina Georgieva previews the latest findings on the economic outlook and financial stability.

Digital Policy Economy & Business Fiscal and Structural Reform Future of Work

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below are more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, touching upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Time for reform in China

• The IMF forecasts that China will see 4.6 percent gross domestic product (GDP) growth, just below Beijing’s target of 5 percent. But its productivity remains low, and it has an aging population. “China has to take on a new policy course,” Georgieva said. “What has worked in the past cannot be sustained for the future—and the Chinese leadership is aware of that.”
• Georgieva said that the IMF is slated to have consultations with China soon, where it will discuss what the managing director called three “solvable problems” for China: Low domestic demand, a need to reform its state-owned enterprises, and its real-estate crisis.
• On China’s challenges in the property sector, Georgieva said that while Beijing has taken some measures, it could “be more forceful” to let the market “decide on price,” and that it could also help support construction and “be more decisive” in dealing with failing companies.
• During a recent visit to China, US Treasury Secretary Janet Yellen stated that China is using unfair trade practices, a consequence of overcapacity, that hurt US businesses and workers. Georgieva said that China continues to face overcapacity problems in some sectors, making it “critical to develop domestic demand and shift the economy more towards services.”
• Georgieva estimated that when China drops 1 percentage point in growth, the rest of Asia drops about 0.3 percentage points. “China making good choices would be good for everybody,” she said.

“Expect the unexpected”

• “It is tempting to breathe a [sigh] of relief. We have avoided a global recession and a period of stagflation… but there are still plenty of things to worry about,” Georgieva said.
• She said to expect inflation to decline, albeit with “ups and downs,” and only some countries—mainly advanced economies—will be ready to begin cutting interest rates in the second half of the year. “This monetary pivot will differ from country to country,” she cautioned, as premature easing could lead to new inflation and monetary tightening. “No more [are we] in the place of 2020 when everybody went in the same direction,” she said.
• She added that policymakers will need to “deal decisively” with debt, as fiscal buffers “are exhausted,” and debt levels in many countries are “simply too high.” “For most countries, the prospect of a soft landing and strong labor markets mean there is no better time to act, to reach sustainable debt levels and build stronger buffers to cope with the shocks that will come in the future,” she said. “Delay is simply not an option: Consolidation must start now.”
• Georgieva also urged countries to adopt policies that reinvigorate growth and improve productivity, including policies that speed up the green and digital transformation. “How well we handle them will define the legacy of this decade,” she said.
• And with artificial intelligence (AI) poised to affect almost 40 percent of jobs globally, according to the IMF’s estimates, investing in digital infrastructure and introducing strong social safety nets could determine whether AI will enhance the economy, she said.
• “The pandemic, wars, geopolitical tensions: They have already changed the playbook for global economic relations,” the managing director said. “In a fast-changing and more turbulent world, bringing countries together to tackle challenges and pursue opportunities is more important than it has ever been.”

Watch the full event

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Executive summary

Introduction

Chinese economic statecraft in a Taiwan crisis: Tools and applications

Access to Chinese markets

China in the global economy

China’s capacity to circumvent financial sanctions and G7 economic statecraft

Using international Renminbi networks to circumvent sanctions

Current scope of Renminbi internationalization

Policy constraints on expansion of Renminbi financial networks

Responding to G7 economic statecraft in a crisis

Assessing China’s capacity to respond to G7 statecraft

The impact on trade and FDI

Financial statecraft and consequences

Preventing escalation in economic warfare

Appendix 1: China’s formal economic statecraft toolkit

Authors

Acknowledgment

Executive summary

Beijing has watched carefully as Western allies have deployed unprecedented economic statecraft against Russia over the past two years. Our report from June 2023 modeled scenarios and costs of Group of Seven (G7) sanctions in the event of a crisis in the Taiwan Strait. However, that report largely left unanswered a critical question: How would China respond?

This report examines China’s ability to address potential US and broader G7 sanctions, focusing on its possible retaliatory measures and its means of sanctions circumvention. We find that reciprocal economic statecraft measures would exact a heavy financial toll on the G7, China itself, and the global economy. Crucially, however, we also find that China is developing capacities that are making its economy more resilient to Western sanctions.

We consider the use of economic statecraft tools in two main scenarios: a moderate escalation over Taiwan limited to the United States and China that remains short of military confrontation, and a more severe scenario with G7-wide restrictions targeting Chinese firms and financial institutions. For each, we consider China’s potential responses to adversarial economic statecraft in terms of retaliatory action (including restrictions on economic activity within China and China’s potential actions abroad) and attempts to circumvent G7 sanctions.

We arrive at seven key findings:

1. China’s economic statecraft toolkit is quickly expanding. In the past five years, China has used a range of formal and informal statecraft tools, including tariffs, import bans, boycotts, and inspections, to punish firms and countries for their stances on Taiwan and other sensitive issues. In anticipation of the potential for more extensive foreign sanctions, China has also been legislating to equip itself with an expanded toolkit to respond. This scope of options distinguishes China from Russia, which had prepared for additional sanctions in a less organized fashion, and presents a significantly more difficult challenge for Western economic statecraft.
2. China’s statecraft toolkit is heavily weighted toward trade and investment rather than financial statecraft. We assess that in a moderate scenario where US exports to China are curtailed, more than $79 billion worth of US goods and services exports (such as automobiles and tourism) would be at risk. In a higher-escalation scenario involving G7-wide sanctions against China, around $358 billion in G7 goods exports to China could be at risk from the combination of G7 sanctions and Chinese countermeasures. On the imports side, we estimate that the G7 depends on more than $477 billion in goods from China which could be made the target of Chinese export restrictions. Regarding investment, at least $460 billion in G7 direct investment assets would be at immediate risk from the combined impact of G7 sanctions and retaliatory measures by Beijing. By comparison, China has limited financial tools available to directly influence G7 economies. What restrictions China imposes on capital outflows are likely to be driven more by financial stability concerns rather than attempts to coerce.
3. China will face steep short- and medium-term costs if Beijing deploys economic statecraft tools. China would face high economic and reputational costs from using economic statecraft tools, especially in a high-escalation scenario. While export restrictions would be one of China’s most impactful economic statecraft tools, it would also be among the costliest options for China. Over 100 million jobs in China depend on foreign final demand, and nearly 45 million of these jobs depend on final demand from G7 countries. In a high-escalation scenario, most of these jobs would at least temporarily be put at risk. Even in a moderate-escalation scenario, China’s viability as a destination for foreign investment would dramatically decline, with implications for China’s exchange rate and domestic financial stability.
4. China may prefer to avoid tit-for-tat retaliation for strategic reasons. As a result of the major costs to its citizens, China is unlikely to follow a tit-for-tat approach but will target sectors where it can inflict asymmetric pain, particularly through the use of export controls or trade restrictions on critical goods such as rare earths, active pharmaceutical ingredients, and clean energy inputs (e.g., graphite). China’s political objectives in a Taiwan crisis are unlikely to be served with a completely reciprocal response to G7 sanctions.
5. China will likely attempt to divide the G7 and thereby limit the impact of sanctions. In scenarios where the United States alone imposes sanctions on China, Beijing has more opportunities to circumvent sanctions using targeted retaliatory measures against the United States, but not other G7 countries. The G7 has varied relations with and commitments to Taiwan, and a significant proportion of firms, particularly in Europe, continue to see China as a critical export destination. In addition, China may use positive inducements to encourage countries across the Group of Twenty (G20) to stay neutral. Beijing may also leverage its large bilateral lending with a range of emerging and developing economies to attempt to circumvent or not implement G7 sanctions.
6. China is seeking to create resiliency to sanctions by developing alternatives to the dollar-based financial system, including renminbi-denominated transaction networks. Renminbi-based networks are never likely to replace the US dollar-denominated global financial system. However, the gradual expansion of these networks can help Beijing find alternative mechanisms for maintaining access to financing and trade transactions even in the event of far reaching Western sanctions or trade restrictions. A rapidly growing number of domestic and cross border payment projects are being designed with the possibility of Western sanctions in mind.
7. The timing of any crisis can significantly alter the impact of statecraft tools, for both the G7 and Beijing. Western efforts to de-risk and shift supply chains in the next five years may reduce Beijing’s “second strike” statecraft capacity over time. At the same time, China’s renminbi-based financial networks will expand in scope and liquidity, providing Beijing with more options to mitigate Western sanctions.

Introduction

The prospect of a crisis over Taiwan has generated intense discussion in recent years, as other unthinkable scenarios in global affairs have become depressingly manifest. Russia’s invasion of Ukraine presented the United States and its allies with a need to quickly escalate economic sanctions and other tools of statecraft against Russia as part of a broader political response. As tensions in the Taiwan Strait have risen, the policy community began asking whether similar tools could be used to deter China in a Taiwan crisis scenario. Senior leaders in China increasingly reference risks from Western sanctions in policy remarks, and Beijing has reportedly conducted its own assessments of China’s vulnerabilities to Western economic sanctions.¹

As tensions have risen within the US-China bilateral relationship, policymakers and analysts have started to actively discuss the potential use of sanctions, export controls on critical technologies, and China’s retaliatory responses. These economic statecraft tools are now being considered as options within a broader multilateral strategy toward China, without fully considering the consequences for cross-strait stability or the global economy. Over the last two years, economic warfare has become more plausible, even if military engagement still seems remote.

In June 2023, Rhodium Group and the Atlantic Council GeoEconomics Center published a report that found that the Group of Seven (G7) would likely consider a wide range of economic measures to deter or punish China in a Taiwan-related crisis scenario.² While that report highlighted what tools might be considered and their direct costs to the global economy, it largely set aside questions about China’s own economic statecraft tools and responses. This report aims to fill that gap and discuss China’s potential responses to G7 sanctions or other tools of statecraft.

While still extremely costly in economic terms, these tools are nonetheless likely to be considered in a crisis since the costs of war are far higher. But unless the US-China political tensions over Taiwan can be managed, these lines between economic and military warfare will be blurred in any crisis scenario, with economic statecraft tools appearing as plausible and manageable responses.

This is exactly why understanding China’s potential responses to US and allied statecraft is so important. Understanding China’s capacity for economic coercion and circumvention can help refocus policy debate around credible and effective deterrence of both broader military conflict and the steady escalation of tensions from more limited crisis scenarios. Just as theories of nuclear deterrence account for the concept of second-strike capabilities, so too must we consider economic retaliatory measures in assessing the deterrence character of sanctions.³ Recent actions by Beijing to establish export controls on critical raw materials and other critical inputs reveal that Beijing is practicing and refining its use of economic leverage, but the contours of China’s ability, willingness, and channels for action are not well understood.

A February 2024 Atlantic Council policy brief by a senior US official (at the time out of government) with deep experience in this domain outlined seven principles for the effective use of economic statecraft.⁴ While these principles focus on US options, the framework can also be used to evaluate the effectiveness of China’s policy instruments.

Designing and implementing a set of economic statecraft instruments in a Taiwan crisis scenario to achieve political objectives requires clarity on the trade-offs involved among these principles, and where benefits will outweigh costs. In a Taiwan crisis, decisions will need to be made quickly, making it critical to understand China’s potential response. While China’s retaliatory tools can inflict significant short-term economic pain, and China’s leaders may not be considering the same principles as outlined in the table below, Beijing will also struggle to mount an economic statecraft strategy that is both sustainable and effective in limiting G7 policy choices toward China. This study aims to improve understanding of the uses and limits of China’s statecraft tools, as well as the potential costs of escalation, in order to make the commitments from both sides to deescalate in a crisis far more credible.

For the purposes of this report, we are limiting the measures discussed to explicitly economic tools and sources of economic power, even as we are aware that any crisis scenario would also include consideration of other nonmilitary options such as cybersecurity-related measures or disinformation campaigns, as well as military coercion below the threshold of war. Conventional wisdom assumes that China’s response would be coordinated and centralized, free from the democratic factors that constrain US and G7 action, including rule of law and separation of authorities across different branches of government and agencies. This study questions some of those assumptions, as Chinese bureaucratic interests are likely to clash on the question of the country’s need for US dollar inflows in the event of economic sanctions, as well as China’s economic interests in imposing restrictions on trade.

In chapter one, we build a framework to categorize the channels of economic interaction at risk from Chinese economic statecraft. In chapter two, we explore how each of these tools might be used at different levels of escalation, up to the level of retaliation against a major G7 sanctions program. In chapter three, we review China’s capacity to circumvent sanctions and statecraft using financial networks outside of the US dollar system.

This paper, and our prior work on sanctions options in a Taiwan crisis, focuses primarily on China and the G7. A forthcoming paper will explore the role of the G20 in a Taiwan contingency.

Chinese economic statecraft in a Taiwan crisis: Tools and applications

No country has ever tried to sanction an economy of China’s size and importance to the global economy. The use of economic statecraft against Russia following its invasion of Ukraine was exceptional in its breadth and its level of international coordination, but Russia was only the world’s eleventh-largest economy before the war began and had few economic countermeasures available aside from energy export denial.

As the world’s second-largest economy and premier manufacturing powerhouse, China has a far larger toolkit of economic policy instruments. It also has a history of using economic leverage assertively to achieve foreign policy objectives, though with mixed success. That experience means retaliatory efforts are nearly certain in ways the Western powers did not experience after imposing sanctions on Russia in 2014 and 2022 onward. In past work we took stock of economic statecraft tools available to the G7 and the costs and limitations of their use. In this chapter we catalogue China’s economic statecraft tools and applications, and assess the likeliness of their use in moderate or high Taiwan scenario escalations.

Drawing on past case studies and China’s growing legal and regulatory toolkit, we identify a range of economic statecraft actions that China could use in a Taiwan Strait escalation scenario. Scholars of economic statecraft typically subdivide statecraft tools into categories based on their direction (i.e., inbound or outbound flows) and on their channel (i.e., trade or capital flows).⁵ In the first section of this chapter, we look at access to China’s markets—i.e., the potential use of statecraft tools against economic flows into China, looking respectively at trade, foreign direct investment (FDI), and portfolio flows. In the second section, “China in the Global Economy,” we look at the use of statecraft tools aimed at these flows from an outbound perspective.

There is substantial debate within Chinese expert circles on the use of these tools. Academics and experts affiliated with China’s financial and economic bureaucracy often argue that defending against economic sanctions starts by building a strong financial system to improve domestic resilience and by deepening China’s global economic ties to increase the economic and diplomatic costs on the sanctioning economy. Zhang Bei, an economist at the People’s Bank of China’s (PBOC) Financial Research Institute, has argued that although China needs to strengthen countersanctions tools such as the Unreliable Entity List and Anti-Foreign Sanctions Law, it also needs to strengthen management of domestic financial risks and deepen global economic engagement through renminbi internationalization and international financial cooperation.⁶ Chen Hongxiang, another PBOC-affiliated researcher, describes the anti-sanctions policy toolbox as a “last resort strategy.”⁷ Chen notes that the United States faces limitations in the use of financial sanctions given the risks to the attractiveness of the US dollar as a global currency and the diplomatic and economic costs of sanctions.

Other scholars have discussed China’s use of retaliatory measures and the legal foundations for responses in the future. For example, Yan Liang of Nankai University has described trade controls on strategic resources as having played an important role in China’s sanctions toolkit in the past, noting the 2010 export controls on rare earths.⁸ Cai Kaiming, a Chinese cross-border compliance lawyer, has written about the newly developed legal foundations of Chinese economic statecraft tools, including the Anti Foreign Sanctions Law, the 2021 blocking statute, the Unreliable Entity List, and the reciprocal measures of China’s Export Control Law, Data Security Law, and Personal Information Protection Law (see Appendix 1).⁹ Throughout this paper, we consider the use of these new formal tools in a Taiwan crisis scenario, as well as the range of informal tools available, such as phytosanitary inspections and administrative orders, to China’s customs department. Given the range of both formal and informal tools available for the purpose of statecraft, the focus of this paper is on the ends, rather than the means. These tools span many different bureaucratic jurisdictions, but it is likely that, as in past instances of major statecraft actions where major costs to China’s economy are involved (such as China’s retaliatory tariffs against the United States in 2018), the decision to use these tools will come from China’s senior-most leadership.

Scenarios

While China’s past use of economic statecraft is instructive, Beijing may not necessarily respond to future escalations with the same old tools, or with the same intensity. In recent years, China showed a willingness to use economic statecraft more explicitly and intensely than in the past, albeit in a concentrated fashion (e.g., trade bans against Lithuania). China has also created new legal frameworks to justify future retaliatory or punitive actions.¹⁰ In short, we need to make predictions of future use cases beyond the range of China’s past actions.

To explore how China might use economic statecraft tools in the future, we consider two scenarios:

Moderate-escalation scenario: China responds to the United States taking an escalatory diplomatic action in the Taiwan Strait, such as a substantial deepening of the political relationship with Taiwan, a step-change in military aid, or a limited sanctions package in response to Chinese aggression toward Taiwan. In this scenario, China reacts with economic statecraft measures targeting the United States designed to impose relatively higher costs on the United States than China. In this scenario, China’s willingness to use statecraft is constrained by the necessity to maintain a strong business environment amid high geopolitical tensions.

High-escalation scenario: China retaliates to a maximalist G7 sanctions package that includes full blocking sanctions on China’s major banks and the PBOC, sanctions on senior political figures and business elites, and trade bans with relevance for China’s military.¹¹ China adopts a much stronger and broader set of economic statecraft measures against the entire G7, with an intent to impose costs as high as possible on the sanctioning economies.

Both scenarios stop short of war between China and the United States or other G7 countries, and are meant to provide a context to evaluate the potential use of China’s statecraft tools. We consider only economic statecraft responses in a Taiwan escalation scenario, although China is also likely to consider military and quasi-military actions that are outside the scope of this paper, such as undersea cable cuttings, cyberattacks, or blockades. Where we highlight costs in dollar terms, they should be understood as the assets and annualized economic flows at risk of disruption unless otherwise specified.

Access to Chinese markets

One of China’s primary methods of exercising economic statecraft in the past has been to restrict access to its markets, either through trade barriers or disruptions to the operations of foreign companies and investors in China. In this section we consider the use of these tools in the past and in moderate- and high-escalation future scenarios.

Chinese imports

One of China’s primary methods of exercising economic statecraft in the past has been to restrict access to its markets through tariffs and nontariff barriers. In a moderate escalation with the United States over Taiwan, China could scale up these tools to restrict imports across a range of noncritical goods such as consumer products, easily substitutable goods, and goods where the United States is heavily dependent on China as an export market. In a higher-escalation scenario involving a maximalist G7 sanctions program, China could impose import bans on a broader range of goods, although the main initial disruptions to imports would likely come from sanctions against Chinese banks and importers. A total ban on G7 imports, with exceptions for critical agricultural and medical imports, would put $358 billion in exports to China at risk.

Past uses of statecraft

Restrictions on market access have been one of China’s most common forms of coercion in past geopolitical incidents. In most cases, these tools have been narrowly targeted—either against single companies or narrow product categories—to minimize the impacts on China’s economy and to act as a warning rather than full-blown punishment mechanism. Yet they have the potential to be scaled up in response to higher levels of escalation, especially as many G7 companies depend heavily on the Chinese market for revenue and growth.

• Tariffs – In numerous past cases, China has increased tariff rates on imported products in an apparent response to political actions taken by other countries. China retaliated against the Trump administration’s imposition of across-the-board tariffs on Chinese exports to the United States, resulting in a 21% average tariff rate on goods imported from the United States.¹² After members of Australia’s cabinet called for independentinvestigations into the origins of COVID-19 in April 2020, China imposed economic restrictions on a range of Australian products. China’s Ministry of Commerce (MOFCOM) announced tariffs as high as 218 percent on Australian wine and 80.5 percent tariffs on barley.¹³ In these cases, China provided the justification for higher tariffs on the basis of anti-dumping action against Australian exporters, but the timing and character of the tariffs led to speculation that the tariffs were retaliatory action by the Chinese government.¹⁴ Notably, China targeted goods where the costs to China’s economy would be lower than products like natural gas and iron, for which Australia also depends on China as an export market. In the Australia case, MOFCOM was responsible for raising tariffs, but the State Council itself also has powers to increase tariffs, as it did in imposing retaliatory tariffs against the Trump administration’s June 15, 2018, Section 301 tariff announcement.¹⁵
• Inspections and import bans – China also exerts economic pressure through inspections and informal bans on imported goods. In 2010, China effectively banned salmon imports from Norway on the pretense of a violation of sanitary regulations after the Norwegian Nobel Committee awarded the Nobel Peace Prize to dissident Liu Xiaobo.¹⁶ China banned banana imports from the Philippines on health grounds in 2012 amid tensions in the South China Sea.¹⁷ The most recent major case followed the opening of a Taiwanese Representative Office in Lithuania in 2021.¹⁸ China imposed a de facto ban on imports from Lithuania through a range of measures, including denials of trade finance, revocation of import permits, the removal of Lithuania from China’s customs system, and cancelation of freight shipping to Lithuania by a Chinese rail shipping operator. Given that Lithuania only accounts for 0.003 percent of Chinese imports and its goods are primarily agricultural, the immediate cost to the Chinese economy from the import bans was limited. However, the diplomatic blowback from targeting a European Union (EU) member state with a full trade ban was arguably quite high. Coercion against Lithuania led the EU to raise a trade case in the World Trade Organization against China, and it likely strengthened support for the creation of the Anti-Coercion Instrument. It is a matter of debate whether China took these actions against Lithuania accepting these costs, or whether it underestimated the harshness of the EU’s reaction.
• Boycotts – China uses its state media to foment and support boycotts of foreign brands during crises. In 2022, Chinese consumers boycotted H&M for its refusal to use cotton from Xinjiang with backing from state media and party organizations.¹⁹ In February 2017, the Lotte Group approved a land swap with the South Korean government to place a Terminal High Altitude Area Defense (THAAD) missile defense system on its former property. In response, China forced the closure of 74 Lotte supermarkets for supposed fire safety violations and published news articles urging consumers to punish South Korea “through the power of the market.”²⁰ In both cases, China focused on companies that had ample local competition and low import dependence to mitigate the costs to China’s economy. South Korean companies in petrochemicals and semiconductors, by contrast, saw limited or no effect on their performance during the THAAD incident.²¹
• Preferential treatment of competitors – Beijing’s direct and indirect control of state-run procurement provides leverage over foreign firms hoping to capture a slice of China’s market. Companies fear that officials can manipulate the bidding process to hurt their sales and exert influence on their home countries. One example came in 2021 after Swedish authorities implemented a ban on Huawei and ZTE 5G technology in late 2020. In subsequent bidding for state-owned China Mobile in June 2021, Ericsson’s share of 5G equipment awards dropped by nearly 80 percent. Ericsson had previously lobbied against the ban in Sweden, fearing it would be targeted for retaliation in China,²² and an editorial in the state-run Global Times later tied the bidding results to Sweden’s policy decision.²³

Potential use in moderate-escalation scenario

How countries choose which imports to restrict is a central question of economic statecraft. In China’s retaliation against US tariffs in 2018, China’s tariffs tended to target US exports produced disproportionately in counties that leaned Republican and voted for then president Donald Trump in 2016, suggesting a political influence logic to China’s tariff targets.²⁴ More broadly, policymakers are likely to think about the effectiveness of tariffs: Is the sender country able to bear the cost of sanctions while imposing enough damage to compel the other side to make concessions?²⁵

Past instances of China’s restrictions on imports have typically been targeted in ways that limit costs to China’s economy: single firms, narrow sectors, or smaller economies. In a scenario involving the United States in a moderate escalation over Taiwan, China might accept elevated costs if it felt that sanctions on the United States were necessary to signal resolve, punish US behavior, or deter further action. In such a circumstance, China could target a range of sectors where costs to the US economy are high and costs to the Chinese economy, though elevated, are still relatively low. The tools used are likely to be the same as in the past: some combination of higher tariffs and both formal and informal import restrictions. The key question facing Chinese policymakers would be which sectors and goods to target.

