However, two years on it is becoming increasingly clear that the legacy of the IRA is tethered to a renewed pact between government and the US economy, with key implications for trade, technological competition with China, and foreign policy writ large.

Since the early 1980s, the prevailing dogma on both sides of the aisle regarding US economic policy has largely been one of skepticism about direct government intervention in the economy. Trade and domestic market liberalization have been features of Republican and Democratic rhetoric since at least the Reagan administration. Of course, US government spending did increase over this period, and Washington did often step in with, for example, countercyclical spending during economic downturns. Nonetheless, most US politicians took as axiomatic that the government should not be “picking winners and losers” in the economy. The IRA has ushered in a new era in which this reflexive aversion to economic intervention may be vanishing.

Industrial policy has risen from the gutter

The IRA’s subsidies and grants for low-carbon electricity generation and technology manufacturing, along with its capitalization of the US Department of Energy’s Loan Programs Office, represent a divergence from the once-dominant economic policy consensus. The IRA is among the most significant government investments in the US economy since President Franklin D. Roosevelt’s New Deal. In fact, it is rivaled only by primarily demand-side stimulus packages, such as the American Recovery and Reinvestment Act (ARRA) of 2009 and the CARES Act of 2020.

According to Goldman Sachs estimates, by 2032 the IRA will provide $1.2 trillion in incentives with the intention of fueling the deployment of energy technologies. This includes technologies that are currently profitable, such as solar and onshore wind, as well as new market entrants, such as electric vehicles, grid storage, new forms of bioenergy, offshore wind, clean hydrogen for hard-to-abate sectors, point-source carbon capture, and carbon removal. If the broad-scale deployment of these technologies is achieved at the scale envisioned by prevailing models—which is dependent on additional regulatory reform—these effects of the legislation will be uniformly positive for climate mitigation and economic growth alike.

These positive effects are being borne out in data. Of an estimated seventy-eight billion dollars in public investment since the IRA’s enactment, the bill has shepherded between five to six times that figure in private investment. In fact, investment in low-carbon technologies and manufacturing has comprised about half of private investment growth since the IRA’s passage. That is a success.

The implications of the IRA as a shift in economic policy are not uniformly positive, however. The global consequences of this shift have manifested in at least two ways.

First, the floodgates of government market interventions have been opened. In 2023 alone, governments around the world implemented more than 1,600 industrial policies. The IRA is both an example of this general trend and, given the size of the US economy and the IRA’s intervention, something other countries have reacted to with their own interventions. For example, the United States’ use of subsidies for its economy has prompted adverse reactions from the European Union, whose single market makes the use of subsidies difficult, and prompted concerns regarding the comparative advantage of its domestic industry. This year, the European Parliament and European Council passed the Net-Zero Industry Act, which provides financial support through grants, loans, and other funding mechanisms to promote research, development, and deployment of clean technologies and manufacturing capacity—a direct response to the IRA.

In a sense, the IRA has prompted global competition among governments to make public investments in emerging industries and technologies.

Second, trade measures have arisen as a method by which to protect, or “ring fence,” domestic industrial policy strategies from foreign competition. Notably, the May 2024 suite of tariffs announced by the White House represent a substantial signal of intent to isolate encroachment of Chinese imports on domestic industries that have not yet been established and that the IRA supports. In the IRA, certain softly punitive measures impact trade, stoking additional tension. For instance, eligibility for subsidies under the Clean Vehicle Tax Credit is limited, based on the country of origin of critical minerals and battery components and excluding several US allies and partners.

Economic competition among the United States, the European Union, and China is increasing, and the decades-long criticism of China’s subsidy-centric growth model by Washington and European capitals is being usurped by a new industrial policy with US and European characteristics. In some sense, although all three blocs are competing, two distinct visions have emerged: the bottom-up, private sector-led and government-enabled vision of the United States and European Union, and the top-down, state-directed vision of China.

Trade-offs, tariffs, and technological innovation

Will this trend continue? Industrial policymaking in democracies is necessarily impacted by political feasibility, what is favored by those with power, and what works within the parameters of a state’s administrative capacity, as an International Monetary Fund publication recently reflected. As such, the IRA is also a product of the political moment, dubbed by the Breakthrough Institute as a period of “post-COVID congressional profligacy.” It is difficult to predict what the next major industrial policy package in the United States will consist of, but it will likely be shaped as much by the political forces at play as by rigid economic analysis.

Careful reflection is needed going forward, as industrial policy, by definition, leads to concentrated benefits and carries diffuse costs. As such, it can also lead to unintended or counterproductive outcomes. The recent tariffs may prove this true, depending on one’s definition of the intended outcome.

Take the 25 percent tariff increase that was imposed on imports of Chinese solar cells. While this may protect domestic solar manufacturers, it may also slow the rate of solar deployment overall, given the higher resulting price for panels. Absent this tariff, solar panels would likely be cheaper, so it would be fair to say that the Biden administration’s implicit target of countering China’s industrial prowess is countering its explicit goal of achieving a carbon-free power grid by 2035.

The effects of trade policies such as this are unclear. What is clear is that acknowledgement of the trade-offs is necessary.

Public investments in infrastructure do have an important role. They are critical conduits of productivity growth and are necessary in areas where clear incentives for the private sector are not present. For instance, while nuclear energy is critical for bolstering the reliability of the electric grid, its business model has suffered significantly from the natural gas production boom that the United States has experienced from 2005 to the present. The affordability of gas, and increasingly of other resources, such as solar power, has made nuclear power’s high operating and capital costs less attractive to utilities, among other factors. Programs such as the Department of Energy’s Civil Nuclear Credit Program, which provides financial assistance to the United States’ nuclear reactor fleet, play an essential role.

Looking forward, however, it is also worthwhile to recall what is historically the engine of growth for the modern US economy, and the principal root of US competitive advantage in the global economy—technological innovation. It was not the tariffs of the McKinley administration or the safety net of the Roosevelt administration that led the way in supercharging US growth, although safety nets and infrastructure definitively do breed innovation.  

Attempting to reinvigorate domestic industry through grants, loans, or subsidies may be necessary to achieve goals such as “reshoring” manufacturing. At the same time, investments in research and development (R&D) are proven over decades to provide consistent macroeconomic returns and drive technological progress. An independent report commissioned by the Department of Energy’s Office