First, China could target consumer discretionary products such as imported cars and cosmetics. While consumers would face higher costs and fewer choices, a ban on these products would have a far lower impact on the Chinese economy than a ban on intermediate goods or capital goods that China depends on for industrial production. If restrictions were expanded to US-branded products made in China (Tesla cars made in Shanghai, for instance), China would face some employment impacts, but in general these would likely be the easiest goods to target.

Second, China could target products where it has diversified imports and the United States has limited market power. China imports commodities such as crude oil, coal, polyethylene, and copper ore from the United States, but in small quantities relative to other exporters. China could likely impose high tariffs or bans on such goods from the United States, and procure them from other countries (albeit at higher costs). While not included in the table below, China might also include products where import dependence is still high but where China is actively pursuing self-sufficiency and strong local players are emerging, such as medical devices. China would likely avoid targeting critical inputs to its supply chains that would be difficult or costly to replace quickly, such as integrated circuits.

Finally, China could target areas based on how much the United States depends on China as an export market. In 2022, over half of US exported soybeans went to China, as did 83 percent of its exported sorghum. US dependence on China for its agricultural goods informed China’s decision to target these goods in response to the Section 301 tariffs. Yet the costs to China for imposing tariffs on these products would also be high: the United States supplied 31 percent of China’s imported soybeans and 64 percent of its imported sorghum. China would likely tailor the strength of its import restrictions depending on global agricultural conditions and whether alternative supply could be found elsewhere.

Tariffs or bans on US imports could also provide China with an opportunity to drive wedges between the United States and other countries. Sustained demand from Chinese consumers amid higher restrictions on US imports would increase demand for imported goods elsewhere. As a group of advanced industrial economies, the G7’s exports overlap substantially with US exports that could be at risk from Chinese trade barriers. Table 5 shows the top ten exports from the United States to China by value, and the export rank of those products from other G7 countries and Europe to China. For every product that ranks among the United States’ top ten exports to China, at least one other G7 country (and often multiple countries) also have that product ranked in their top exports to China. While these products are often diverse and not completely substitutable, the overlap in the export baskets of G7 countries to China points to the potential for China to exploit competitive dynamics between the United States and other G7 countries.

Potential use in high-escalation scenario

In a maximalist-escalation scenario, the initial disruptions to foreign exports to China would stem from G7 sanctions themselves rather than Chinese retaliation. As we argued in our June 2023 study on G7 sanctions toward China in a Taiwan crisis, many goods such as chemicals, energy, and electrical equipment would likely fall under a strengthened G7 export control regime, putting hundreds of billions of dollars of trade at risk.²⁶ Sanctions on China’s banking system would limit exporters’ ability to settle transactions with importers.

Over time, however, foreign businesses could shift their transactions to unsanctioned importers and banks. Despite sanctions on much of Russia’s economy, at least 101 multinational companies from G7 countries are continuing operations in Russia as of January 2024, according to Yale researchers.²⁷ While some of these firms are operating in sectors that may be considered humanitarian exceptions— such as agriculture and healthcare—most are not.

G7 trade with Russia fell by more than half in 2022. One quarter of the remaining trade is in agricultural commodities, medicine, and medical devices, which are explicitly authorized under a general license from the US Office of Foreign Assets Control.²⁸ But despite sanctions on many major Russian firms and banks, G7 countries exported almost $25 billion in non-agriculture and non-medical products to Russia in 2022, regardless of the reputational and logistical challenges of exporting even permitted goods to Russia.

The resilience of G7 exports to Russia after sanctions suggests that trade with China, though diminished, could continue even in a maximalist sanctions regime. Broadly speaking, there are three groups of exports in a maximalist sanctions program: (1) goods at higher risk of G7 export restrictions, (2) goods at higher risk of Chinese import restrictions as retaliation, and (3) goods at lower risk of either G7 or Chinese restrictions.

It is impossible to know a priori what sectors G7 countries would agree to impose strict export controls upon, given the substantial costs to their own economies from these sanctions. But for the sake of this analysis, we assume that energy, machinery, chemicals, electrical equipment, trains, planes, and metals are at higher risk of G7 sanctions, making Chinese import restrictions in these sectors less relevant.

What’s left? China imported $92.4 billion in automobiles, plastics, textiles, and rubber from G7 countries in 2022. Losing these imports would certainly be costly to the Chinese economy, but not fatal, making them possible candidates for Chinese retaliation in a maximalist scenario.

Finally, China imported $79.5 billion in agricultural goods, pharmaceuticals, and medical devices from G7 countries in 2022. Agricultural and medical goods were exempt from G7 sanctions in the Russia case as part of humanitarian carveouts present in all sanction regimes. It is likely they would be exempt from G7 sanctions against China as well. While China is likely to impose some restrictions on agricultural products (as it has in the past against French wine and US soybeans), a total ban on agricultural products from the G7 would be extremely costly to the Chinese economy, even if some of those imports could be backfilled by greater imports from non-G7 countries like Brazil. Medicine and pharmaceuticals would be even more so. In this instance, it seems likely that agricultural and medical goods would face lower risks of a total trade ban from either China or the G7.

Import-related statecraft tools have been a part of China’s economic statecraft toolkit in the past and would likely be featured in a moderate- and high-escalation scenario in the future. In a moderate-escalation scenario, the tools would remain more or less the same, but could target a broader range of sectors where Chinese dependence is low (consumer discretionary goods and substitutable goods) or where US dependence on China as an export market is high. Targeted import restrictions against the United States would also create opportunities for China to weaken G7 unity by importing more from other G7 countries.

In a high-escalation scenario, the initial disruption to foreign market access in China would stem primarily from G7 sanctions and market turbulence more broadly, rather than Chinese countersanctions. China is more likely to be judicious in imposing import bans on agricultural goods and pharmaceuticals against the full G7. Excluding those products, the full range of G7 exports to China at risk from G7 sanctions and Chinese countersanctions is around $358 billion.

Foreign direct investment in China

During past geopolitical crises, China has used investment-related tools such as audits, inspections, and antitrust rules, typically either to punish a specific firm for its own actions (such as perceived support for Taiwanese independence) or to pressure firms to lobby their home governments. In a Taiwan escalation scenario, these tools could be used more expansively, potentially affecting up to $460 billion in G7 investment in China and an estimated $470 billion in annual revenue, but at the cost of undermining investor sentiment and accelerating capital flight from China.

Past uses of statecraft

China’s past use of statecraft against foreign firms domiciled in China indicates the wide range of tools available:

• Forced shutdown of online platforms – China’s cyberspace regulator has in the past used its authorities to force companies to adhere to China’s conception of “One China” on their websites and branding materials. In 2018, the Cyberspace Administration of China (CAC) forced Marriott to temporarily shut down its website in China due to an email questionnaire that listed Hong Kong, Macau, Tibet, and Taiwan as separate countries.²⁹
• Merger/antitrust reviews – China has used its antitrust authority, the State Administration for Market Regulation (SAMR), as a powerful extraterritorial tool to block mergers between foreign companies during times of geopolitical tension. It is widely believed that China blocked the $44 billion merger of Qualcomm and NXP in 2018 in retaliation for US Section 301 tariffs on Chinese goods.³⁰ The deal had been approved by eight other jurisdictions but was ultimately called off, as China’s refusal to approve the deal would have prevented the merged companies from operating in China. SAMR refused to approve the merger of Intel and Israeli firm Tower Semiconductor in 2023 amid escalating US tech controls on Chinese semiconductor firms.³¹
• Inspections, audits, fines, and permit delays – China has often used health, safety, environmental, and quality inspections, tax audits, and other routine regulatory actions to punish firms (or the firm’s home country) for their stances on crossstrait issues. In 2021, the Chinese subsidiaries of Taiwan-owned conglomerate Far Eastern Group were fined $13.9 million for a range of violations, including breaches of environmental protection rules. Far Eastern had been a major donor to Taiwan’s Democratic Progressive Party (DPP), a party that Beijing views as advocating for Taiwan’s independence. In the leadup to the 2024 Taiwan general election, Foxconn’s Chinese subsidies became the subject of tax audits and land-use investigations. The investigations were believed by some to be meant to force Foxconn’s founder, Terry Gou, out of the presidential race to avoid splitting votes away from Beijing’s favored party, the Kuomintang.³² And in 2017, China used fire safety and health code inspections to force the closure of Lotte supermarkets during the THAAD incident.³³
• Personnel disruptions – In some cases, China has imposed restrictions on personnel traveling in or out of China for geopolitical reasons. ³⁴ China’s aviation regulator in 2019 ordered Hong Kong carrier Cathay Pacific to ban airline staff who supported the Hong Kong protests from traveling to China.³⁵ In March 2023, China detained five local staff of Mintz Group, a corporate due diligence firm.³⁶ In October 2023, China detained and then arrested a Japanese employee of Astellas Pharma on suspicion of espionage.³⁷

Table footnotes^{38 39}

Potential use in moderate-escalation scenario

Past methods of disrupting multinational corporation (MNC) activities in China could be scaled up in a moderate-escalation scenario, but the use of these tools runs the risk of accelerating MNC diversification away from China and impairing China’s economy. These tools are more effective when firms believe that, despite short-term tensions, China still holds promise for their business operations and sales.

The CAC could use its powers to shut down US companies’ websites in China, disable their apps, or close their app stores. China could impose these restrictions through a variety of legal and regulatory tools, including revoking a firm’s Internet Content Provider (ICP) filing license or by blocking their Internet Protocol (IP) address within China’s Great Firewall.⁴⁰ Through merger reviews, authorities can force companies to choose between abandoning the Chinese market or what can be years-long, multibillion-dollar deals. Inspections, audits, and fines could be scaled up against US firms in a crisis. Personnel disruptions, including tacit hostage-taking as in the cases of Michael Kovrig and Michael Spavor, is extremely worrisome for firms. Put together, these instruments may create a strong incentive for businesses to lobby their home governments for more amicable relations that would allow a deal to go through, but they would also accelerate plans to move operations from China, particularly if it looks like relations will be tense for the long term. Previously unused tools could also be used at higher levels of escalation. China could initiate investigations into a firm’s handling of data or revoke certifications for cross-border data handling. Rules around data, personal information, and cybersecurity ranked second on the list of US companies’ top 10 challenges in China in 2023.⁴¹ Already many companies are working to minimize their regulatory risk by partially or completely localizing their data storage, information technology, human resources, and software solutions in China.⁴² Data issues are particularly acute in the automotive, healthcare, and financial services sectors, making retaliatory data audits and investigations a possibility in a moderate escalation scenario.⁴³ Chinese authorities could also restrict how firms repatriate earnings. In past times of macroeconomic stress, China has restricted remittances for MNCs moving money abroad, although there is no evidence suggesting these restrictions were geopolitically motivated.⁴⁴ Foreign companies in China often repatriate income by issuing dividend payments to their overseas parent companies, which requires certain tax documents and processing by a Chinese bank. Chinese authorities could initiate tax audits targeting US companies to delay repatriation, or order banks to delay or reject processing requests. However, even in a moderate-escalation scenario, China would face macroeconomic pressures that would constrain how aggressively it targeted foreign companies. High geopolitical tensions would likely increase capital outflows and put depreciation pressure on the Chinese currency. Although China has substantial foreign reserves and strong capital controls, China’s reserves are finite and its capital controls are imperfect. Aggressive moves against foreign companies in China could exacerbate capital outflows in ways that Beijing would want to avoid.

Beijing would also seek to avoid moves that make it appear “uninvestable” to foreign firms more broadly. China’s long-term economic and financial stability depends in part on the willingness of foreign investors to continue investing in China, both to offset inherent outflow pressures and to drive productivity through partnerships with world-leading MNCs. Actions taken against MNCs, even if targeted against only one country, could undermine China’s narrative that it is a safe and attractive place for foreign investors to do business.

Potential use in high-escalation scenario

In a high-escalation scenario, China’s willingness to use aggressive economic statecraft actions against MNCs would likely be much higher. G7 sanctions on China’s major banks would immediately make China appear “uninvestable” for many investors, and many MNCs would be executing plans to exit the market even before considering Chinese retaliatory action. At this point, China would have little to gain from holding back on retaliatory actions on a pretense of maintaining “investability.”

Firms selling their assets in China would likely do so at a steep discount given a limited number of buyers and intense pressure to move quickly. Even once assets are sold, it would not be guaranteed that sellers could repatriate the proceeds of the sales to their home countries given strict capital controls on foreign reserves.

Tools used at lower levels of escalation could be used at greater scale. Local staff and visiting executives would likely face higher risks of travel delays and, potentially, exit bans or detentions amid heightened concerns over espionage. Restrictions on personal information protection and cross-border data transfers would likely be tightened considerably, adding to the logistical challenges of operating a Chinese subsidiary. Strict capital controls would likely prevent MNCs from repatriating any earnings in dollars whatsoever.

Companies would also be exposed to risks of asset seizure. G7 companies in strategic sectors such as chemicals and pharmaceuticals could face the risk of immediate expropriation. Within months of Russia’s invasion of Ukraine, for instance, Russia took control of German and Finnish utility assets in Russia.⁴⁵ In China, companies that stayed, even in nonstrategic sectors, would face the risk of seizure as retribution in kind for G7 asset seizures or freezes or to ensure continued employment at firms that suspended their operations due to G7 sanctions.⁴⁶

Estimating the FDI stock and revenues of G7 firms in China is hamstrung by a number of methodological challenges. China’s total inward FDI stock in 2022 was $3.6 trillion, according to the International Monetary Fund’s (IMF’s) Coordinated Direct Investment Survey.⁴⁷ However, because the IMF compiles data based on the immediate investing country, rather than the ultimate beneficial owner of the investing firm, it is difficult to identify what FDI ultimately comes from G7 countries. For instance, only $460 billion of China’s FDI stock comes directly from G7 countries, according to Chinese reporting to the IMF as of 2022, while $2.5 trillion (70 percent of the total) is attributed to Hong Kong, the Cayman Islands, and the British Virgin Islands, some of which is G7 investment channeled through these intermediaries. Complicating matters further, a substantial portion of China’s inward FDI stock is actually China-origin investment that is routed back through Hong Kong or other tax havens. Here we use the most conservative estimate of G7 FDI—that which is directly attributable to G7 countries. The full value of the G7 FDI stock in China is likely much larger.

Similarly, it is difficult to assess the total revenue and profit exposure from MNCs in China. Annual filings of listed companies do not systematically break out revenue by region. Data from China’s MOFCOM estimate that the total revenue of foreign-invested enterprises above designated size in China in 2022 was $3.9 trillion.⁴⁸ China does not individually report business revenues from foreign-invested enterprises by country, although MOFCOM does report the amount of realized inward FDI by country. Assuming that business revenues are proportional to overall business revenue, we estimate that G7 foreigninvested enterprises earned $470 billion in revenues in China in 2022 and $33 billion in profits—all of which would be put at risk from the combined impact of G7 sanctions and Chinese countersanctions in a high-escalation Taiwan crisis scenario.

Portfolio investment and other capital flows

China could use restrictions on its equity markets to limit outflows of foreign portfolio capital from China. While these tools have not been used in the context of economic coercion in the past, China has restricted activity in its equity markets in an attempt to stabilize market conditions. In a moderate- or high-escalation scenario, China will likely consider imposing restrictions on market activity or outbound portfolio flows.

Past uses of statecraft

To our knowledge, China has not restricted trade orders or imposed capital controls in equity markets during disputes with other countries in an effort at coercion. However, China has intervened heavily in equity markets in the past in an attempt to steady markets during times of financial instability. In July 2015, a speculative bubble in China’s equity markets burst, with the Shanghai Composite Index falling by 32 percent from a peak the month prior. To stem the decline, China ordered brokerages not to process sell orders while using state funds to buy stocks.⁴⁹

Potential use in moderate-escalation scenario

In a moderate-escalation scenario, it is probable that China would impose some capital controls and restrictions on equity markets to stanch capital flight stemming from a heightened sense of geopolitical risk among investors. Rather than a tool of economic statecraft per se, capital market controls should be seen as a likely response to financial instability during a crisis. In a more moderate scenario, where tensions with the United States and China trigger a stock market rout, for instance, China might turn to administrative controls on equity markets, as in 2015, that de facto restrict foreign investors selling Chinese stocks and repatriating funds. Given that the objective of such controls would be to ward off financial instability rather than impose costs on other countries, these restrictions would likely affect all financial investors in China rather than any one country.

Potential use in high-escalation scenario A higher-escalation scenario would likely see China impose capital controls across the board, including on capital flows through Hong Kong and Macao, to limit destabilizing outflows. Theoretically speaking, some of these tools could be targeted at G7 investors, but in practice, it would be difficult even for Chinese authorities to identify which portfolio assets belong to which investors. As with direct investment flows, portfolio investment is intermediated through tax havens, obfuscating the ultimate owners of capital. Efforts to estimate the holdings of Chinese securities on a nationality basis (rather than the typical residency basis) suggest that official data significantly understate holdings of Chinese securities.⁵⁰ Chinese authorities in a crisis would likely be hard-pressed to systematically identify G7 countries’ portfolio assets in China, let alone block them in a targeted fashion. If they did pursue this strategy, it is more likely that only a few high-profile investment firms would be targeted.

Instead, the more likely outcome is a comprehensive set of controls aimed at preventing a financial crisis. The IMF’s Coordinated Portfolio Investment Survey provides estimates of total portfolio assets and liabilities by economy.⁵¹ Based on this data, if full capital controls were put in place, an estimated $2.5 trillion worth of foreign equity assets in China, Hong Kong, and Macao would be at risk.

China in the global economy

China’s central place in global supply chains means that disruptions stemming from actions in a Taiwan escalation scenario would have far-reaching consequences. The previous section considers Chinese economic statecraft actions on flows and assets into China. This section considers the use of China’s statecraft toolbox on the global economy outside China: exports, outbound investment, and interactions with global financial markets.

Chinese exports

In an escalation over Taiwan, China could use its central position in global supply chains to exercise leverage against other countries. Because weaponizing supply chains may accelerate diversification away from China, these tools have been used sparingly in the past. However, new legal and regulatory tools have created a pathway for their use in a future scenario where China is more willing to bear the economic and reputational costs of disrupting supply chains.

Past examples of statecraft

Export restrictions on critical goods – China has used export restrictions in past geopolitical incidents to exert leverage over other countries. In September 2010, after a collision between Japanese coast guard ships and a Chinese fishing vessel and Japan detained its captain, China imposed an informal export ban on rare earths to Japan.⁵² In October 2010, industry officials reported that China expanded the export restrictions to the United States and Europe amid a trade dispute. China resumed exports in November of that year.⁵³

In July 2023, China announced it would require export permits for Chinese gallium and germanium, elements used in chip production and solar panels among other products.⁵⁴ China’s announcement came as the United States imposed restrictions on high-end chip and chip equipment exports to China. China announced in October 2023 it would require licenses for export of graphite products used in electric vehicle batteries.⁵⁵ In both cases, demand for the products shot up immediately in advance of the license requirement, as importers stockpiled goods, and then fell, as the license regime was put in place. Gallium and germanium exports returned to pre-control levels by December. Rather than an export ban as in the past, the imposition of an export regime around gallium and germanium appeared to be an effort to formalize the legal foundation of export controls on a new set of critical goods. While Chinese authorities denied that the measures were retaliatory and aimed at any particular country, the announced measures did highlight China’s economic leverage in a period of heightened geopolitical tensions.

Potential use in moderate-escalation scenario

Export restrictions on critical goods – In a moderate-escalation scenario, China could limit exports to the United States across a range of products through export tariffs, informal restrictions, or full export bans. The United States is China’s largest export destination, with $583 billion in goods exported to the United States in 2022 (16 percent of China’s total exports).⁵⁶ Export trade to the United States is an important source of employment, with an estimated 21.6 million jobs in China supported by exports to the United States.⁵⁷ China’s dependence on the United States as an export market suggests that Chinese policymakers will be cautious when imposing export restrictions, aiming to reduce the impacts on the Chinese economy while still imposing meaningful costs on the United States.

For this reason, initial export restrictions would likely focus on select intermediate goods where trade volumes and Chinese export-dependent employment is low, but the lack of which would have compounding effects on US industry. Past supply chain analyses have identified some of the main dependencies on imports from China (see Table 9).

Table footnotes^{58 59 60 61 62}

Restrictions on overseas IP and licensing – In addition to restricting goods exports, China may also change its posture on technology exports to the United States. Since 2008, China has maintained a technology catalogue that regulates what technologies may be exported from China.⁶³ The technology catalogue contains twenty-four technologies prohibited for export and 111 technologies requiring an export license. The latest revision issued in December 2023 added LiDAR systems, used in autonomous driving applications, to the list of technologies requiring a license. Other technologies covered requiring licenses under China’s technology control regime include advanced materials processing (e.g., chemical vapor deposition) and underwater autonomous robot manufacturing and control technology, among others. As China reaches the cutting edge in some of these technologies, the ability to grant or revoke export licenses to companies in the United States and elsewhere represents an additional statecraft tool.

Potential use in high-escalation scenario

In a high-escalation scenario, Chinese policymakers may decide to impose as high costs as possible on the sanctioning G7 countries by imposing export restrictions on all goods where import dependence on China is high. Such an approach would cover a broad range of consumer and industrial goods, and would be aimed at disrupting the economies of the targeted countries and increasing costs for consumers. However, this would come at tremendous cost to the Chinese economy and its ability to withstand sanctions.

Import dependence is contingent on a range of factors, including not only how much a country depends on another for a particular good, but also how widely available that good is in the global market. While a true accounting of import dependence requires a sector-by-sector approach, we roughly estimate the value of goods where the G7 nations are highly dependent on China by summing up G7 imports at the HS 6-digit level where (1) over 50 percent of G7 imports come from China, and (2) China accounts for over 50 percent of global exports. This encompasses all products where both initial dependence on China is high and where substitutes from other countries may be expensive or hard to find given how dominant China is in that product category, at least in the short run. Based on this approach, the G7 is highly dependent on $477.5 billion in goods imported from China. This is a highly conservative measure, since losing access to intermediate goods would disrupt downstream manufacturing and incur costs much greater than their import value alone.

While export restrictions would be one of China’s most impactful economic statecraft tools, it would also be among the options costliest to China itself. First, an estimated 101.2 million jobs in China depend on foreign final demand, 44.8 million of which depend on final demand from G7 countries.⁶⁴ Any measures that disrupted these factories would exacerbate structural issues in employment and wages. Secondly, a major source of China’s resilience against sanctions is the fact that it runs a persistent trade surplus, which could be put at risk from export restrictions. Even under a full-scale G7 sanctions regime against Chinese banks, it would be very difficult to trigger a balance of payments crisis in China so long as the country continues to run a strong trade surplus. Trade restrictions from China that undermine its own trade surplus would work against China’s ultimate objective of maintaining macroeconomic stability in a moment of crisis. Finally, sanction regimes face the challenge of preventing transshipment of goods from third countries into the targeted economy. To effectively cut off the United States and other G7 economies from these products would require China’s non-sanctioned trading partners to agree not to transship controlled products to the G7, and for China to be willing to impose punishments on third countries that refuse to comply. China is unlikely to have the bureaucratic breadth even to monitor potential sanctions evasion on this scale, and may be loath to punish other countries in a moment where it is diplomatically isolated.

Chinese investment abroad

China has typically used overseas investment as a positive inducement rather than a coercive tool. In a moderate-escalation scenario, China could pair promises of outbound investment to friendlier countries with limitations on new outbound investment to other countries, although this would be likely driven less by a statecraft agenda and more by geopolitical realities in the host countries. In a highescalation scenario, China could potentially force the shutdown of Chinese-owned subsidiaries abroad, but this would be extremely costly and of limited effectiveness.

Past uses of statecraft

State-backed overseas investment – Overseas investment is a key part of China’s economic diplomacy.⁶⁵ Although it is debatable how much investment is driven by state versus commercial interests, major investment projects are often marked by both governments as opportunities to demonstrate a constructive relationship. In many cases these projects bring tangible economic benefits to the host country, making them an important part of China’s statecraft toolkit.⁶⁶

Table footnote⁶⁷

Administrative control on outbound FDI flows – China maintains administrative controls on outbound investment, limiting or approving investment when it meets political and economic goals. In the early 2010s, China began liberalizing its strict controls on outbound FDI to encourage Chinese firms to invest abroad.⁶⁸ In 2016, a surge in capital outflows led Beijing to reimpose restrictions on outbound FDI in an attempt to mitigate balance of payments pressures. While this is not a direct application of statecraft, the tools exist for China to selectively restrict outbound investment in a future escalation scenario.

Potential use in moderate-escalation scenario

In a moderate-escalation scenario, Beijing could use promises of investment as positive inducements to align with China diplomatically, or use threats to cut off ongoing or future investments as a form of coercion.

The perceptions of China and its role in a moderate-escalation scenario would matter significantly to the effectiveness of these tools. Where the escalation exacerbates national security concerns toward China, Chinese promises of outbound investment or threats to cut off ongoing or new projects will likely have little effect. Similarly, if the geopolitical environment contributes to capital outflow pressure, China will be less likely to greenlight much new outbound investment.

Potential use in high-escalation scenario

In an escalation over Taiwan, China could theoretically halt all outbound investment to G7 countries as a form of coercion, although geopolitical conditions would likely make the point moot. G7 countries would be unlikely to welcome new investment from China in a major Taiwan escalation. The wave of new and updated inbound investment screening regimes across the G7 over the past decade give G7 governments the capacity to block many types of investments on national security grounds.⁶⁹ China would likely limit outbound investment regardless to stem capital outflows, and Chinese project developers would likely struggle to find overseas lenders willing to finance their projects at the risk of getting caught up in G7 sanctions.

China could hypothetically impose restrictions on the activities of Chinese-owned businesses abroad, with the aim of disrupting the domestic economy of the sanctioning countries. Chinese authorities could theoretically pressure Chinese firms in the United States to slow down operations or lay off workers. Chinese ownership of critical infrastructure — including State Grid Corporation of China’s 40 percent stake in the Philippines’ national grid and COSCO’s proposed 24.99 percent stake purchase in a port terminal in Hamburg — has raised concerns among policymakers over the national security risks of Chinese ownership of critical infrastructure in a crisis.⁷⁰ To our knowledge, there have been no documented cases of Chinese firms shutting down their operations in other countries amid a geopolitical dispute with the intent to disrupt the local economy.

In a moderate- or high-escalation scenario, it is unlikely that China would or could compel Chinese-owned firms in the United States or G7 countries to disrupt their operations as part of an economic statecraft campaign. First, except in the most extreme circumstances, China would avoid pressuring its firms abroad to disrupt their own operations for fear of reputational blowback that could undo years of efforts to expand the global footprint of Chinese companies. Second, a large share of Chinese direct investment abroad is held in minority stakes, and China-based board representation would be too small to unilaterally force a work disruption. Finally, in the event of a deliberate slowdown or disruption, it is likely that G7 governments would nationalize the assets of the Chinese firms, as Germany preemptively did when it nationalized Gazprom’s German subsidiary after Russia’s invasion of Ukraine.⁷¹

Altogether, China holds an estimated $61 billion in FDI assets in G7 countries that could be theoretically put at risk from disruption, although the likelihood of China turning to such tools—even in high-escalation scenarios—seems low. China invested $13 billion in G7 economies in 2022. The most substantial disruptions to Chinese outward investment to G7 economies would likely be China’s own capital controls and defensive investment restrictions from G7 countries toward China in a moment of high escalation over Taiwan.

Portfolio investment and other capital flows

In addition to restrictions on market access or manipulation of operating conditions for multinational companies in China, Beijing could potentially use some of its financial policy tools to achieve certain political signals in response to G7 economic statecraft. However, China would struggle to use these tools aggressively without creating corresponding costs for its own economy and financial institutions. Most of the tools of financial leverage that China can use, including currency swap lines, are likely to be directed against borrowers from Chinese institutions. That volume of lending or the terms of lending could be adjusted in response to political developments. Selling foreign assets in large volumes (particularly US Treasuries) has never been a particularly viable policy option for Beijing. Similarly, using a policy-led depreciation of China’s currency as a tool of statecraft to pressure other countries would have significant implications for China’s own financial stability.

Past uses of statecraft

Official lending (in the form of subsidized concessional or preferential loans) and foreign aid are some of China’s primary economic diplomacy tools with developing and emerging market countries. These programs rarely take the form of explicit quid pro quos, but instead build long-term bilateral relationships that China can later activate to obtain political support on controversial Chinese “core issues,” including Taiwan, Hong Kong, and Xinjiang.

Aid and lending pledges are also key elements of the unofficial financial packages that China uses to induce diplomatic recognition switches from Taiwan to China. Recent examples include Nauru, the Solomon Islands, and Panama. Diplomatic relations with China (rather than Taiwan) are a prerequisite for the receipt of official aid (including concessional loans). Importantly, pledged lending may be just as important as the receipt of actual funds. Past cases suggest China can effect some control over the timing of these recognition switches to maximize their potential political impact on Taiwan, including Gambia (2016, after the DPP’s electoral victory in Taiwan), the Solomon Islands (2019, ahead of the People’s Republic of China’s 70th anniversary), and most recently Nauru (2024) (and likely Tuvalu), to coincide with adverse political events.

China has also offered bilateral swap lines to provide liquidity to developing countries. Although these are nominally intended to facilitate renminbi-denominated trade and investment, most swap agreements are never activated. Yet they are increasingly critical to a handful of countries, including Argentina, Pakistan, and Egypt, providing several billion dollars in emergency liquidity. Swap agreements typically last three years; countries may request the line be activated for a specific amount, and in practice that amount is simply rolled over at the end of a year. It is very rare for China to refuse to activate a swap line or to roll over any outstanding amounts, which would put pressure on any country relying on the swap line as a foreign exchange backstop. One (unconfirmed) counterexample came in December 2023, when China allegedly refused a request from Argentina to activate additional funds under the swap in response to Argentine President Javier Milei’s criticism of the China-Argentina relationship during the 2024 elections.⁷² The implications of China’s bilateral swap agreements with G20 countries will be covered in our forthcoming paper on the role of the G20 in a Taiwan crisis.

Potential use in moderate-escalation scenario

None of the G7 countries receive foreign aid or (official) loans from China in any significant amounts. In a moderate-escalation scenario, China could be expected to approach major recipients of development finance to ask for statements of diplomatic support or voting support in international forums like the United Nations General Assembly. China could look to accept a recognition switch from a country where discussions were already underway, to ratchet up additional pressure on Taiwan’s incumbent administration.

Most likely, China’s financial statecraft would not immediately increase in scope in a scenario of escalating tension over Taiwan. Financial pressures on China during a moderate escalation would likely constrain China’s ability to rush additional development finance to woo new allies. Rather, China would likely leverage the results of past financial statecraft measures to constrain Taiwan’s diplomatic space.

China would also benefit from deep economic and financial relationships with emerging market and developing countries itself to prevent alignment with the United States. China would also be unlikely to immediately begin punitive measures by formally cancelling or conditioning financial flows with existing partners. We are not aware of any examples of negative statecraft involving official lending or aid, where China either outright canceled existing aid projects or called in outstanding loans in response to a diplomatic or policy dispute. Such moves would be not only diplomatically counterproductive, but would also be restricted by Chinese aid and lending agreements and contracts, and a desire to avoid harming Chinese contractors, exports, and financial institutions for relatively limited marginal diplomatic gains. Rather than cancel existing projects, there is evidence that China instead has delayed or cancelled upcoming aid projects in past disputes. One example came in the Philippines in 2012. During a flare-up around the Scarborough Shoal, China continued to execute on existing aid and loan contracts, but does not appear to have undertaken new work until the election of Rodrigo Duterte in 2016.

Similarly, even in a moderate-escalation scenario, it is unlikely that Chinese lenders would cancel or otherwise call in existing projects or loans. As most of China’s project finance is funded on commercial terms, governed by commercial legal contracts, there are few instances where Chinese lenders could accelerate payment outside of clear events of default. One potential channel that could be deployed would be escrow accounts. China’s loans often require the use of escrow or other special accounts in China (either funded directly or through commodity sales to Chinese purchasers), which must be funded at certain levels. In an escalation, China in theory could raid these existing escrow accounts and demand replenishment. One recent example is Suriname, where in 2023 China EXIM Bank tapped an escrow account for payment while Suriname had halted debt service during multilateral debt renegotiations, a major breach of international debt protocol. Additionally, China would be more likely to halt lending (not yet committed or disbursed) in specific countries, as recent reports indicate it has done in Pakistan and Kenya. In an escalation scenario, bilateral swap lines would likely serve as an implicitly threatened target where they have been activated. This could constrain diplomatic support for any G7 sanctions or additional action. However, as very few countries have drawn upon swaps in significant volumes, China may find this tool of leverage limited.

Although China is unlikely to impose punitive measures with loans and aid, it has other options available to gain leverage. China accounts for 6 percent of the IMF’s voting share. An 85 percent majority is required for major decisions at the IMF such as quota increases and allocations of Special Drawing Rights (SDR). In partnership with a small number of other countries, China could disrupt processes (or threaten to do so) at the IMF to gain negotiating leverage.

In a moderate-escalation scenario, China might consider turning to other financial statecraft tools such as competitive devaluation of the renminbi. Facing persistent capital outflows for much of the last decade, China’s central bank frequently intervenes in currency markets to maintain the value of the renminbi, by selling US dollars and buying domestic currency. China could slow down that intervention, allowing the renminbi to depreciate, which would also likely trigger competitive devaluations and capital outflows in other emerging markets, particularly if the depreciation was seen as a policy signal. While this tool benefits from plausible deniability, Beijing runs the risk of undermining confidence in domestic monetary policy, encouraging additional capital outflows from both domestic and foreign investors, and antagonizing other countries with whom Beijing competes for export share. For G7 countries, a weaker renminbi would result in lower demand for G7 goods due to the weaker purchasing power of Chinese consumers, and greater competitive price pressure from Chinese exports.

Potential use in high-escalation scenario

In a high-escalation scenario, China would have limited capacity to harass G7 economies through financial statecraft without drastically undermining its own financial stability. Instead, China’s financial statecraft would be more effectively deployed at developing and emerging market countries to prevent a cohesive response outside of the G7.

Ever since China began to accumulate foreign exchange reserves in the 2000s, analysts have questioned whether China would sell its holdings of foreign assets to retaliate against the United States for political reasons. China officially held $782 billion in Treasuries at the end of November 2023, and likely holds around twice that level including holdings by state banks. The implied threat of a selloff would be to raise US interest rates and tighten US financial conditions. However, this threat has been somewhat overstated, as China could not sell these assets all at once, and US officials could take measures to respond well before significant volumes of assets could be sold. For example, if the Federal Reserve were to issue a statement claiming that it was noticing politically motivated disruptions in financial markets and would purchase securities as necessary to maintain stability, it would likely counteract any aggressive selloff. In March 2020, amidst COVID-19- related disruptions in markets, several foreign reserve managers began aggressively selling Treasuries and other US assets to repatriate funds and manage financial risks, and the Federal Reserve was still able to purchase assets and steady financial markets.

Even if China were able to sell significant volumes of its holdings of Treasuries, at the end of the day Beijing would still be holding US dollars, and would need to invest them in something, which would likely indirectly result in additional Treasury purchases. The withdrawal of China from new Treasury market purchases is also likely to have a limited impact, as Beijing has not been a significant net buyer of Treasuries for many years now. Ultimately, Treasury sales are an unlikely vehicle for Chinese economic statecraft, even in the case of a significant escalation in tensions.

Rather, Beijing would be likely to focus financial statecraft on preventing emerging and developing economies from aligning with G7 sanctions. Under high-escalation conditions, those countries would already feel acute macroeconomic pressure in the form of increased global finance and debt servicing costs (brought on by a stronger dollar), fluctuating commodity prices, and disruptions to global trade. This would increase developing countries’ potential susceptibility.

Even under high-escalation conditions, certain channels would still have constraints. Official lending and aid offers relatively little direct leverage against the G7. China would also be unlikely to be able to convince G20 or developing countries to impose their punitive measures against the G7, beyond pariah states like Iran, Russia, or Venezuela. But other channels would provide more room for maneuver. China has far greater ability to deliberately sell non-US dollar foreign assets in specific markets, as these are more discretionary purchases, and not the result of China’s decision to manage its exchange rate against the US dollar. China does hold significant proportions of non-US dollar currencies in its foreign reserves, and could potentially liquidate those holdings rapidly in response to political events. This may have an outsized impact on currency valuations and interest rates in certain emerging markets that are heavily reliant upon foreign demand for government bonds, such as Indonesia or Malaysia.

Additionally, more aggressive steps could be taken with outstanding loan agreements with developing countries. Publicly disclosed lending contracts from China’s policy banks allow for the lender to declare default—and immediately demand repayment—in response to certain political events, including a switch in diplomatic recognition to Taiwan (or China severing relations with a foreign country). Similarly, under “illegality clauses” common to commercial loans, China’s policy banks could immediately cancel disbursements or call in outstanding amounts due to changes in law that impact their ability to perform their obligations. G7 financial measures (like currency or banking restrictions) could, at least under a theoretical expansive reading, qualify. Yet invoking these clauses would come with bureaucratic risks for China Export-Import (EXIM) Bank and China Development Bank, which would be hard-pressed to collect any outstanding amounts and would likely be reluctant to acknowledge any debt as unrecoverable, especially at a time when China is seeking diplomatic support among other borrowing countries.

China’s capacity to circumvent financial sanctions and G7 economic statecraft

The previous section was concerned with China’s capacity to retaliate against US and G7 economic statecraft, but this is not Beijing’s only option. There have been long-running efforts in Beijing to not only develop tools to respond to foreign economic restrictions, including sanctions and export controls, but to circumvent or bypass them as well. Primary among those tools has been the development of alternative national-level and international financial networks using China’s own currency, the renminbi, rather than the US dollar. These have included bilateral currency swap arrangements for trade settlement, the designation of specific clearing banks in third countries, and the gradual expansion of China’s own interbank payment networks, the Cross-border Interbank Payment System (CIPS). The development of China’s central bank digital currency (CBDC) can be viewed in the same context, although the current structure is focused far more on domestic retail transactions than cross-border interbank financing.

At the same time, China’s reliance upon the US dollar is a major source of friction between different camps in Beijing. Security-minded officials have always viewed the dollar as a source of risk and vulnerability for China, given the potential threats posed by sanctions and other restrictions. However, financial technocrats in China have led the charge to integrate China’s economy more closely with the global financial system, precisely to attract foreign capital inflows. China faces a significant problem with the world’s largest single-country money supply at $40 trillion, which generates new pressures for Chinese savers to actively diversify into foreign assets, as the money supply continues growing by around $3.5 trillion in new renminbi every year. This outflow can create financial instability inside China and weaken the exchange rate and the global influence of China’s economy, unless it is counterbalanced by capital inflows via foreign direct investment or flows into China’s bond and equity markets, meaning purchases of renminbi-denominated assets. While the outflows from China’s financial system are inevitable, the inflows to stabilize conditions are contingent upon the state of China’s economy, interest rates, and the reform of the financial system.

As a result, throughout the past decade, even though the political climate in China has turned more hostile to foreign influence and interests, China has persistently attempted to attract foreign investment and capital inflows, denominated in foreign currency. This has also meant prioritizing policy choices and reforms favored by foreign investors and governments. Maintaining access to US dollar inflows has required deepening China’s access to the global financial system, and therefore exposing China’s financial institutions to potential restrictions on those dollar inflows. China has consistently made compromises when necessary to maintain foreign inflows, most recently including permitting audits conducted under the imprimatur of the US Public Company Accounting Oversight Board (PCAOB) in order to prevent the delisting of Chinese companies on US stock exchanges.

Beijing will continue to prioritize maintaining access to foreign capital and inbound investment, despite concerns about the vulnerability of Chinese institutions to US sanctions. Should China lose access to US dollar inflows, the renminbi’s value globally would depreciate over time, and China’s influence and throw weight in the global economy would similarly diminish. Any credible claim that China could catch the United States in economic prowess would evaporate. As a result, even as China’s overall policy environment has become obsessed with security, this has not fully extended to the financial system, where technocrats have been able to push back against the concerns of security-oriented officials.

At the same time, it is not a credible threat that outside of a wartime or similar scenario, the United States would completely cut off China’s access to US dollars, or take actions against China’s financial system as comprehensive as those against Russia. First and foremost, China remains a sizable exporter and global manufacturing center, at an estimated 14 percent of global exports. While there are alternative sources of exports, disrupting China’s capacity to use US dollars would necessarily interrupt China’s $5.9 trillion in annual trade flows as well. Other more extreme options, such as freezing significant proportions of China’s $3.22 trillion in foreign exchange reserves, as was done to Russia’s central bank following the invasion of Ukraine, would similarly not be credible because the primary impact would be on China’s capacity to defend its currency, producing a sharp depreciation of the renminbi and ironically making China’s exports even more competitive in the global economy. The disruptions of global supply chains during the COVID-19 era created significant economic dislocations, which only moderately eased after China’s rapid return to production and exports in April and May 2020. Suspending China’s overall access to US dollar financing and its impact on trade would generate immediate political opposition in the United States and other allied and like-minded democratic states.

Moreover, Beijing is very aware that wholesale restrictions on financing channels for all of its banks are improbable and difficult to maintain. As a result, China’s methods for avoiding broader sanctions have focused on channeling transactions through individual banks that typically have limited cross-border business. Therefore, when these smaller banks are inevitably sanctioned themselves, the net impact on the rest of the financial system is minimal. This was the playbook that China used in designating the Bank of Kunlun as a preferred vehicle for transactions with Iran after sanctions were imposed in 2012, even though the sanctions did force the bank to shift its behavior as well. Banks in Hong Kong have similarly been forced to juggle overlapping sanctions threats from the United States and China in recent years, but no bank in Hong Kong has completely lost access to US dollar clearing facilities because of secondary sanctions imposed by the United States. And as long as some banks within the Chinese system maintain access to dollar clearing facilities, then it is probable that Beijing and Chinese firms will be able to channel transactions through these institutions. It remains highly unlikely that all Chinese banks will suddenly find themselves unable to access or trade in US dollars in a situation similar to some Russian financial institutions, given China’s importance in the global trading system. Beijing’s awareness of these limits similarly conditions China’s attempts to develop alternative financial networks that do not involve the US dollar. These can serve as alternative channels to be expanded in case of temporary need and limited purposes, rather than alternatives for everyday usage.

Using international Renminbi networks to circumvent sanctions

Obviously, one method China can use to avoid economic sanctions on US dollar-denominated transactions is to conduct business in China’s own currency, the renminbi. (Here, we are assuming that China’s efforts would be designed to avoid or circumvent an explicit secondary sanctions package from the United States or the G7.) Over time, China has sought to both encourage the development of offshore pools of the Chinese currency as well as denominate trade transactions in renminbi. At first, this was primarily a mechanism to avoid the disruptions to US dollar-denominated trade transactions caused during the global financial crisis in 2008. Later, and particularly following the Russian invasion of Ukraine, China’s efforts to promote the international use of its currency carried greater geopolitical significance, as a potential tool of sanctions avoidance, and to reduce the scope of Chinese financial transactions potentially exposed to US economic statecraft. Former Chinese officials such as Yu Yongding, who served on the PBOC’s Monetary Policy Committee, has pointed to the G7’s freezing of Russian foreign exchange reserves as proof of US “willingness to stop playing by the rules” and have suggested sitting Chinese officials are exploring new alternatives to safeguard its foreign assets.74⁷³

Russia itself started invoicing a far higher proportion of its own imports in renminbi in 2022 and using renminbi as a “vehicle currency” for transactions with third countries as well.⁷⁴ Overall, however, the potential for renminbi-denominated transactions to bypass or circumvent economic sanctions depends upon:

1. The liquidity and availability of renminbi to conduct economic transactions
2. The capacity of Chinese international interbank payments systems to accommodate these transactions
3. The ability of financial institutions to conceal those transactions from Western regulators, who could still impose secondary sanctions upon Chinese institutions should the transactions circumventing sanctions be discovered

Among these three requirements, the first one is likely the most difficult for Chinese authorities to control. It is always easy enough to provide financing in renminbi, but it is difficult to find counterparties willing to accept renminbi as payment or in borrowing, unless they have no other alternatives (as in Russia’s case). Setting up the institutional infrastructure to accommodate renminbi-denominated interbank transactions can occur largely within China’s borders, although it does require approvals of several international banks to facilitate these transactions. Beijing’s difficulty in avoiding detection of sanctions-busting financial transactions stems from the fact that China’s banks are also likely to maintain large volumes of dollar-denominated business, particularly for trade settlement. Beijing can always play a game of chicken regarding the imposition of secondary sanctions on China’s larger banks if certain sanctions-busting transactions are discovered, but it still runs the risk of retaliation from the United States and its allies.

Current scope of Renminbi internationalization

The term “renminbi internationalization” is often used to describe multiple phenomena, not all of which are relevant for China’s avoidance of Western economic statecraft. The most conventional definition involves the holdings and usage of renminbi outside of China’s borders, including for trade settlement. Other definitions include foreign holdings of renminbi-denominated assets within Chinese markets, which are less important in the context of sanctions avoidance. Sometimes “renminbi internationalization” incorporates the use of bilateral currency swaps extended by China’s central bank, or the usage of renminbi in outbound lending. But in terms of sanctions avoidance using renminbi-denominated transactions, the primary threat is the usage of Chinese financial networks by third parties to bypass US financial and regulatory surveillance. The most important consideration in that context is the liquidity and availability of renminbi itself, and trade and financial activity involving China’s currency, particularly wholesale transactions between banks.

One of the methods Beijing attempted to use to improve the attractiveness of renminbi-denominated assets was to have China’s currency included in the IMF’s SDR basket of currencies, which would provide an official designation that the renminbi was a currency that the IMF agreed was acceptable for holding within foreign exchange reserves. In addition, any transaction with the IMF would need to include renminbi, so this designation would produce a certain volume of purchases of renminbi. In addition, it would reduce a perceived obstacle to other investors, including central banks, acquiring renminbi-denominated assets. Beijing was required to demonstrate that the currency was “freely usable” in international financial markets. Because the renminbi was not fully convertible, and there were still capital controls in place on the currency, attesting to the currency’s usability was difficult. Instead, Beijing argued that the offshore currency, or the international renminbi (the Chinese yuan traded in the offshore market, or CNH) traded primarily in Hong Kong, fulfilled those criteria, since these transactions were subject to more limited capital controls. The IMF ultimately accepted the argument when it admitted the renminbi into the SDR currency basket in 2015, which helped to expand the range of investors who could readily invest in renminbi-denominated assets.

However, the accumulation of offshore renminbi and improving liquidity in financial markets for China’s currency is far from a straightforward process. Because China runs a global trade surplus, even if 100 percent of China’s trade was denominated in renminbi, no Chinese currency would necessarily accumulate outside the country’s borders, while foreign currency would come into the country. A portion of China’s trade could be denominated in renminbi—primarily China’s imports—which would result in third countries accumulating renminbi payments from Chinese companies. Then they would be forced with the choice of what to do with the Chinese currency: trade it for dollars or domestic currency, invest in renminbi-denominated assets, or deposit it in an overseas or Chinese bank. Chinese consumers could carry renminbi outside the country, but would need to find merchants to accept it. Capital outflows, including overseas investment and lending, could hypothetically increase the pools of available renminbi outside the country, assuming there were third parties willing to hold the currency or invest it in Chinese assets. This is one reason China’s central bank has encouraged currency swap deals to expand liquidity in offshore renminbi markets, but the actual utilization of these swap lines has been very limited. Simply put, there is no easy mechanism for Beijing to encourage foreign investors and central banks to hold the Chinese currency, as this depends upon public perceptions of the currency’s utility, liquidity, safety, and long-term value.

China’s currency is generally considered the fifth-most commonly used currency in the world, and is used for 3.6 percent of global transactions by value, according to SWIFT data. It still falls behind not only the US dollar and the euro, but the Japanese yen and pound sterling. Excluding payments within the eurozone, according to SWIFT’s data, the renminbi is sixth, falling behind the Canadian dollar. (And this may be low, given that SWIFT’s data will more heavily sample transactions in Western financial markets.) In terms of offshore holdings of renminbi, the PBOC’s own data shows that foreign holdings of renminbi-denominated assets totaled 9.76 trillion yuan ($1.36 trillion) as of June 2023, down from a peak of 10.8 trillion yuan in 2021. Naturally, the change in US interest rates starting in 2022 reduced the attractiveness of renminbi-denominated assets to foreign investors, along with geopolitical risks tied to China’s alignment with Russia.

Most relevant for sanctions avoidance is the liquidity of renminbi-denominated trading, or the ability of third parties to use renminbi in transactions outside of US and Western surveillance. However, the vast majority of renminbi-denominated financial transactions still take place in Hong Kong (79 percent), followed distantly by the United Kingdom (5 percent) and Singapore (3 percent). While this is logical given Hong Kong’s role as the gateway between China and international financial markets, the importance of Hong Kong within the offshore renminbi market raises the question of how “international” offshore renminbi trading really is. Most likely transactions involving offshore renminbi that are used to avoid sanctions would transact via Hong Kong, using institutions that would also maintain business in the US dollar, and would therefore also be subject to US sanctions or other economic statecraft.

As of 2023, the renminbi share of allocated global foreign currency reserves stood at around 2.4 percent, a decline from 2022 (2.6 percent) and 2021 (2.8 percent).⁷⁵ According to the PBOC, more than 80 foreign central banks or monetary authorities have held renminbi in their foreign currency reserves.⁷⁶ Many of the countries publicly committed to holding renminbi in their foreign currency reserves have a significant trade relationship with China (Table 13). China is the top trading partner of Russia, Australia, Brazil, Bangladesh, and Kazakhstan. At 13.1 percent, Russia holds the largest disclosed share of renminbi reserves (although the effective share of Russian reserves may be higher given the impact of sanctions). US sanctions on the use of US dollar assets have added pressure on Russia to diversify into other currencies, and Russia’s share of trade invoiced in renminbi increased from 3 percent in 2021 to 20 percent by the end of 2022.⁷⁷ Around 2018, several European countries, including France, Belgium, Germany, Slovakia, and Spain, as well as the European Central Bank, began announcing the inclusion of renminbi in their reserves, likely a result of the renmimbi’s inclusion in the IMF’s SDR currency basket. However, these countries do not publicly disclose the current composition of reserves, and more recent reporting on the quantity of renminbi reserves is sparse. African countries such as Rwanda and South Africa primarily mention trade settlement and investment promotion as motives for diversifying assets with renminbi holdings.

Because the currency remains subject to capital controls and is not fully convertible, choosing to hold foreign exchange reserves in renminbi is not necessarily as straightforward as holding other currencies. But during periods when interest rates on US Treasuries and other traditional reserve currencies are low, higher return on Chinese government bonds may offer an attractive alternative to diversify reserve holdings.

Trade settlement in China is also increasingly denominated in renminbi. Naturally, it is easier for China to impose payment terms upon its own imports from foreign companies, as the customer. As a result, along with foreign exchange reserves, countries that tend to denominate more trade in renminbi tend to be significant exporters to China, and run trade surpluses with China, primarily in raw materials or commodities. The overall volume or proportion of trade settlement in renminbi is a far less significant gauge of renminbi internationalization than other metrics such as the accumulation of renminbi assets or the volume of cross-border financial transactions in renminbi. Nonetheless, the proportion of trade denominated in renminbi has increased notably since the Russian invasion of Ukraine, and has hit all-time highs above 35 percent in recent months.

In the past, when renminbi-denominated trade settlement surged from 2013 to 2015, this reflected strong demand for renminbi in offshore markets, because the Chinese currency was appreciating against others, and against the US dollar. As a result, exporters to China were more likely to be willing to hold renminbi if Chinese importers paid in the currency. The recent surge also corresponds with a change in the currency’s value, but the renminbi has depreciated against the dollar since early 2022. The rise in renminbi-denominated trade settlement in recent years has occurred alongside the rise in US and global interest rates relative to Chinese interest rates. The lower Chinese rates can make trade credit denominated in renminbi more attractive to firms, relative to more expensive US dollar-denominated trade finance. The renminbi’s share of global trade finance increased to 5.12 percent in November 2023, from only 2 percent in December 2020, according to SWIFT data, and it is probable that lower Chinese interest rates can explain the recent rise in overall trade settlement.

Financial infrastructure: CIPS

Central to Beijing’s efforts to build resilience and circumvent potential G7 sanctions is CIPS. Launched by the PBOC in 2015, CIPS is a large-value renminbi payments system designed to facilitate and settle domestic and cross-border renminbi transactions.⁷⁸ Built to resolve the inefficiencies of China’s legacy payments system, including the China National Advanced Payment System (CNAPS), CIPS promises to integrate its participants into the existing global financial architecture, while allowing for onshore renminbi clearance and settlement services.⁷⁹

Structured like the Clearing House Interbank Payments System (CHIPS), the US-led interbank payments system, financial institutions are either direct participants, which maintain an account within CIPS, or indirect participants, which engage with the system through relationships with a direct participant. As of December 2023, CIPS boasts 139 direct participants, with foreign participants concentrated within China’s trading partners, and 1,345 indirect participants.⁸⁰ Direct participants have to be incorporated in China. However, direct participants can be located abroad if they are a subsidiary of a Chinese financial institution In total, CIPS participants span across 113 countries and regions around the world.⁸¹

CIPS’ stated goal is to improve efficiency and reduce costs associated with international renminbi settlements. Beijing aspires to make it an integral part of the world’s existing financial infrastructure. Unlike CNAPS, CIPS is directly interoperable with SWIFT and uses the ISO 20022 international payments messaging standard. However, CIPS’ potential as a replacement to the US-led global financial plumbing has not gone unnoticed. Experts in China noticed US efforts to disconnect Iran from SWIFT in 2012 and threats to take similar action against Russia in 2014. Fearful that the United States may eventually consider similar actions against China, some have argued CIPS may be more important as a tool to protect Beijing’s national and economic security.⁸² Recent actions by the G7 against Russia to follow through and disconnect ten Russian banks from SWIFT have amplified these fears.⁸³ As a result, while CIPS does reportedly utilize SWIFT for around 80 percent of the transactions it processes,⁸⁴ among CIPS’ direct participants, it does maintain an alternate communications channel.

Due to its capacity to operate independently with its direct participants, even in a maximalist-sanctions scenario similar to G7 actions against Russia or US sanctions against Iran, CIPS can continue to function and process bank-to-bank transfers. CIPS provides meaningful insulation for the Chinese financial system as well as means to easily engage with willing partners abroad either through CIPS’ current roster of direct participants or by onboarding new ones.

There is also little question CIPS can scale to meet China’s needs in the face of Western sanctions. When looking at CIPS’ support for renminbi internationalization efforts, especially in the context of sanctions, it’s critical to disaggregate Chinese goals to encourage international use of the renminbi from building resilience against potential G7 sanctions. At the end of 2023, CIPS processed around 3 percent of the total value that passes through CHIPS.⁸⁵ This transaction volume is well short of what Beijing would need to legitimately challenge the dollar as the dominant currency of international commerce. However, taken along the far narrower goal of building a payments network that remains operational for trade and basic financial transactions in the face of economic sanctions, Beijing has succeeded.⁸⁶ CIPS has the capacity and resilience to manage and onboard China’s global economic relationships in the event of maximalist G7 sanctions. While CIPS processes a fraction of the total value that passes through CHIPS, this is already adequate capacity to cover China’s total goods trade in the event Beijing is removed from SWIFT. In Q3 2023, CIPS processed, on average, $51 billion in transactions a day. Chinese total imports and exports over the same period amounted to an average of around $17 billion a day. Restrictions and transitional pain points will primarily stem from Chinese trading partners’ willingness to engage with the system.

Digital currency and e-CNY

In 2017, China established the digital yuan project, a CBDC, with the stated goal of facilitating cross-border transactions and reducing reliance on traditional payment systems. Mu Changchun, the director of the Digital Currency Research Institute at the PBOC, discussed expanding the scope of Project mBridge to eventually “formulating a road map to develop an influential cross-border payment infrastructure.”⁸⁷ In the context of a Taiwan crisis, policymakers should consider China’s advancements and ambitions in both retail and wholesale CBDCs and how these platforms could be leveraged to mitigate the effect of potential Western sanctions.

China’s retail CBDC project focuses on enabling Chinese individuals and businesses to use the digital currency for everyday domestic transactions and creating a network of state-enabled payments.⁸⁸ Common use-cases of the retail e-CNY include public transportation, integrated identification cards, school tuition payments, tax payments, and refunds.⁸⁹ Currently, the domestic pilot project has 13.61 billion renminbi in circulation with 260 million digital wallets.⁹⁰ However, this project has limited ability to help internationalize the yuan and serve as a means of sanctions evasion given its domestic focus.

China’s wholesale CBDC projects are different. Phase 1 of Project mBridge started in 2021 as a joint experiment with the central banks of China, Thailand, the United Arab Emirates, and the Hong Kong Monetary Authority (HKMA), and select commercial banks within these jurisdictions, as well as the Bank for International Settlements (BIS) Innovation Hub.⁹¹The project was initially designed to create a common infrastructure that enables real-time crossborder transactions using CBDCs. In the current version, the project connects over twenty banks across the four jurisdictions, reducing the reliance on the correspondent networks utilizing the dollar.⁹² mBridge can be understood as an upgrade to the current cross-border payments technology, and if implemented at scale could deliver efficiency, speed, and security to international payments outside of dollar-based networks. In October 2022, the project successfully conducted 164 transactions, settling a total valued at $22 million, with almost half of all transactions in e-CNY.94⁹³ This was the first successful test of a wholesale CBDC with actual funds and concluded Phase 1 of the project.⁹⁴

In Phase 2 of the project, China and the BIS will expand the mBridge participants. As of January 2024, twenty-five central banks have joined the project as observing members and additional countries are interested in joining this expanding network.⁹⁵ mBridge is organized in a three-tier participation structure.⁹⁶ The first level is the project’s founding members: China, Thailand, Hong Kong, and the UAE. The second level consists of eleven anonymous central banks engaged in mBridge’s sandbox testing; notably, the Central Bank of Türkiye has announced its involvement in testing. mBridge’s sandbox offers a secure environment for central banks to experiment with simulated nodes and transactions. The third tier consists of observing members, which includes the IMF, the World Bank, and fourteen additional central banks. The value of a payments infrastructure lies in the network effects it generates for participants. As more central banks join, this infrastructure becomes increasingly efficient.⁹⁷ China has also announced plans to integrate traditional payment systems like real-time gross settlement systems or fast payment systems with mBridge, so that central banks can issue their own CBDC on mBridge without creating their own CBDC infrastructure.⁹⁸

Transactions on this payment infrastructure are conducted outside of the US dollar and therefore outside of US sanctions influence. As a result, mBridge can offer an alternative cross-border settlement system to jurisdictions looking to bypass US sanctions or compliance with US anti-money laundering/countering the financing of terrorism regulations. Therefore, mBridge could serve as an alternative financial channel that could be leveraged in the event of a Taiwan crisis—especially as an option for jurisdictions that may be reluctant to join Western sanctions and/or “fence-sitting” economies that rely significantly on Chinese import and export markets. In a crisis scenario, China could also evade secondary sanctions and still maintain access to critical commodity markets and energy products.

There have been changes in technology that also reflect Beijing’s influence on the cross-border project. Until recently, mBridge was running on a proprietary blockchain based on Ethereum’s Solidity language and developed by “central banks for central banks,” unlike other CBDC initiatives that run on blockchains built by third parties.⁹⁹ However, in November 2023, Chinese media reported that mBridge will be transitioning to the Dashing protocol, which was developed by the PBOC’s Digital Currency Research Institute and Tsinghua University.¹⁰⁰ The specific program language has not been announced, but the protocol could achieve higher scalability and lower latency. This shift underscores how much China remains the center of mBridge as the project designer, manager, and main trading partner.

There is also a lack of US- or dollar-based alternatives to mBridge. Despite the dollar comprising more than 70 percent of SWIFT messages worldwide in 2023, there is currently no equivalent Western or G7 digital currency or platform to counterbalance the advantages presented by mBridge, including faster settlement and reduced transaction costs. This is a significant gap in the emerging digital financial ecosystem, which provides China with an opportunity to use this infrastructure to encourage more countries to opt for faster and more cost-effective transactions, and then turn to this system during a sanctions scenario.

While mBridge has significant potential to serve as a cross-border payments alternative for China, it is currently in the experimental stage—its scalability and wider adoption in real-world scenarios remains uncertain. Experts have projected that mBridge’s current capabilities are limited to facilitating roughly $190 million in transactions annually, which limits Beijing’s ability to shift flows in the event of a crisis in the short term.¹⁰¹ In the medium term (three to five years), the project can potentially be leveraged to shield China’s financial system. In 2022, the total trade volume between the four founding mBridge members was $540 billion—if China moves just 5 percent of these flows to mBridge it could facilitate trade up to $27 billion.¹⁰² Moving the mBridge consensus protocol to Dashing would also improve the efficiency of the project by increasing the number of transactions per second. However, liquidity remains a major concern for the scalability of mBridge. To facilitate large-scale cross-border transactions daily without dollars or euros would require a change in the current currency settlement system. However, at least for a shortterm crisis and for specific transactions that would fall under sanctions, mBridge can help the Chinese financial system and its commercial banks maintain liquidity.

mBridge, along with CIPS (see below), can potentially augment China’s ability to respond in a Taiwan crisis scenario. Despite its growth over the last two years, CIPS’ capability is limited by its reliance on SWIFT. Participants can message each other through the CIPS messaging system, but 80 percent of transactions on CIPS rely on the SWIFT infrastructure for translation.¹⁰³ As a result, China might pivot toward strengthening the role of digital yuan and mBridge in its international payment networks, hoping to maintain transactional flows and mitigate the impacts of any restrictions on CIPS. Ultimately, China is likely to rely on both networks in a crisis to mitigate sanctions through multiple avenues.

One way to understand China’s goal with CIPS and its linkages with SWIFT is that by adding more banks to both networks China is making it more difficult to sanction the Chinese banking system without enormous repercussions to trading partners all over the world. Instead of a sanctions shield, like mBridge, CIPS expansion can be thought of as a leverage point to discourage sanctions.

There is growing interest around the world in finding alternatives to the dollar-based messaging and settlement systems. China is meeting this demand while also serving its own goals of internationalizing its currency and providing a hedge against sanctions. The development of the e-CNY and mBridge project provide Beijing with new options to circumvent a potential international sanctions regime in a Taiwan crisis. This makes the timing of a crisis critical. Without a change in current dynamics, the impact of sanctions today on China’s economy could be far more significant than the impact in three to five years when mBridge has become fully operational with additional countries as partners.

Prospects for future expansion of international Renminbi

While China has struggled to increase the attractiveness of the renminbi in overseas markets, there are certain political initiatives Beijing can take to increase the currency’s utility to third parties, and to expand participants in mBridge and CIPS. One of these is the use of currency swap arrangements to administratively offer pools of liquidity in renminbi for trade settlement or financial transactions in other countries. Another would be to offer concessionary lending to third countries in renminbi, for overseas infrastructure or Belt and Road Initiative-related projects, which can improve liquidity in overseas markets but may also require the borrower to spend or convert many of the proceeds back in China or with Chinese firms who can accept the renminbi.

Other options for Beijing include more ambitious concepts such as the use of a BRICS currency, which emerged as a topic of discussion during the last BRICS summit in South Africa in August 2023 and will continue to be a key area of policy exploration under the Russian BRICS presidency in 2024.¹⁰⁴ Any creation of a BRICS currency would necessarily require China’s participation, and given China’s economic weight within the group of countries, a BRICS currency would be almost equivalent to an offshore renminbi. The basic challenge persists, though, in that a BRICS currency could not provide any meaningful insulation from Western economic statecraft. Most of the BRICS countries, including China, run trade surpluses, so unless China dramatically increased imports from these countries, these countries would continue to export to Western economies, most likely using US dollars, and accumulating US dollars that would need to be cleared via US-domiciled accounts.

Beijing is also using the Shanghai Cooperation Organization (SCO) to advance non-dollar-denominated financial systems by promoting the use of local currencies like the renminbi in international trade and finance. Chinese leaders have supported the creation of an SCO development bank and have advocated for measures to increase local currency settlements including through improving local-currency cross-border payment and settlement systems as well as bilateral currency swaps arrangements.¹⁰⁵

The problem with the BRICS currency and Chinese efforts at the SCO speak to the larger limitations on the accumulation of offshore renminbi. As long as China runs a trade surplus, globally, then renminbi remains scarce, and remains inside China itself. Only by running a persistent trade deficit would renminbi end up circulating more regularly outside of China, and therefore create incentives for other market participants to hold renminbi-denominated assets. Otherwise, renminbi must spread through outbound investment, outbound lending, or currency swap arrangements, all of which must be negotiated with Chinese commercial banks or the central bank, rather than proceeding entirely via market transactions. The conundrum for Beijing is that should China run a persistent trade deficit or face persistent capital outflows, China’s currency would remain less attractive than other alternatives, because these forces may reduce the value of the currency over time. But those are also the only channels through which renminbi can significantly increase its circulation outside China.

Policy constraints on expansion of renminbi financial networks

China could meaningfully expand the international use of its currency by opening its capital account more rapidly to both capital inflows and outflows. The fact that the currency is not fully convertible meaningfully limits its usage, because market participants cannot exchange the currency freely for others, nor participate freely in Chinese financial markets. Beijing has significantly liberalized its own financial markets and allowed more foreign participation, but this has primarily been focused on maintaining inflows, rather than permitting outflows. There are still considerable restrictions on daily transaction volumes through China’s Bond Connect and Stock Connect programs, which permit two-way flows via Hong Kong.

However, fully liberalizing China’s capital account would bring a slew of additional financial risks, which explains Beijing’s reluctance to commit to greater opening. China has maintained a closed capital account for years, while the world-leading money supply has expanded to over $40 trillion, even though 98 percent of China’s monetary assets are denominated in renminbi. Currently, Chinese citizens are limited by the $50,000 annual quota on per capita foreign exchange conversions, and corporates are limited by a series of restrictions on outbound investments and rules limiting access to foreign exchange. These capital controls do not completely prevent conversions into foreign assets, but they slow down these flows considerably. Liberalization of the capital account would likely permit more inflows, but at the cost of much faster potential outflows, which may trigger significant liquidity problems within China’s financial institutions and significant pressure on the renminbi to depreciate. And such depreciation pressure would meaningfully reduce the attractiveness of the currency to overseas investors.

Implicit within these limitations is a broader problem of trust and credibility in Chinese policymaking. To hold an asset denominated in renminbi implicitly involves some degree of confidence in the longerterm value of the currency, the stability of China’s regulatory environment, and the credibility of China’s policymaking process. That policy credibility takes years to accumulate, but can be disrupted rapidly, through actions such as the crackdowns on IT firms or education and tutoring firms in 2021, or the botched efforts to bail out the equity markets, both in 2015 and earlier this year.¹⁰⁶ These campaigns and crackdowns were highly adverse to foreign investors’ interests and raised questions about the ultimate intentions of China’s leadership to maintain economic growth and preserve an attractive climate for foreign investment. The same concerns among investors can emerge over geopolitical issues, such as China’s alignment with Russia after the invasion of Ukraine, which has cost China considerable credibility as an attractive economic partner or investment destination. As China’s political system has become more centralized, and campaign-style governance has become more common, it is more difficult for economic technocrats to send countervailing signals that campaigns have ended and normalcy has returned.

All of these constraints limit Beijing’s capacity to develop highly liquid and credible markets for its currency outside of China itself. As a result, China’s financial institutions remain dependent upon the US dollar at the same time as Beijing attempts to expand alternative financial networks in renminbi. Even while many states may seek an alternative to the US dollar system, Beijing faces meaningful limits in its capacity to provide that alternative, without jeopardizing financial stability in China itself.

Responding to G7 economic statecraft in a crisis

The concerns outlined above are longer-term in nature. The immediate question looming for Beijing is what China can plausibly do now if G7 countries initiated some of the economic sanctions and other statecraft measures discussed in the scenarios above. And Beijing does have some meaningful options, simply because most of the renminbi-denominated financial networks can still be used on a limited basis, even if they are unattractive for large volumes of conventional economic transactions.

The first and most obvious step would likely be to route trade transactions involving energy sources and critical commodities imports via countries that were unlikely to cooperate with G7 sanctions or export controls. This would also likely involve the use of the renminbi as a payment currency, which is plausible since many of the commodity exporters to China are likely already receiving renminbi from their Chinese customers. The third-party exporters to China could then be subject to secondary sanctions in some cases, but this would likely involve a significant escalation in targets from G7 countries. Most of this trade activity is likely to continue in spite of Western sanctions on China.

The second measure includes currency intervention, openly selling US dollars in order to shore up the value of China’s currency and reduce near-term pressures for capital outflows that would likely intensify as sanctions were imposed. Currency stability would likely be necessary to maintain Beijing’s capacity to use alternative financial networks in a crisis scenario, to prevent third countries from facing pressure to sell their renminbi and avoid the currency because of sanctions risks. This may appear in Western financial markets as China “dumping” US Treasuries or other US dollar-denominated assets, but the nature of this operation would be to maintain ammunition to stabilize China’s currency.

Third, Beijing can reallocate critical trade and financial transactions with the rest of the world through very large or very small financial institutions. Small financial institutions may be sanctioned, and lose access to US dollar clearing facilities, but these limits are unlikely to have significant implications for financial stability in China, and can shift to other institutions as necessary. Larger financial institutions are more difficult to sanction because of the potential for significant disruptions in regular trade activity with Western markets, and the potential for sudden dislocations in global supply chains. Shifting more critical transactions to larger state-owned banks such as the Bank of China or Industrial and Commercial Bank of China, for example, would be a more difficult secondary sanctions target for Washington.

In terms of rapidly accelerating the development of renminbi-denominated financial networks, Beijing may struggle to react quickly and effectively. More participants from third countries can certainly be admitted into CIPS, more central banks can be linked to mBridge, and more CBDC can be issued, of course. Beijing can suspend cooperation with SWIFT altogether, including within CIPS. But these are not the primary limits on the utilization of these networks, which remain the liquidity and attractiveness of renminbi financial assets, and the limits Beijing places on convertibility of the renminbi. The imposition of G7 sanctions would likely intensify these problems for Beijing, given the rising political costs of third countries in economic engagement with China, rather than catalyzing faster growth of renminbi-denominated financial networks.

Beijing’s responses to different types of crises

As discussed previously, the level of escalation and the mechanics of the scenarios involved will also influence the level of Beijing’s response and attempts to circumvent sanctions. Moderate escalation as defined in this report would suggest that Beijing will attempt to maintain the perception of normalcy in its international financial engagement, leaving channels open for capital inflows into China’s equity and bond markets. The exchange rate would likely be under pressure but within the capacity of the central bank to stabilize conditions, and under most circumstances, it would be in Beijing’s benefit to project financial stability. China would likely try to shift sensitive trade and financial transactions to smaller banks at less risk of international sanctions or restrictions.

Renminbi-denominated international financial networks could become more active in a moderate-escalation scenario, precisely because Beijing would not be facing widespread restrictions on trade, and would be attempting to portray Western sanctions as unreasonable and overreactions, demonstrating the lack of credibility in US and G7 economic policy. Beijing would likely attempt to sign up additional countries’ financial institutions to networks such as CIPS and mBridge, and channel trade and wholesale financial transactions through those networks. Renminbi-denominated central bank swap lines to friendly countries could also be expanded under these circumstances to improve liquidity conditions for renminbi-denominated trade transactions.

In a high-escalation scenario, the renminbi would presumably already be under considerable pressure and would be weaker against the US dollar, and the PBOC would not be as interested in maintaining a certain level of the currency (while also trying to prevent an outright currency collapse). Since this scenario assumes widespread restrictions on China’s financial institutions, it is probable that third countries would be cautious about engaging with China’s renminbi-denominated financial networks for fear of potential secondary sanctions. Furthermore, it is more likely that the pressure on the renminbi would reduce the attractiveness of engaging in trade transactions via China’s international financial networks. More probably, these transactions would be limited to those conducted with Beijing’s explicit political guidance.

Supply and demand of alternatives to the dollar-based financial system

Demand for alternatives to the dollar-denominated financial system are shaped by a desire to mitigate the impact of possible Western sanctions and reduce transaction costs associated with utilizing dollardenominated cross-border payments systems. The G7 and its partners levied unprecedented coordinated sanctions against Russia in response to Russia’s invasion of Ukraine. However, several governments maintain economic and political relationships with Russia. These “fence-sitter” governments, which include BRICS and Gulf countries, have not joined the sanctions campaign and are exploring alternatives to the dollar and euro in order to continue their economic relationships with Russia.¹⁰⁷

The United States and its allies’ perceived willingness to use tools of economic statecraft in the event of any conflict shapes the urgency with which countries are pursuing these alternatives.¹⁰⁸ Similar to G7 economic initiatives to de-risk or pursue China+1 goods supply chain initiatives, nonaligned capitals around the world are also interested in analogous financial hedges.¹⁰⁹ Their efforts are not necessarily meant to supplant the dollar as the dominant international currency but are designed to safeguard their economies in a crisis scenario. It is important to recognize that different countries within the BRICS, for example, have varying motivations and levels of interest in de-dollarization. It is therefore more useful to evaluate de-dollarization efforts on a country-by-country basis as the Atlantic Council has done in its Dollar Dominance Monitor.¹¹⁰

Countries are also striving to reduce dollar usage in cross-border payments because of potential efficiency gains brought about from local currency settlement, or, in the case of China’s trading partners, renminbi trade settlement. This is particularly prominent in Association of Southeast Asian Nations (ASEAN) member states whose central bankers have long taken issue with the inefficiencies and risks incurred by their reliance on the dollar for regional trade and finance.¹¹¹ Currently, most high-value crossborder dollar payments are settled through the US-led CHIPS system. However, because only one ASEAN member state’s bank—Thailand’s Bangkok Bank Public Company Limited—is a direct participant in CHIPS,¹¹² most dollar-denominated financial flows have to rely on correspondent banking relationships where local institutions maintain accounts with institutions that are members of CHIPS. This financial intermediation incurs costs on traders and financial institutions generating financial motivations to advance dollar alternatives.¹¹³ Still, the network effects associated with dollar dominance are considerable, and dollar alternatives may not be readily available or cost effective.¹¹⁴ So while ASEAN countries, for example, are exploring new systems to directly link national payments systems as an alternative to correspondent banking,¹¹⁵ policymakers in the region face considerable headwinds to develop an alternative that is cheaper than established US dollardenominated financial networks.

Foreign exchange markets are one such example. Countries interested in local currency settlement still must utilize foreign exchange markets to convert their domestic currency to their partner’s. However, G7 currencies, led by the dollar, make up nearly 85 percent of all foreign exchange transactions globally.¹¹⁶ With emerging market currencies comprising just 8.9 percent of all foreign exchange transactions, markets for non-dollar currency pairs are mostly underdeveloped. Low volumes for local currency settlement increase the gap between buying and selling rates (the bid-ask spread). For example, in Asia, where ASEAN governments have made a concerted effort to close this gap and increase cross-border local currency use, the bid-ask spread can still be more than double what traders pay for a transaction involving the local currency against the dollar.¹¹⁷ This can counteract the dollar transaction costs incurred by financial intermediation, reinforcing the role of the dollar.

To decrease local currency transaction costs between China and its trading partners, Beijing is actively providing additional pools of renminbi offshore to improve liquidity. During the summer of 2022, the PBOC and the HKMA upgraded their currency swap line to a standing arrangement, providing offshore renminbi markets with stable, long-term liquidity support. The PBOC has also encouraged other regional central banks, namely the Monetary Authority of Singapore, to utilize its renminbi swap funds to enhance the liquidity of their own renminbi markets. The PBOC has suggested it will continue to improve offshore renminbi liquidity through additional supply arrangements.¹¹⁸

Geoeconomics and transactional efficiency gains must reinforce each other for meaningful supplies of dollar alternatives to emerge. The immense network effects of the dollar mean that governments must foot some of the bill, as Beijing and its financial system is doing to develop renminbi foreign exchange markets. These costs can be more easily justified when there is a legitimate national security concern. While the Russia sanctions have accelerated interest in efforts to find dollar alternatives, many of these initiatives are still years away from having enough demand from China’s partners to be useful and effective at scale. However, in the aftermath of a Taiwan crisis, and a sanctions package from the G7, it is likely countries would increase efforts to build these systems both between each other and with China. However, if G7 use of financial statecraft instruments becomes more infrequent or guidelines are adopted to constrain them, there will be less incentive and momentum to develop and adopt alternatives.

Assessing China’s capacity to respond to G7 statecraft

The costs of any Taiwan crisis scenario that threatens to spiral into broader conflict between China and the United States are so large that it may seem trivial to draw finite distinctions between these scenarios, or break down where costs are likely to be most severe. But understanding how China is likely to respond to G7 economic statecraft can help policymakers prepare to minimize those costs, while also outlining alternative paths to avoid conflict by emphasizing that the G7 understands the scope and range of China’s economic second-strike capability. Respect for the damage that both G7 and Chinese economic statecraft can impose can help both sides walk back from the brink of a Taiwan crisis.

The timing of any scenario is also critically important, given how policy is currently evolving in both Western democracies and in Beijing to improve the range of choices in the event of a crisis. The process of de-risking and diversification of supply chains is likely to marginally reduce China’s capacity to practice critical elements of economic statecraft via trade and export restrictions over time. But in finance, policy is trending in the opposite direction, with China’s renminbi-denominated financial networks likely to continue to expand in scope and liquidity, providing more alternative options for China to potentially circumvent US or G7 statecraft tools. A Taiwan crisis in a year’s time will present both sides with far different options and concerns about costs relative to a scenario in five years’ time.

The impact on trade and FDI

One of the principal arguments of this study is that China is armed with powerful statecraft options relating to trade (both imports and exports) and foreign investment (particularly inbound FDI), but that the expansive use of these tools in a moderate- or high-escalation scenario comes with steep economic and reputational costs. Prior geopolitical incidents have shown China to have a wide array of formal and informal tools available, but it has generally used these tools in a targeted fashion: on single firms or industries, or smaller trading partners. China is expanding the legal foundations for these tools. China’s Anti-Foreign Sanctions Law, anti-blocking statute, and expanding export control regime serve to highlight Beijing’s leverage in trade and direct investment with G7 countries.

In an escalation over Taiwan, China has the capability to expand the use of these coercive tools. Trade-related tools would likely focus first on restricting access to China’s market in goods where the costs to China are lower (consumer discretionary goods, easily substitutable goods) and where the relative costs to adversaries are high. Export-related restrictions would likely focus on critical raw materials and key industrial inputs that account for a relatively small share of China’s overall output and employment, but which are difficult for other countries to replace or do without. Investment-related tools would likely begin with disrupting MNC operations through investigations, audits, and interfering with data and financial flows. In a higher escalation scenario, all of these tools could be scaled up further, up to near-total trade restrictions and seizure of MNCs assets in China.

But using these tools, even in limited ways, comes with immediate costs to China. China’s economy depends in large part on the contributions of foreign firms and export-oriented manufacturing. It also carries longer-term costs from frightening off global investors worried about China’s “investability” due to macroeconomic and geopolitical risks. In short, though these coercive tools exist, their use comes at a cost that Chinese policymakers will be loath to bear.

More germane in a moderate-escalation scenario will be China’s usage of positive trade and investment inducements to create cracks in G7 unity on economic sanctions or restrictions, in combination with other restrictions on market access. Beijing may combine measures to restrict market access for one country while offering preferential access to another. In conditions where countries adopt unilateral sanctions against China, China is likely to seek opportunities to undercut alignment by focusing countersanctions solely on that country and offering positive inducements to other G7 countries or the broader G20.

Beijing’s response will also ultimately depend on China’s central position within global supply chains, and as a node in $5.9 trillion in annual global trade activity. Gradual de-risking and diversification of global investment will shift this position, even if the outright volume of China’s trade with the rest of the world remains at a high level and China continues to provide intermediate goods to newer manufacturing centers.

Financial statecraft and consequences

Beijing’s capacity to retaliate against G7 economic statecraft using financial tools alone is limited, and far less consequential for the global economy than Chinese statecraft’s impact on trade and FDI activity. More important are Beijing’s efforts develop alternatives to the dollar-based system financial infrastructure to withstand Western sanctions in the future.

Certainly, Beijing has the ability to impose financial sanctions on Western banks and firms. In a crisis, Beijing is likely to impose stricter capital controls in ways that disrupt financial investments in China, although the primary purpose of these tools would be to prevent destabilizing capital outflows rather than punish foreign investors. Beijing also exerts considerable influence over countries that have borrowed from state-owned banks or received other preferential credit terms for infrastructure construction in cooperation with Chinese companies. These loans could be withdrawn or renegotiated quickly, imposing immediate financial concerns for the borrowing country. This is far less relevant a tool in retaliation against the G7 specifically, but could help Beijing to shape the global political environment in the course of an escalating Taiwan crisis.

The greater focus of policy efforts in Beijing is to expand the scope and capacity of renminbi-denominated international financial networks to offset or circumvent some of the impact of G7 financial sanctions or other economic restrictions. These renminbi-denominated networks are unlikely to challenge the US dollar-dominated financial system at any point in the future, in terms of liquidity, global reach, or reducing transaction costs. But Beijing does not need a comparable or fully competitive system in order to preserve alternatives for critical transactions that can bypass US or G7 controls in the event of broader financial sanctions. Beijing is likely to make further progress in expanding the technical reach of these networks via its digital currency pilot programs such as mBridge and adding more banks in multiple countries to CIPS. This can occur even if offshore renminbi liquidity conditions continue to weaken, as China’s currency remains under pressure to depreciate from capital outflows, which would likely intensify considerably in the event of a Taiwan crisis. Ultimately, it is easiest to understand the internationalization of the renminbi as a safety valve for Beijing in the event of a crisis rather than a full-fledged alternative to the US dollar system.

Preventing escalation in economic warfare

In contemplating the use of economic statecraft in a Taiwan crisis scenario, the challenge for policymakers in G7 capitals and in Beijing will be managing escalation, limiting economic costs, and preventing a spillover into broader kinetic conflict. Understanding how Beijing is likely to respond to G7 statecraft tools can thus help to communicate the potential costs of responsive or retaliatory spirals, and assist both sides in stepping back from the brink before ruinous economic costs result. Escalation is a particular concern for financial markets, which are likely to draw simple parallels between any Taiwan-related crisis and the Russian invasion of Ukraine, along with the past G7 sanctions response. The potential costs of escalation will be presented clearly in the very early stages of any crisis scenario.

Beijing’s initial responses to G7 statecraft measures are likely to fall upon predictable ground, in line with the past actions that China has taken in more limited scenarios. The range of those actions detailed in the previous sections is unlikely to surprise G7 policymakers. But there will still be uncertainty about China’s escalatory responses from those initial steps. The revealed capacity of Beijing to respond with policy agility on unfamiliar ground appears limited, based on the current state of economic policymaking. In addition, past episodes of retaliation against economic statecraft seem to value the perception of reciprocity rather than a technocratic skill in targeting a response toward G7 weaknesses. However, there are some notable counterexamples, such as the restrictions impacting specific foreign firms in the semiconductor industry.

As a result, the chances of escalation and rising economic, political, and potentially humanitarian costs will be higher if in addition to Beijing, G7 actions are also seen as unpredictable, rather than following a logic that global policymakers, financial markets, and Beijing can understand. The case for transparency about the enormous costs of even economic restrictions short of military conflict is strong, particularly as tensions over Taiwan have already risen over the past several years.

Similarly, the more frequent usage of economic sanctions and G7 statecraft targeting US dollar-denominated transactions that are central to the global trading system will help to create further global demand for alternative networks, including those managed by Chinese institutions (even as Beijing maintains similar threats of controlling access to these alternative financial architectures). Explicit restraint in deploying the most aggressive restrictions on economic activity can therefore help to reduce the attractiveness of alternative renminbi-denominated financial networks to third countries, and can also weaken China’s potential leverage over global supply chains and trade activity.

As the lines between economic statecraft and military conflict blur, mapping the paths and consequences of escalatory dynamics can help to prevent initial actions that risk policymakers finding justifications to unveil newer economic statecraft tools. But analyzing the steps China has taken in the recent past and anticipating steps Beijing may take in the future can only go so far. China’s economic second-strike capability is considerable, extending into a large proportion of global trade activity. Credible commitments to restraint in the usage of the most aggressive G7 economic statecraft tools can be just as effective as actively threatening their deployment in limiting escalation in a crisis.

Appendix 1: China’s formal economic statecraft toolkit

About the authors

Logan Wright is a partner at Rhodium Group and leads the firm’s China Markets Research work. He is also a Senior Associate of the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. Previously, Logan was head of China research for Medley Global Advisors and a China analyst with Stone & McCarthy Research Associates, both in Beijing. Logan holds a Ph.D. from the George Washington University, where his dissertation concerned the political factors shaping the reform of China’s exchange rate regime. He graduated with a Master’s degree in Security Studies and a Bachelor’s degree in Foreign Service from Georgetown University. He is based in Washington, DC, after living and working in Beijing and Hong Kong for over two decades.

Agatha Kratz is a director at Rhodium Group. She heads Rhodium’s China corporate advisory team, as well as Rhodium’s research on European Union-China relations and China’s economic statecraft. Agatha also contributes to Rhodium work on China’s global investment, industrial policy and technology aspirations. Agatha holds a Ph.D. from King’s College London, having studied China’s railway diplomacy. Her previous positions include associate policy fellow at the European Council on Foreign Relations and editor-in-chief of its quarterly journal China Analysis, assistant editor for Gavekal-Dragonomics’ China Economic Quarterly, and junior fellow at the Asia Centre in Paris.

Charlie Vest is an associate director on Rhodium Group’s corporate advisory team. He manages research and advisory work for Rhodium clients and contributes to the firm’s research on US economic policy toward China. Charlie holds a master’s degree in Chinese economic and political affairs from UC San Diego and a bachelor’s degree in international affairs from Colorado State University. Prior to joining Rhodium, he worked in Beijing as research manager for the China Energy Storage Alliance, a clean energy trade association.

Matthew Mingey is an associate director with Rhodium Group, focusing on China’s economic diplomacy and outward investment, including development finance. Matthew is based in Washington, DC. Previously, he worked on global governance issues at the World Bank. Matthew received a Master’s degree in Global Business and Finance from Georgetown University’s Walsh School of Foreign Service and a Bachelor’s degree from the University of Pennsylvania.

Acknowledgments

This report was written by Logan Wright, Agatha Kratz, Charlie Vest, and Matthew Mingey in collaboration with the Atlantic Council GeoEconomics Center. The principal contributors from the Atlantic Council GeoEconomics Center were Josh Lipsky, Kimberly Donovan, Charles Lichfield, Ananya Kumar, Alisha Chhangani, and Niels Graham.

The GeoEconomics Center and Rhodium Group wish to acknowledge a superb set of colleagues, fellow analysts, and current and former officials who shared their ideas and perspectives with us during the roundtables and helped us strengthen the study in review sessions and individual consultations. These individuals took the time, in their private capacity, to critique the analysis in draft form; offer s uggestions, w arnings, a nd a dvice; and help us to ensure that this report makes a meaningful contribution to public debate. Our gratitude goes to Sarah Bauerle Danzman, Gerard DiPippo, Matthew Goodman, Peter Harrell, Annie Froehlich, Emily Kilcrease, Daniel McDowell, William J. Norris, Daniel Rosen, Dave Shullman, and Hung Tran.

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations.

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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.

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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.

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.

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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Table of contents

Evolution of freedom

The evolution of the Freedom Index for Sub-Saharan Africa closely resembles that of the global average since 1995, with a very mild convergence. The same is also true for the subindexes of economic, political, and legal freedom. This is already good news for the region, as the trends are positive, but this does not capture the full story of freedom development in Africa. This is because the big movement towards liberalization, especially in terms of economic freedom, took place during the 1980–2000 period, so largely before the starting point of the Freedom and Prosperity Indexes data set.

In 1970, all dimensions of economic freedom were extremely low in most of the countries of Sub-Saharan Africa. Figure 1 below shows the evolution of trade freedom back to 1970, obtained from the same source used in the Freedom and Prosperity Indexes (the Fraser Institute’s Economic Freedom of the World index). The average score for the region at the beginning of the period was around 3.8 out of 10, significantly lower than the rest of the world (5.5). In the 1970s, governments were following counterproductive policies such as overvalued exchange rates or quantitative restrictions on trade. These policies were destroying any possibilities to develop an exporting sector because, with an overvalued exchange rate, exports were simply uncompetitive. Exporters would have to turn in their dollar earnings at an artificially low rate and, in many cases, they would have to resort to the black market to buy their imports. The number of countries in Sub-Saharan Africa with a black market premium above 40 percent was very substantial.

A big wave of economic liberalization took place in the 1980–2000 period, with governments correcting the artificial distortions in their exchange rates and opening trade and financial flows. So, this first dramatic movement towards a more economically free environment is not captured by the economic freedom subindex, which mainly shows what we could call a second wave of liberalization after the year 2000. This has been mainly driven by increasing women’s economic rights, which have clearly improved in some countries of the region, but certainly not all. Investment freedom has also improved in the last ten years, making capital movements more efficient. This is evident when you observe that there are no countries today in Sub-Saharan Africa with black market premiums above 20 percent.

Figure 1. Trade freedom in Sub-Saharan Africa, 1970–2022

Property rights also show a mild improvement in recent decades, but the weak institutional environment portrayed by the legal freedom subindex probably represents the biggest constraint to further improvement nowadays. The very low and stagnant levels of all indicators of legal freedom, especially that of bureaucracy and corruption, impose a significant drag on Sub-Saharan Africa’s development. A critical aspect of legal freedom is security, a very unstable area in Africa. Religious and ethnic conflicts are always a risk in the region, and this generates a high level of uncertainty, which can have negative effects on investment and economic development.

The development of political freedom in Sub-Saharan Africa was not so great as economic liberalization, and the democratic institutional framework is rather weak in those places that transitioned to more inclusive political regimes. This is well captured by the fact that legislative constraints on the executive are significantly lower than the rest of the indicators of the political freedom subindex, and judicial independence is also low, suggesting that proper systems of democratic checks and balances are still not fully developed in most countries.

Overall, the story of the development of freedom in Sub-Saharan Africa has so far been very uneven, in two senses: First, there is large variability across countries in the region. Second, there is large variability among dimensions of freedom. Economic freedom really took off after 1980, but legal and political institutions have not really improved. And this situation imposes a constraint on development because there is complementarity among different areas, so reforms in one aspect need supporting reform in others if they are to be successful in the long run. Moreover, further progress in legal and political freedoms are not just means to achieving higher levels of material prosperity, but are in themselves a measure of well-being, which emphasizes the need for continuing liberalization in these areas.

From freedom to prosperity

The Prosperity Index shows a parallel evolution of the Sub-Saharan African region and the global average. Even if we would hope to see a stronger process of convergence, so that Sub-Saharan Africa would catch up with the rest of the world, parallel trends are already good news for the region. Compared to the situation before the 1980s, where Africa was significantly falling behind the global average, the fact that, in the last three decades, the region has been able to develop at a similar pace to other regions is a clear sign that the economic liberalization of the 1980–2000 period has paid off.

An extreme example of the trends of both freedom and prosperity is Ghana. Figure 2 shows what was happening with exchange rates and black market premiums over the last sixty-two years. By 1982, the real exchange rate had appreciated to a level that was more than one thousand percent higher than it is today. The black market premium on foreign exchange was also above a thousand percent. The consequences were disastrous. Ghana used to dominate the world market for cocoa. By 1982, Ghanaian cocoa growers were receiving only 6 percent of the world price, and cocoa exports had collapsed. Facing famine, Ghanaian leader Jerry Rawlins began reforms in 1984. The government devalued sharply the nominal exchange rate and thereby reduced the black market premium.

Figure 2. Black market premium and real exchange rate index in Ghana, 1960–2022

The economic liberalization coincided with a turning point for Ghana’s economy. As shown in Figure 3, Ghana experienced a sharp decline in per capita income from 1960 to 1983. After the reforms, Ghana registered a steady rate of economic growth that has continued ever since.

Ghana also undertook some political liberalization in 2000, and since then Ghana has had an unbroken series of competitive elections. This may also have contributed to Ghana’s steady growth in the new millennium.

Getting back to Sub-Saharan Africa as a whole, indicators like health and environment show a very rapid improvement throughout the period of analysis. It is true that the starting point was really low, and thus there remains ample room for improvement in the future. Foreign aid, which has clearly been ineffective in other areas, may have helped improve health and sanitation conditions, especially in rural areas. For example, early life mortality has significantly decreased in recent times, which accounts for an important share of the progress in overall life expectancy.

Figure 3. Cumulative logarithmic growth in per capital income in Ghana since 1960

Some progress has also been occurring in education, in terms of convergence with global averages in primary and secondary school enrollment. However, the education indicator of the Prosperity Index, which measures average years of education, does not fully show the region’s convergence towards the rest of the world. This may be due to faster expansions in college enrollment in other regions like Asia and Latin America compared to Sub-Saharan Africa. But the growth in the number of people enrolled in early levels of education in Africa is substantial. Nonetheless, another aspect of education not captured by the Prosperity Index is quality, and this is obviously an issue in Sub-Saharan Africa. When you consider quantity and quality, it is clear that there is still a lot of progress to be made.

The future ahead

The different dimensions of the Freedom Index very well identify the constraints and challenges of Sub-Saharan Africa’s development in the medium and long term. Economic liberalization has borne fruit lately, although further financial and trade integration of the region with the rest of the world should continue. But today the big challenge is to strengthen the process of democratization and institution building, and the necessary reforms in these areas are much harder to accomplish. The recent wave of military coups is not a promising sign, and there is ongoing conflict associated with Islamic movements in some areas. So, the situation regarding security and the maintenance of peace is a necessary condition for Sub-Saharan African development.

I think there is probably not going to be as much support for African development from international institutions and foreign countries as there was in the past (particularly in the 2000s), because there is a shift of focus towards other regions, like Ukraine and Eastern Europe. Also, I assume that the Israel-Hamas War will continue to focus attention towards the Middle East. Usually, things tend to go in cycles. I do not think that foreign support was all that successful in achieving economic growth, but aid probably deserves some of the credit for the progress on health and education, especially.

In relation to foreign influences in the region, I do not think that China’s Belt and Road Initiative will have very different results than the significant amounts of funds received by Sub-Saharan African countries from Western nations during the 1980–2010 period. Moreover, I think the same problems of debt repayment and default are likely to be repeated, this time with China’s investments. At the end of the day, for foreign investment and aid to successfully affect Africa’s economic development, it has to be directed to some productive uses. And this is not usually the case with this kind of heavily politicized financing.

Finally, the efforts to deepen economic and financial integration within the region are probably a good idea, as within-region trade is unusually low for neighboring countries in Sub-Saharan Africa. But it is certainly not an easy task, as the several unsuccessful attempts to promote free trade areas or common currencies in the region in the last several decades prove. This failure may be due to Africa’s burden of having too many countries, some of them very small states. This generates great difficulties in reaching agreements because there are multiple strong political interests. Institutional development and democratic reform may help in this sense, as deeper integration among African nations would probably benefit the majority of the population.

William Easterly is professor of economics at New York University. He is the author of The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor (2014), The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (2006), and The Elusive Quest for Growth (2001). He has published more than 70 peer-reviewed academic articles.

Trackers and Data Visualizations

Jun 15, 2023

Freedom and Prosperity Indexes

The indexes rank 164 countries around the world according to their levels of freedom and prosperity. Use our site to explore twenty-eight years of data, compare countries and regions, and examine the sub-indexes and indicators that comprise our indexes.

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This trend reflects both opportunity and necessity. The era of hyperglobalization is over, but the world economy remains more connected than ever, providing nations the opportunity to break linkages of trade, capital, and technology (or threaten to do so) for geopolitical advantage. At the same time, we have entered the most intense period of great power competition since the Cold War ended, with Russia and China expressing a shared desire to upend the US-led international order. Since today’s “great powers” are also nuclear powers, barring catastrophic miscalculation, the logic of mutually assured destruction suggests that direct confrontation is more likely to play out in the theater of economics than on the battlefield.

The implication is that economic statecraft will remain a fixture of foreign policy—filling the policy space between war and words when conflicts emerge. But for economic statecraft to have maximum effect, it should be grounded in a doctrine that animates the United States’ guiding purpose to enhance global prosperity while safeguarding national security. Indeed, while the United States has spent hundreds of years developing and refining its doctrine for military engagement—for example, by identifying “containment” as the strategic anchor at the dawn of the Cold War—the effort to formulate a grand strategy for economic statecraft has only recently begun.

A doctrine of economic statecraft

Laying down a doctrine would serve multiple objectives. If taken seriously, it would limit overreach in the use of restrictive or punitive forms of statecraft. It might also reassure other countries that the world’s leading economic power is not firing economic weapons in an arbitrary or reflexive manner. Most profoundly, it could promote balance in the conduct of statecraft—specifically, between measures that impose economic pain and those that offer the prospect of mutual economic gain—and in doing so, enhance the credibility of economic statecraft and help to bring geopolitical “swing states” into strategic alignment.

Recent events underscore the urgency of this effort. Two years after the start of Russia’s full-scale invasion in Ukraine, more than two-thirds of the world’s population lives in countries that have not joined the sanctions coalition. Some officials from nonaligned countries have voiced concerns about the efficacy of sanctions, arguing that the costs of breaking linkages in the global economy exceed the benefits of changing Russian President Vladimir Putin’s calculus on the battlefield. Others have pushed back with the unfortunate perception that sanctions represent an illegitimate exercise of (mostly the United States’) brute economic force.

These concerns deserve careful attention—first on the merits, but also because the force of sanctions greatly depends on the size of the coalition implementing them. The bigger the sanctions coalition, the higher the direct impact of those sanctions and the lower the opportunity to evade them.

The elements of doctrine: Principles, rules, and a code of conduct

What would be the core elements of a doctrine for economic statecraft? It would begin by laying down guiding principles for restrictive or punitive tools. Illustratively, these principles could include the following:

1. They should be used sparingly, and only when shared global interests of peace and security are under threat.
2. They should seek to avoid unnecessary spillovers to civilian populations of the target country and third countries.
3. They should be calibrated to maximize the chance of coordination with like-minded partners.
4. They should be designed flexibly so that the impact can be ratcheted higher or lower depending on the target’s response.
5. They should be sustainable for the United States and the global economy, recognizing that these measures are typically designed to generate impact over the long term.
6. They must pass a threshold of efficacy; the impact delivered to the target, and the likely influence on the target’s behavior, must be judged as sufficient to justify the economic costs and risks (relative to the next best alternative).
7. Their design and implementation must be infused with a sense of humility. By design, sanctions break the bonds of trade, capital, and technology in the global economy—sometimes instantaneously—making unintended consequences almost inevitable. Humility requires us to change our minds when we’re mistaken in our judgments or assumptions, admit when we’re wrong, and course correct as needed.

A doctrine of economic statecraft should also set out rules of engagement to govern why, when, what, how, and against whom restrictive measures are deployed.

• Why refers to the need for a clearly defined geopolitical objective that sanctions, export controls, or tariffs are designed to serve.
• When refers to the timing of deploying statecraft—the standards for doing so before, during, or after a trigger event. It also considers when and under what conditions these measures should be rolled back.
• What is all about the limits of what the United States will do, and especially what it won’t contemplate—for example, sanctions on food and medicine, or seizing private property without due process.
• How points to the circumstances in which the United States would be willing to deploy sanctions unilaterally if it is unable or unwilling to build a coalition.
• Against whom delineates how the United States thinks about deploying sanctions on private citizens and private companies, as opposed to technocrats, government officials, military personnel, and political leadership.

A third prong of an economic statecraft doctrine would be a code of conduct. Practitioners of statecraft should commit to standards of behavior that uphold the principles and rules outlined above. There should be a pledge of caution to “do no unnecessary harm” to the civilian population of the target country and to those of third countries. In the spirit of humility, practitioners should also commit to follow an evidence-based and unsentimental approach that challenges lazy narratives, strives to imagine the full distribution of possible outcomes, and helps policymakers see their blind spots. Lastly, there should be a pledge of transparency and accountability—to Congress and the broader public—that would involve documenting decisions, sharing the rationale for key judgments, and providing updates on progress or setbacks. 

Operationalizing doctrine: Upgrading the analytical infrastructure

Taking such a doctrine seriously requires an upgrade to the analytical infrastructure of the US government to make it fit for purpose. I would recommend that several actions feature prominently in this effort:

To start, take regular inventory of the tools for economic statecraft that are deployed across various US government agencies and departments: sanctions, export controls, tariffs, investment restrictions, price caps, and so forth. Central banks such as the Federal Reserve maintain an inventory for the range of tools at their disposal—including updates on their operational readiness—and so should government entities with authority to execute economic statecraft.

Second, at regular intervals, assess the historical efficacy of these tools, when used alone or in tandem, unilaterally or multilaterally, before or after a trigger event.

Third, study the historical spillovers from using these tools, with the objective of identifying limitations and tradeoffs when using them.

Fourth, stress test and wargame the tools of economic statecraft against simulated scenarios that imagine a multiplayer, multistage conflict transpiring globally over several years. The test should begin by assessing where the United States’ economic strengths (and those of its allies and partners) intersect with the target’s vulnerabilities, and vice versa. It should evolve into a continuous process that identifies where the United States needs to strengthen or invent new tools, new defense mechanisms, and new forms of coordination to prevail in an extended conflict.  

Fifth, anticipate how and where evasion is likely to occur and build readiness for countermeasures in real time, whether by tightening the screws on the target or by applying outsize penalties on violators to generate a more powerful deterrent to evasion.

Sixth, build surveillance practices that inform the design of economic statecraft. Central banks across the world have developed exercises to spot vulnerabilities in the financial sector, test the financial system’s liquidity and capital buffers against shocks, and locate vectors of contagion. Practitioners of economic statecraft should build an analogous discipline to monitor risks to economic security, for instance by testing the resilience of critical supply chains, assessing the capacity for domestic stockpiles or imports from abroad to boost availability of vital supplies, and building early warning systems with trusted partners to detect emerging chokepoints.  

Creating analytical infrastructure with this kind of ambition will likely require a step change in personnel. One approach would be to recruit a multidisciplinary SWAT team of specialists—centralized either within the Executive Office of the President or a newly established Department of Economic Security—with expertise in macroeconomics, critical supply chains, financial markets, capital flows, trade finance, diplomacy, and the law. The unit will need sufficient scale, scope, and absorption capacity to handle multiple crises at once. It must be accountable to Congress, including through semiannual testimonies. And it needs to develop connective tissue with allies and partners—both existing and potential ones—as well as stakeholders in the private sector and regulatory community, so that it can coordinate and execute quickly in the crucible moments of conflict.  

Regulators will also need to do their part. For example, the Federal Reserve Board could designate a governor with the standing responsibility to evaluate the impact of existing and prospective policies of economic statecraft, drawing on the analytical insights of board staff and those of the Federal Reserve Bank of New York.

The conduct of economic statecraft: Toward a positive vision

Changing the narrative on economic statecraft will ultimately require more than just doctrine and analysis. The most important step policymakers can take in this regard is to strike a deliberate balance in the conduct of economic statecraft. Specifically, the United States should convey a standing preference for using economic instruments when they positively induce and attract countries via the prospect of mutual gain, rather than feed a perception that the United States’ focus and energy is mostly spent on deploying tools that are designed to inflict economic pain. Debt relief, concessional lending, infrastructure finance, supply chain partnerships, and technology alliances are examples of positive inducements, each with the potential to forge an enduring alignment of interests with geopolitical swing states that have expressed skepticism toward the United States’ use of statecraft.

This is especially relevant in the context of the intensifying global competition with China. Relying strictly on the coercive tools of economic statecraft to blunt or weaken China’s geostrategic position is not a winning strategy. China’s defensive buffers are far more formidable than Russia’s, against which the sanctions coalition found numerous areas of asymmetric advantage where the United States and its allies produce or supply something Russia needs and can’t easily replace. So is Beijing’s capacity to go on the economic offensive, whether by exploiting chokepoints in critical supply chains such as clean energy and pharmaceuticals or weaponizing its unrivaled scale in producing manufactured goods.

This is not to suggest there aren’t pressure points that could be targeted in an economic campaign against China before or during a conflict scenario. No country is too big to sanction. But there isn’t an obvious knock-out blow that coercive statecraft could deliver by itself without incurring severe collateral damage in a full-fledged confrontation with China.

There are, however, major geostrategic opportunities for the United States and its allies to attract nonaligned countries into its orbit with positive inducements, and in doing so to gradually isolate China before any conflict unfolds.

We have already seen laudable progress by the United States and Group of Seven (G7) governments in recent years to revitalize their efforts in this regard—most visibly by offering a positive alternative to China’s Belt and Road Initiative lending through the Partnership for Global Investment and Infrastructure (PGI). But additional steps to augment or invent tools that bolster the financial firepower of the United States and its allies would boost their credibility. 

For example, the United States has a sparingly used instrument on the shelf, sovereign loan guarantees (SLGs), that could be put to much greater use—especially for middle-income countries that don’t qualify for support programs offered by the International Monetary Fund and World Bank. The way SLGs work is simple: The US government guarantees to private lenders that a foreign government’s borrowing will be repaid. Unsurprisingly, the guarantee induces private lenders to charge the borrower nearly the same interest rate as the United States enjoys—a benefit that slashes the interest expense of the borrower and is highly cost effective for US taxpayers. By working in concert with the G7 and other partners, the United States could multiply the impact of SLGs and similar guarantees or insurance tools that allow the West to compete with the scale and speed of China’s lending activity, but at higher levels of financial transparency and standards for environmental and labor market impact.

Other ideas worthy of exploration include reimagining the US strategic petroleum reserve as a “strategic resilience fund” that makes direct investments in the supply chains for critical minerals and scarce inputs used to produce clean energy and foundational technologies. A moonshot idea would be the launch of a sovereign wealth fund for the United States to make long-term, strategic investments in high-standard infrastructure projects at the center of the PGI.

As a corollary to imagining new and augmented financing tools at the country level, the G7 and key partners in the Group of Twenty (G20) such as India should keep amplifying calls for multilateral development banks, especially the World Bank, to take on far more risk in terms of how much, where, when, and on what terms it lends—even in the absence of further capital injections. The most innovative idea in this regard comes via former US government official Brad Setser, who suggests that the World Bank issue bonds linked to special drawing rights, a claim on the reserve currencies of the world, to raise funds that can boost lending capacity almost immediately. A less exotic alternative would be to estimate and exhaust the lending headroom available to the World Bank without risking a credit downgrade from rating agencies.

We’ve been here before

Almost a century ago, the UK Foreign Office developed a comprehensive doctrine of economic statecraft as a guide for how its economic powers could be used in the context of its looming conflict with Germany. Having been on the front lines of designing and deploying economic statecraft over the past decade, I’m convinced that we need a modern doctrine to institutionalize how, when, where, and why the United States uses economic tools in the context of today’s great power competition. But for such a doctrine to produce better results than a century ago, the United States and its partners will need to apply the same creativity and urgency toward developing a positive vision for economic statecraft as they have in designing sanctions and other restrictive measures in the recent past. 

Daleep Singh was the chief global economist at PGIM Fixed Income and is a former US deputy national security advisor for international economics. He will soon return to his role as deputy national security adviser for international economics.

This article reflects views expressed by the author in his personal capacity prior to rejoining the US government.

The post Forging a positive vision of economic statecraft appeared first on Atlantic Council.

Fast forward fifteen years and Brazil and India continue to share views on key global issues. For the first time since its inception in 1999, the Group of Twenty (G20) will have four consecutive emerging economy presidencies (Indonesia in 2022, India in 2023, Brazil this year, and South Africa in 2025). As G20 foreign ministers kick off their meeting in Rio de Janeiro on Wednesday, expect to see the shared views of India and Brazil reflected in a high degree of continuity between their G20 agendas.

The members of the G20 collectively account for more than 80 percent of global gross domestic product, three-quarters of world trade, and two-thirds of the world’s population. Moreover, the forum remains the world’s premium platform for coordinating international policy. Over the next year, the Atlantic Council’s G20 programming and research will track how Brazil leads this group in addressing four key areas (presented below) and will work to promote continuity with South Africa’s presidency in 2025 and the United States’ in 2026.

Food security and hunger elimination

Both New Delhi and Brasília have sought to highlight the needs of emerging markets and developing economies through their agenda-setting role at the G20. Perhaps no need stands out as urgently and pervasively as food insecurity. According to the World Food Programme, 783 million people worldwide faced chronic hunger in 2023, and most are in emerging markets and developing economies.

Under the Indian G20 presidency, the New Delhi Declaration was adopted by all members at the leaders’ summit. Among other provisions, it committed members to cooperate on agriculture research, access to fertilizers, capacity-building, and market transparency to foster food security among vulnerable populations. In particular, India emphasized the export and provision of millets, aligning with the “International Year of Millets” initiated by the United Nations General Assembly. Indian Prime Minister Narendra Modi was even nominated for a Grammy award for his appearance in a song titled “Abundance in Millets.”

Brazilian President Luiz Inácio Lula da Silva has doubled down on the social dimension of development, with a focus on combating poverty, inequality, and hunger. Food security is front and center in his domestic and foreign policy. 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. Brazil is the world’s second-largest exporter of agriculture and is central to global supply chains—and in particular supply chains for emerging markets and developing economies. Expect to see Brazil leverage its weight in global markets to build consensus on the path forward in addressing food insecurity this year.

Climate and development finance

On climate and sustainable finance, Brazil’s G20 presidency appears poised to build on the legacy of India’s, while offering notable innovations and customizations. The four priorities of 2024’s Sustainable Finance Working Group are illustrative of Brazil’s particular interests and this G20’s overall mandate of “Building a Just World and a Sustainable Planet.” For example, financial instruments for nature-based solutions are rightfully receiving greater attention than ever in Brazil, which should not be a surprise in a country that contains two-thirds of the Amazon rainforest and 15-20 percent of the world’s biodiversity.

Leveraging Brazil’s active participation in various international financial institutions, the Brazilian finance sherpas are also placing a sharp technical focus on streamlined coordination among multilateral development banks and vertical funds. The troika of India-Brazil-South Africa G20 presidencies will press on with key Global South development financing priorities, such as just transition plans and blended finance for adaptation (see Atlantic Council’s related work on this here). In addition, Brazil has a unique opportunity to bridge this year’s G20 with the UN climate change conference known as COP30, which it will host in Belem in 2025. Brazil can coordinate its presidencies of both platforms to spur continued progress in Belem on landmark accomplishments from recent COPs, including the Loss and Damage Fund announced during last year’s COP28, held in Dubai.

Digital public infrastructure

Another area of continuity and compatibility between the G20 presidencies of India and Brazil is the provision of digital public infrastructure through payments, identity, and other digital networks created by the state to digitize and upgrade the provision of public services. Through Brazil’s Pix and India’s Unified Payments Interface (UPI), for example, both countries have seen tremendous success in building digital payments ecosystems and increasing digital and financial connectivity. 

Through the payments working group, G20 member states set targets for payments modernization for central banks and multilateral institutions. These targets address the cost, transparency, and speed of global payments. In 2023, the cost of retail payments to businesses and individuals across countries exceeded the previously set 3 percent target in a quarter of jurisdictions around the world. Similarly, the average cost of remittances is more than twice the goal of 3 percent. These metrics benchmark the G20’s progress and lay out the actions that member states still need to undertake to achieve these targets by 2027 (for cross-border retail payments) and 2030 (for remittances). 

Both India and Brazil position themselves as leaders among emerging markets in the provision of digital public infrastructure, and the G20 provides a platform to showcase their digital payment and identity models to the rest of the world. While both countries view the adoption of these platforms as a mechanism to increase financial inclusion and digital democratization, the wider adoption of digital public infrastructure will also present challenges. The G20 will have to come together to provide robust frameworks on data privacy, consumer protection, cybersecurity, competition, and public-private collaboration. These are going to be ongoing discussions, to be reflected in targets to come in the future. 

International financial institutions

During its G20 presidency, India initiated a set of processes and frameworks through the New Delhi Declaration that committed to “pursue reforms for better, bigger, and more effective Multilateral Development Banks.” The Declaration also included provisions to improve the multilateral development banks’ capital adequacy frameworks, which could yield an additional two hundred billion dollars in lending headroom over the next decade. India’s efforts focused on the quality and quantity of financing provided by international financing institutions and were supported by the United States, the largest shareholder at the International Monetary Fund (IMF) and the World Bank.

Brazil is adding to India’s priorities with a focus on governance and on augmenting the influence of emerging markets over decision-making at international financing institutions. However, divergent interests between the United States and China, the world’s two largest economies, and heightened geopolitical tensions between Russia and Western economies will make meaningful progress on economic global governance difficult.

India learned as much late last year in negotiations regarding an increase in IMF quotas—or the capital a country contributes to the institution, which correlates with that country’s voting power. The United States had proposed an increase in the quotas that would leave voting shares unchanged—a proposal that drew criticism from China and other emerging market economies who feel underrepresented at the IMF. Ultimately, the countries agreed to the US-backed “equiproportional” increase in quota resources that, in effect, pushed the issue of expanding voting power in the IMF for emerging markets to a future date.

Just like the Indian G20 presidency, Brazil’s achievements in this area will likely be incremental yet important. For example, Brazil might advance innovative ideas for increasing private finance partnerships and for making measurable improvements in international financial institutions’s operations and development impact assessments. These increments will accumulate, particularly as the G20 presidency moves in 2026 to the United States, by far the largest shareholder of various international financial institutions. Reform is a current priority for the United States, as stated by US Treasury Secretary Janet Yellen at the Atlantic Council in April 2022 and elsewhere, and the subject will be high on the agenda when G20 finance ministers meet next during the April IMF-World Bank Spring Meetings in Washington, DC.

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

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center.

Pepe Zhang is a senior fellow at the Atlantic Council’s Adrienne Arsht Latin America Center.

Valentina Sader is a deputy director at the Atlantic Council’s Adrienne Arsht Latin America Center.

The post What’s on Brazil’s G20 agenda? Start by looking at where India left off. appeared first on Atlantic Council.

Thank you Chairman Hill, Ranking Member Lynch, and distinguished members of the subcommittee, for your leadership in holding this hearing and the honor of the invitation to testify. My name is Carole House. I am a Nonresident Senior Fellow at the Atlantic Council, an Executive in Residence at Terranet Ventures, and Chair the CFTC’s Technology Advisory Committee (TAC).

Most of my career has been at the intersection of national security, emerging technologies, and finance. I have served in the US Army, the Senate Homeland Security and Governmental Affairs Committee (HSGAC), and FinCEN. I also served two tours in the White House, including most recently at National Security Council (NSC) where I supported initiatives like the US Counter-Ransomware Strategy and President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets.

Innovation is core to the US economy, but we have learned that responsible innovation does not mean unchecked technological advancement without regard to implications for society, security, and democratic values. Cryptocurrency remains a serious risk for illicit finance. It is not inevitable for the sector to always be that way, but the unique aggregate features of crypto compounded by the existing state of compliance domestically and abroad have cultivated an environment ripe for exploitation by rogue nations and fraudsters. There are mitigating measures like transparency that are helping to combat illicit finance, but critical and timely steps are needed to make best use of them. The status quo has not yielded benefits for consumers, the evolving DeFi ecosystem, or US leadership.

Core to cryptocurrency’s appeal to both licit and illicit users is its ability to transfer significant value peer-to-peer, pseudonymously, immutably (or irreversibly), with global reach, with increased speed and cost efficiencies.¹

The absence or reduction of financial intermediaries and central points of control in more highly decentralized cryptocurrency systems also challenges clear lines of responsibility and accountability that are crucial in managing risks in high value, high risk sectors like finance.

A risk-mitigating feature of cryptocurrencies is their often public and transparent nature.² However, aside from concerns about consumer privacy, there are limitations to this transparency–ranging from off-chain data to the use of obfuscation methods like mixing, chain-hopping, and encryption.^{3 4} The same extent of transparency we see today is also not inevitably a part of these systems, given growing experimentation to integrate privacy enhancing technologies (PETs).

With these features and the lagging state of non-compliance in mind, cryptocurrency remains attractive to a full spectrum of illicit actors.

• It is a favored tool of cybercriminals and the predominant means of payment in sophisticated ransomware-as-a-service (RaaS) economies targeting critical infrastructure like energy and hospitals, extorting at least one billion dollars last year alone.

• The Biden Administration also reported that North Korea funds about half of its proliferation regime via cybercrime and cryptocurrency theft.⁵

• Despicable pig butchering and investment fraud schemes continue to harm consumers, with over nine billion dollars reported in fraud in 2022.⁶

• Cryptocurrency is one in a suite of tools used in many forms of transnational organized crime, including drug and human trafficking, as well as terrorism financing and sanctions evasion and offset.^{7 8 9 10}

There are also national security concerns implicated by diminished leadership in driving responsible financial and technology experimentation when adversarial nations have for years been pursuing alternative financial systems and developing building blocks for the next phase of the internet.

In light of the threat, policymakers must consider what to do about it. The CFTC TAC recent report on DeFi outlined opportunities for approaching accountability, such as building in compliance features at different layers across the DeFi tech stack, as well as considering ongoing infrastructure provider-focused regulations developing at DHS and Commerce. Despite some calls for equivalent privacy and neutrality treatment of DeFi as we give the internet, I encourage consideration that financial versus information activity carries different levels of risk. “Neutrality” is not an acceptable position to take toward illicit finance.

I’ll offer some opportunities to consider for combating crypto crime:

• Enhance regulatory and enforcement agencies’ capability to take action against egregious violators of our illicit finance framework, such as through prioritized funding for agencies and honing disruption authorities like FinCEN’s 9714 and 311 designations.

• Next, promote international action on combating illicit cryptocurrency activity in priority jurisdictions through diplomacy and capacity building.

• Third, enhance outcome-oriented public-private partnerships for information sharing and R&D.

• Finally, promote development of secure, trustworthy, and interoperable digital identity infrastructure.

Thank you again for the opportunity to speak on this issue, I look forward to your questions.

Fellow

Carole House

Nonresident Senior Fellow

GeoEconomics Center

Cybersecurity Digital Currencies

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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.

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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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.

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 Lipsky authors op-ed in Banking Risk and Regulation on CBDC adoption appeared first on Atlantic Council.

The post Lipsky and Kumar quoted in Finextra on Fed CBDC progress appeared first on Atlantic Council.

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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Central bank digital currency (CBDC) is a digital version of cash issued by a central bank to be used either by individual consumers (retail CBDC, or rCBDC) or financial institutions (wholesale CBDC, or wCBDC). At the time of writing, more than one hundred central banks are pursuing CBDCs for a variety of motives: improving payments efficiency and upgrading existing financial infrastructure, increasing financial inclusion, and enhancing monetary policy transmission. CBDCs allow their developers unparalleled discretion in terms of their constituting features—inter alia, choice of design, accessibility, and programmability. CBDCs present unique opportunities and challenges for policymakers, regulators, market participants, and individuals, making this a transformational moment in the history of money.

International financial institutions (IFIs) have taken note of their member countries’ burgeoning interest in CBDCs. IFI mandates and responsibilities intersect with CBDCs in several important ways. First, CBDCs may present new financial-stability challenges. This brings CBDC-related developments under the purview of the International Monetary Fund (IMF). Second, CBDCs’ development potential (including financial inclusion)—a major force driving adoption in emerging markets and developing economies (EMDEs)—makes them relevant for the World Bank. Finally, the Bank for International Settlements(BIS), with its standard-setting committees, is a natural forum for discussion on issues related to technology and regulation around CBDC. Recognizing the intersection of CBDCs and their mandates, and spurred by the demands of member countries, these IFIs have been rapidly developing workstreams on CBDC.

Collectively, IFIs’ efforts constitute an emerging global governance architecture for CBDCs. But is that emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report is an attempt to answer this question, with a focus on three domains: financial stability, development and financial inclusion, and global payment systems. One chapter is dedicated to each of these issues. Each chapter considers the risks, challenges, and opportunities associated with CBDC development, and discusses the mandates, activities, and plans of the international financial institutions. Finally, recommendations are made in each area to improve the global governance architecture for CBDCs.

Greg Brownstein is a Bretton Woods 2.0 Fellow with the GeoEconomics Center.

Utsav Saksena is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. He is also a Research Fellow (Macro-Finance) at the National Institute of Public Finance (NIPFP), an autonomous institute under the Ministry of Finance, Government of India.

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Issue Brief Jan 16, 2024

Navigating subsidy reform at the WTO

By Sona Muzikarova and Sophia Busch

The legitimacy of the World Trade Organization is in question. The United States and its allies, and leaders in the organization, can better wield its potential to address global issues, specifically to reduce inefficiencies from fragmentation caused by subsidies.

Economy & Business Fiscal and Structural Reform

Issue Brief Jan 16, 2024

Governance reform of the Bretton Woods Institutions

By Sienna Nordquist and Joel Christoph

The paper emphasizes the need for a governance reform roadmap at the IMF and World Bank focusing on quota reallocation, diplomatic efforts, and a commitment to diversity and democratic principles.

Economy & Business European Union

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 Developing an agenda for international financial institutions and central bank digital currency appeared first on Atlantic Council.

This paper addresses the need for governance reform in the Bretton Woods Institutions (BWIs), namely the International Monetary Fund (IMF) and the World Bank. The report, informed by interviews with former officials, consultants, and think tank experts, provides an analysis of the challenges these institutions face in a rapidly evolving geopolitical climate.

The authors highlight that the most recent reforms in the BWIs, including the IMF’s General Reviews of Quotas and the World Bank’s selective capital increases, have been insufficient in adapting to significant economic and geopolitical shifts. The paper emphasizes the need for a governance reform roadmap, focusing on quota reallocation, diplomatic efforts, and a commitment to diversity and democratic principles.

Key points include the stagnation in quota shares and Special Drawing Rights (SDR) allocations in the IMF, with the Fifteenth General Review of Quotas concluding in 2020 without any alterations. The anticipatedIMF outcomes of the Sixteenth and Seventeenth General Reviews of Quotas suggest a potential shift in the representation of major economies like China and India, but concerns remain about the slow pace of substantial reforms.

The report examines geopolitical challenges, especially the reluctance of the United States and Japan to significantly increase China’s role and influence in the BWIs. This has led to the underrepresentation of certain regions like Southeast Asia and Africa, both in terms of quota shares and on a nominal GDP and per capita basis. The paper underscores the persistent inequalities in representation since the founding of the BWIs in 1944, with fluctuations in power generating grievances for underrepresented states.

The authors propose a four-point approach to governance reforms in the BWIs, emphasizing rules-based, automatic quota reallocation, transparency, and gradual changes. They suggest introducing weighted voting on the executive boards for specific issues, like climate change; creating a joint committee for governance reforms, and addressing the overrepresentation of European nations. They also highlight the critical role of Executive Directors (EDs) in governance reform, advocating for more diverse representation in leadership and staff, and suggesting policy changes to enhance transparency and inclusivity. The authors also advocate for doubling the number of deputy directors and vice presidents at the IMF and World Bank, respectively, and instituting a rotational system for Executive Board leadership to ensure more geographic diversity in the BWIs.

In conclusion, the paper calls for a democratized governance structure in the BWIs, emphasizing the need for reevaluating quota allocations and diversifying leadership roles. By addressing these foundational challenges, the BWIs can navigate the complexities of today’s global economic landscape more effectively, fostering trust, representation, and robust leadership. The authors also argue persuasively that BWI reform can not only reinforce the legitimacy of the IMF and World Bank but also indirectly help the soft and hard power of the states most hesitant to reform the international monetary system.

Sienna Nordquist is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. She is also a PhD student in Social and Political Science at Bocconi University (Milan, Italy).

Joel Christoph is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. He is also a Ph.D. researcher in Economics at the European University Institute (EUI) in Italy.

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

Related content

Issue Brief Jan 16, 2024

Navigating subsidy reform at the WTO

By Sona Muzikarova and Sophia Busch

The legitimacy of the World Trade Organization is in question. The United States and its allies, and leaders in the organization, can better wield its potential to address global issues, specifically to reduce inefficiencies from fragmentation caused by subsidies.

Economy & Business Fiscal and Structural Reform

Issue Brief Jan 16, 2024

Developing an agenda for international financial institutions and central bank digital currency

By Greg Brownstein and Utsav Saksena

Is the emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report focuses on three domains: financial stability, development and financial inclusion, and global payment systems.

Digital Currencies Economy & Business

The post Governance reform of the Bretton Woods Institutions appeared first on Atlantic Council.

The World Trade Organization (WTO), founded in 1948, and regulating trade among its 164 member countries, has been a powerful engine for overall economic expansion, at the forefront of the international rules-based system. It has generated economic gains by promoting freer and fairer trade; increasing competition, efficiencies, and innovation; protecting consumers; and providing a platform for rules enforcement and dispute resolution to enhance stability and predictability in the global trading system. It also has supported the integration of developing countries into the world economy by fostering growth, development, and poverty reduction. Since its founding, the global economy has evolved largely in line with the ideals the WTO prescribed, as exports in 2019 were 250 times the level of 1948, reflecting widespread economic growth and interconnected trade.¹

However, the WTO has now become almost infamously ineffective at settling disputes and holding countries accountable for unfair trade practices. Global trade has grown increasingly fragmented since the global financial crisis of 2007–2009, the COVID-19 pandemic, and Russia’s 2022 invasion of Ukraine, all of which accelerated the trend against free trade and globalization. In all major economies, trade policy is increasingly used as a strategic instrument to address geopolitical competition. While US policymakers fixate on China’s unfair trade practices, US export controls against China and the US Inflation Reduction Act are prime examples of trade-distorting policies. The legitimacy and relevance of the WTO is in question, and it faces many challenges. However, the WTO retains unique characteristics that grant it an important role in international trade policy problem-solving: a set of core principles, a forum for negotiating and monitoring, and membership representing 96.7 percent of global gross domestic product (GDP).²

This report aims to provide recommendations for how the United States and its allies, and leaders in the organization, can better wield its potential to address global issues, specifically to reduce inefficiencies from fragmentation caused by subsidies. By first outlining and explaining the obstacles preventing an effective WTO, this report will ultimately provide recommendations for how the organization can provide guidance on subsidies for global public goods by facilitating discussions within multilateral trade agreements. It also provides suggestions for how the WTO can work with other Bretton Woods institutions to ensure that less-developed countries (LDCs) gain access to green financing, technology, and resources.

About the authors

Sona Muzikarova is a political economist, author and policy consultant, with over a decade of experience delivering forward-looking insights on the region of Central and Eastern Europe.

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

Related content

Issue Brief Jan 16, 2024

Governance reform of the Bretton Woods Institutions

By Sienna Nordquist and Joel Christoph

The paper emphasizes the need for a governance reform roadmap at the IMF and World Bank focusing on quota reallocation, diplomatic efforts, and a commitment to diversity and democratic principles.

Economy & Business European Union

Issue Brief Jan 16, 2024

Developing an agenda for international financial institutions and central bank digital currency

By Greg Brownstein and Utsav Saksena

Is the emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report focuses on three domains: financial stability, development and financial inclusion, and global payment systems.

Digital Currencies Economy & Business

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 Navigating subsidy reform at the WTO appeared first on Atlantic Council.

The World Bank’s 2023 document Evolving the World Bank Group’s Mission, Operations, and Resources: A Roadmap, otherwise known as the “evolution roadmap,” sets a laudable goal to shift more focus and action onto climate change in low-income and developing countries (LIDCs). The language used throughout the report clearly reflects the Bank’s shifting priorities. The word “climate” was mentioned forty times in the evolution roadmap document, “poverty” was mentioned forty-two times, and prosperity was mentioned only twenty-one times. This shows a clear paradigm shift that is expanding from the World Bank’s “Twin Goals” of ending extreme poverty and boosting shared prosperity to also include issues related to climate change and financing.

In the evolution roadmap report, the World Bank Group (WBG) rightly identifies that the world has not only stalled, but regressed in achieving the prosperity and development goals set for this decade. Further, the WBG identifies that LIDCs are not prepared to face the development challenges of the modern world. One of the key development issues the WBG identifies is climate change, which has an outsized impact on LIDCs. In this regard, the WBG has already created frameworks to engage climate issues in LIDCs. The WBG’s Country Climate and Development Reports (CCDR) offer a comprehensive resource to support development and climate objectives at the country level. These public reports empower governments, private sector investors, and citizens to prioritize resilience and adaptation and reduce emissions without compromising broader development objectives. These goals can be achieved, the WBG estimates, with an investment averaging 1.4 percent of a given country’s gross domestic product (GDP)— though in some low-income countries that number can be between 5 percent and 10 percent.

While the CCDR gives nations the tools to achieve climate objectives without significantly compromising development, it does not bridge the gap between the increasing focus of the WBG and the developed world on climate change and the real priorities of LIDCs.

People in LIDCs do not place climate change among their top development priorities, despite the outsized impact of climate change on LIDCs. This is not to say that LIDCs are not concerned about combatting climate change, or uninterested in adaptation strategies. Rather, citizens of LIDCs typically prioritize other development goals ahead of climate change— particularly when working with multilateral development institutions such as WBG. Across forty-three WBG client countries surveyed, climate emerged as a top development priority for less than 6 percent of the respondents on average. It only ranked among the top two development priorities in Vietnam. It only broke into the top three priorities for six countries, none of which are International Development Association (IDA) borrowers. Clearly climate change —particularly among the poorest countries— is not a pressing development priority.

LIDCs are instead more focused on securing funding for development projects with more immediate results. Overwhelmingly, education and health (human capital) are most widely identified as top development priorities. Other areas of focus identified in this survey include:

• Economic growth, agricultural and rural development, job creation and employment, and poverty reduction, which can be broadly categorized as economic development.
• Natural resources, infrastructure and transportation, and energy, which can be broadly categorized as natural and physical capital.
• Security, stability, and governance reform, which can be broadly categorized as governance related issues.

These areas of focus are confirmed by other surveys, such as the 2021 “Listening to Leaders” survey published by Aid Data, where climate change landed in the bottom quartile of responses.

The lack of emphasis on climate change makes sense for LIDCs. Climate change mitigation is a global endeavor, and thus far the richest economies have done little to commit to it despite being the largest per capita contributors to climate change. Given the negligible per-capita contribution of LIDCs to climate change— and the fact that they will not be major contributors in the near future— it makes sense for LIDCs to direct attention elsewhere. Second, development and poverty reduction are excellent resilience strategies for LIDCs. Impoverished communities are much more vulnerable to climate change than richer communities. Under the assumption that climate change will continue regardless of LIDCs’ mitigation and adaptation efforts, due to their limited impact; it makes sense for these countries to focus on lifting their populations out of poverty and developing resilient infrastructure, governance, and economies instead of allocating their dwindling resources to fight climate change.

Because environmental concerns are not among the top three priorities for the majority of WBG’s clients in LIDCs, the WBG needs to demonstrate the immediate and long-term benefits of climate adaptation and mitigation for these economies. This is especially true if the WBG aims to convince LIDCs to allocate over 5 percent of their GDP toward addressing climate issues while they contribute the least to climate change. Additionally, the WBG must persuade major contributors to climate change to drastically decrease their emissions and assist LIDCs with their direly needed adaptation efforts. Otherwise, LIDCs will have little to no incentive to reduce their emissions, as they will perceive such measures as having a negligible impact on reversing global warming and climate change.

This policy brief examines the impact of climate change on other development priorities, specifically education and health, that are among the top two in the WBG’s 2020-2021 Country Opinion Survey. One or more of these priorities ranks higher than climate change for the governments, aid agencies, media, academics, private sector, and civil societies of the countries in the survey, yet both of these are intrinsically linked to climate change. The remainder of the report goes through each of these priorities outlined by LIDCs in the World Bank survey and highlights the impact of climate change on each one of them.

Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads 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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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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Signs of ordinary everyday life in wartime Ukraine are a reflection of the remarkable resilience demonstrated by Ukrainians since the onset of Russia’s full-scale invasion almost two years ago. This normality is also due to the little-noticed fact that the Ukrainian economy did surprisingly well in 2023.

Ukraine’s strong economic performance is reflected in recent EU and IMF assessments. These traditionally harsh reviews now read like love letters. “Despite the war, the country has benefited from a stronger-than-expected recovery and steadfast reform momentum,” noted the IMF in an entirely typical December 2023 summary.

The Russian invasion drove Ukraine’s GDP down by 29 percent in 2022, but in 2023 the economy grew by 19.5 percent year-on-year in the second quarter and by 9.5 percent in the third quarter. Rather than an expected stabilization, Ukraine is likely to achieve annual economic growth of nearly 6 percent in 2023. Admittedly, that still means a decline of around 25 percent from the prewar level in 2021. However, given the scale of the destruction caused by the Russian invasion and the fact that Russia still occupies around 17 percent of Ukraine’s territory, these figures are nevertheless impressive.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

In the fall of 2022, many were concerned by the threat of rising inflation in Ukraine due to the EU’s failure to meet its commitments. Ukraine was forced to print money, and inflation rose to 27 percent in December 2022. The European Commission took heed and secured $20 billion in financing for 2023, covering around half of Ukraine’s budget requirements. The United States contributed another $10.9 billion, with the IMF providing $4.5 billion. In the end, Ukraine’s budget deficit of some $40 billion was more than financed. As a consequence, inflation plummeted to just five percent by October 2023.

Ukraine had budgeted for foreign financing of $41 billion in 2024, but as foreign funds may fall short, the country’s finance minister has suggested a revision down to $37 billion, not least because of greater than expected tax revenues. This revised figure may be realistic. The IMF noted that tax collections were up by 23 percent year-on-year in January-September 2023.

Usually, a country with an IMF program fails on some accounts, but that was not true of Ukraine in 2023. The IMF confirmed that Ukraine had met all quantitative performance criteria as well as all indicative targets by the end of September, and had done so with big margins, having collected much more in taxes than anticipated, while social spending continued as planned. Despite wartime conditions, Ukraine has not yet suffered from any arrears in state sector wages or pensions.

Ukraine’s National Bank has done particularly well since the start of Russia’s invasion. While inflation in Russia is currently around 7.5 percent, Ukraine’s rate has fallen to five percent. Ukraine recently cut its interest rate from 16 percent to 15 percent, while the Central Bank of Russia did the opposite.

Ukraine is maintaining a relatively open currency market with a floating exchange rate that held relatively stable throughout 2023. Ukraine’s international currency reserves are currently higher than they have ever been, at around $40 billion. The country’s banking system functions surprisingly normally. According to a recent IMF report, Ukraine’s total banking system assets and client deposits increased by 36 percent and 51 percent respectively between the start of Russia’s full-scale invasion and August 2023. Ukraine’s banks are flush with money and offer ample and cheap credits.

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Remarkably, Ukraine has carried out more systemic reforms than ever during the war. These reforms have been driven by the EU and the IMF, with keen support from the United States and the G7 group of nations.

On December 14, 2023, the EU decided to open membership negotiations with Ukraine. This landmark decision was based on Ukraine having fulfilled seven vital conditions set by the EU in June 2022. Four concerned the rule of law, while three were political. The most important conditions were the cleansing of the notoriously corrupt Constitutional Court and the similarly deficient Supreme Council of Justice, which appoints Ukraine’s judges. These steps are among the most important rule of law reforms ever implemented in Ukraine.

The EU appears to have learned from its excessively lenient earlier policies toward Bulgaria and Romania. Brussels now demands specific changes and details them. Ukraine has complied with all its demands, with President Zelenskyy signing off on the last three laws the week before the EU convened in December 2023.

In its most recent assessment, the IMF stated that the Ukrainian authorities had demonstrated “a strong commitment to reforms.” It noted that the authorities met seven of the 12 structural benchmarks for June-October 2023 on time, while four benchmarks were implemented with delays under very difficult circumstances. These were significant reforms related to corporate governance and anti-corruption measures. The law restoring asset declarations for public officials was enacted in October and public access to asset declarations was reinstated. Meanwhile, money-laundering legislation was tightened. The IMF’s key remaining demand is to render the special anti-corruption prosecutor truly independent from the prosecutor general.

Despite wartime conditions, the Ukrainian authorities are performing better than expected, both in terms of daily financial administration and advancing the country’s reform agenda. Higher than anticipated tax revenues are being collected, with pensions and wages so far paid on time. The nation’s currency reserves are larger than ever, and inflation has been brought down to five percent. Quietly, Ukraine has finally carried out important and politically challenging rule of law reforms. The Ukrainian government is to be congratulated for its considerable accomplishments on the economic front while defending itself against Europe’s largest invasion since World War II.

Anders Åslund is the author of “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.”

Further reading

UkraineAlert Dec 21, 2023

Putin scents historic victory amid growing signs of Western weakness

By Peter Dickinson

Recent indications of growing Russian confidence in victory over Ukraine owe much more to Western weakness than to the Kremlin’s own military might, writes Peter Dickinson.

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UkraineAlert Dec 20, 2023

Ukrainian telecoms hack highlights cyber dangers of Russia’s invasion

By Mercedes Sapuppo

An unprecedented December 12 cyber attack on Ukraine’s largest telecoms operator Kyivstar left tens of millions of Ukrainians without mobile services and underlined the cyber warfare potential of Russia’s ongoing invasion, writes Mercedes Sapuppo.

Conflict Cybersecurity

UkraineAlert Dec 19, 2023

Ukraine’s EU accession process faces bureaucratic and political hurdles

By James Batchik

The European Council’s recent decision to open accession negotiations with Ukraine was a momentous moment both for Kyiv and the European Union. Now the serious work begins, writes James Batchik.

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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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

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These initial steps have provided reassurance to investors and signal the welcome transition of a maverick candidate into a more responsible, even if not mainstream, future head of government. They are also a sign that, now that the fate of his country will soon rest on his shoulders, Milei has realized that there are few realistic policy options for him to pursue. Foreign exchange reserves are exhausted, financial markets remain all but closed to Argentina, and an International Monetary Fund (IMF) program has run badly off track due to the actions of the outgoing administration. Moreover, China will remain a critical trade partner and possibly the only major source of bilateral financial assistance for the foreseeable future.

In this situation, adopting the US dollar as Argentina’s official currency could have pushed the country into a severe depression that could have resulted in more people out of work and increased poverty. Since the country has far from enough dollars to replace its monetary base at the current exchange rate, dollarization would have implied another major depreciation of the peso. The resulting loss of purchasing power for peso holders, combined with deep cuts in subsidies and other public expenditure that would be needed to bring the budget into balance, would have been a serious hit to those without access to dollar income or foreign remittances.

Milei has said that dollarization still remains a consideration over the medium term. One could indeed imagine that, for a country with a long history of regular bouts of hyperinflation, abandoning the peso could finally bring about monetary stability and impose much-needed fiscal discipline. However, a strong currency whose exchange rate is influenced by factors entirely unrelated to the domestic cycle would bring its own set of problems, primarily for the competitiveness of exports, on which Argentina remains heavily dependent.

Most importantly, dollarization would not provide insurance against fiscal recklessness down the road once Argentina could again borrow in financial markets. The experience of dollarized economies such as Ecuador and El Salvador shows that the adoption of the US dollar is no panacea in the absence of sustained growth and responsible macroeconomic policies.

The question therefore remains how the Milei administration intends to reduce inflation and lower the fiscal deficit once in office. A rational course of action would be to reduce the public deficit, cease direct monetary financing, and raise real interest rates over the first half of the new president’s first term, leaving some measures in place to protect the poorest segment of the population. However, monetary and fiscal consolidation would only be a necessary, but not sufficient, condition to generate a sustainable uptick in long-term growth that would be needed to eventually raise Argentinean living standards.

The key to economic success indeed lies in removing the thicket of obstacles that have curbed the productive capacity of Argentina’s economy over the past decades. It is for this reason, no doubt, that the new president-elect promised to send a package of reforms to the national congress, which would be recalled on December 11, the new administration’s first day in office. 

Alas, the chances of a strong reform package being passed into law appear low at first sight. The Peronist opposition would hardly agree to turn Argentina into a wholly free-market economy overnight, and Milei and his conservative allies have no legislative majority on their own. Moreover, most of Argentina’s provinces are still governed by the opposition, leaving Milei with only a small political power base. In fact, having thrown in his lot with the conservative alliance, Milei could find himself in a similar situation as former President Mauricio Macri, whose economic reform plans were largely dependent on winning a legislative majority for his second term.

It is therefore necessary to draw the right lessons from the failed 2015-2019 reform experiment. First, it would be a mistake for Milei to squander his large popular appeal in a rerun of the Macri experience. The outcome would be disastrous for Argentina, which has moved closer to a full-blown economic collapse in the meantime. Milei would instead need to make his case for economic reform directly to the Argentinean people, raising the cost for the opposition to refuse support for critical legislative steps.

Second, the IMF has a key role to play in forging a bipartisan reform consensus. Unlike the simple loan rollover during the Fernandez administration, the resumption of IMF lending this time would need to depend on the legislative implementation of growth-enhancing reforms. Given the multi-year time frame for such reforms, it would not be unusual for the IMF to engage with both the ruling and opposition parties.

Third, the United States and Europe, as the largest IMF shareholders, have a special responsibility in this regard, and they should lean on the IMF leadership and Argentina’s body politic to work toward an ambitious program outcome. Moreover, by identifying ways to directly support the Argentinean economy, they could increase the chances for program success, providing much-needed relief for the long-suffering Argentinean population.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF official with decades-long experience in economic crisis management and financial diplomacy.

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Flagship Event Tue, November 28, 2023 • 9:00 am ET

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.

Digital Currencies Economy & Business International Financial Institutions

Over the past few years, the number of central bank digital currencies and other digital assets has grown exponentially. This growth speaks to the confidence that many people have in the interplay of technology finance and money that can offer cutting-edge transparency, speed and efficiency. But it has also resulted in new concerns, including how standards can be developed to create an even playing field for new entrants into the financial system, maintain privacy and security, and ensure that new systems are compatible with existing ones. This problem of “interoperability” needs to be solved, or else what may emerge is a world of digital asset “silos.”

The emerging and disparate marketplace of digital ledger technologies (DLTs) “is going to challenge our ability for a harmonized global solution,” explained Jennifer O’Rourke, executive director of innovation strategy at the Depository Trust and Clearing Corporation. “But the answer to that is going to be interoperability,” she added at a panel session of the Atlantic Council’s conference on central bank digital currency on November 28.

When it comes to the future of digital currencies, interoperability, which O’Rourke defined as “the sharing and the coordination of disparate data across multiple participants,” is top of mind for governments, financial institutions, and international organizations.

To examine the many technical, legal, and regulatory issues surrounding digital currency interoperability, O’Rourke was joined by Federico Grinberg, senior economist for the International Monetary Fund; Tony McLaughlin, head of emerging payments and business development at Citi; Tom Zschach, chief innovation officer at SWIFT; and Jordan Bleicher, senior advisor to the under secretary for domestic finance at the US Treasury Department.

Below are highlights from this discussion about the crucial role that interoperability will need to play in the future of digital currency, which was moderated by Ananya Kumar, an associate director of the Atlantic Council’s GeoEconomics Center.

Why is interoperability so important?

• Bleicher illustrated the importance of interoperability by outlining some of the alternatives. “One alternative would be a world of proliferating silos that can’t speak to each other. This would be a world of high transaction costs and limited gains from trade,” he said. On the other end of the spectrum, he said, is a “world of monopoly rents, limited competition, and general stagnation.” Interoperability, he said, “is a kind of middle path between these extremes.”
• Zschach spoke about how crucial interoperability is for new networks. “If you’re creating a new network and new digital asset” but have “no way to connect to what’s there already, then you’re going to build a digital island,” he said. “And you won’t drive adoption and you create even more fragmentation.”
• Grinberg warned that “if we let bridges and interlinking systems proliferate, that’s going to create a lot of inefficiencies,” as well as “create operational risks, and increase the attack surface of bridges and systems.”

Why is achieving interoperability so challenging?

• “We have to remember that DLT was created as the antithesis of regulated financial services and not in order to augment it,” said McLaughlin. “The first thing that you have to do if you want to apply DLT to the regulated spaces,” he said, is “to put a number of fundamental blockchain constructs into the garbage.”
• “The marketplace has already created distinct networks that right now are predominantly single asset networks,” said O’Rourke, “and we’ve got to figure out how we can connect those together.” She added that banks’ and market participants’ incentives cause them to find “localized solutions that are creating this fragmented marketplace.”
• “Where there are regulatory gaps or new standards that have to be developed,” said Bleicher, “we have existing institutions that we can leverage to make progress,” including the Group of Seven (G7), the Group of Twenty (G20), and the Financial Stability Board. “There’s much that needs to be done,” he said, “but we do have venues in place that we can use to advance some of this work.”

What should the approach toward interoperability look like?

• McLaughlin cautioned against allowing technology to lead the conversation on regulatory frameworks. “What really should be leading,” he said, “is a consensus about what kind of settlement venues we want to build.” Then, he said, “we can go and build something new.”
• O’Rourke emphasized the need for industry to address the outstanding problems surrounding interoperability and access standards “sooner rather than later,” because “there already are organizations and governments that are moving forward quickly,” and are “creating their own solutions without having these conversations.”
• “I think it’s very important to avoid the digital divide across countries,” said Grinberg. New technologies may be “difficult to set up from a legal regulatory standpoint” and will “require a lot of political capital to be adopted and to be aligned,” he said. “But we need to strive to make this work for the countries that are excluded or have more costly access to cross-border systems.”

Daniel Hojnacki is an assistant editor of editorial at the Atlantic Council.

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Flagship Event Tue, November 28, 2023 • 9:00 am ET

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.

Digital Currencies Economy & Business International Financial Institutions

With debt crises unfolding all over the world, a new effort is underway to deploy technology to improve lending to developing countries.

The project, announced Tuesday by Bank for International Settlements (BIS) Innovation Hub head Cecilia Skingsley at an Atlantic Council conference, will bring together the International Monetary Fund, World Bank, and BIS in an effort to “tokenize”—or apply blockchain technology to—World Bank development aid. The aim is for the technology to help speed up cross-border settlements and make development aid safer, protecting secure information.

The project may also make it easier to guarantee that the aid is fully compliant with regulations against money laundering and the financing of terrorism.

“Will [it] save a lot of money? Will it revolutionize the world? No, probably not,” Skingsley said at the conference on central bank digital currencies (CBDCs) hosted by the Atlantic Council’s GeoEconomics Center. “But I think it’s a very tangible way to actually put the technology to work.”

Below are more highlights from the conversation, moderated by Alice Fulwood of the Economist, which touched upon shaping the financial system for the public interest and rebutting arguments against CBDCs.

Meeting new demand

• Skingsley explained that global technological progress has increased the appetite for cross-border financial transactions that settle instantly, a solution offered by CBDCs. “It’s critical to get the right infrastructures in place” to facilitate that, she explained.
• With technological change happening “so fast,” driven largely by the private sector, central banks “need to pay attention,” Skingsley argued.
• “There are many technological ideas out there that have… potential,” she added. “If this is left unchecked, these technologies may develop into services used in our societies in a way that may not have the public interest as the first priority.”
• Designing a financial system for a digitized future will require grappling with questions around the protection of privacy, financial stability, geopolitics, and financial inclusion, Skingsley added. She also said that a new financial system should protect people’s right to choose how they spend money. “Cash should continue to play a role. People should have the option to use it if they want,” she argued.

Defying the doubters

• Skingsley pointed to the criticism that retail CBDCs—intended for use by households or companies—designed for domestic use don’t address any immediate needs, as they don’t tackle cross-border payments. But “if we dismiss CBDCs,” she argued, “we might be foregoing opportunities to improve the previous public good, which is money; and we could miss opportunities to provide better and cheaper services to people.”
• In response to those who argue that CBDCs present a threat to privacy and a risk that a country could institute social controls, Skingsley explained that privacy is “not something that we have that comes by chance” and that most countries already have legal protections in place that would cover financial privacy. “These mechanisms,” she said, “should be preserved.”
• She also noted that because privacy relates to the development and strength of democratic institutions, government officials—beyond central banks—should help ensure strong privacy regulations around CBDCs.
• When CBDC skeptics argue that the currency presents a risk to financial stability, Skingsley said she replies that the “train has already left the station” as digital bank runs already happen. She also argued that CBDCs wouldn’t make the problem worse, as—according to central banks—countries have the tools to counter bank runs.

Setting the standards

• Skingsley said that other, private-sector-led crypto projects are a “sort of wake-up call” that central banks cannot “just sit on their hands” anymore. “But that is not necessarily the same thing [as] to say that we need to rush things,” she said, adding that she thinks many countries are exploring CBDCs “at a good pace” and the paces of their transitions should vary.
• Looking back on many other historical innovations, she noted that the private sector led first, and then the public sector stepped in with needed laws, regulations, and foundations. “We need to think about the regulations and the international standards,” she argued.
• The Swedish banker put these efforts into three categories: The first is principles for financial market infrastructures; she explained there are already such legal and regulatory standards in place through the Basel Committee on Banking Supervision and the Financial Action Task Force.
• But moving forward, Skingsley added, countries should work together on two other categories: Setting standards related to payment-specific technologies—and how to operate them—as well as establishing cross-cutting technology standards.
• “It’s a really collective responsibility to make sure technology ultimately [serves] economically meaningful activities,” Skingsley concluded.

Katherine Walla is an associate director of editorial at the Atlantic Council.

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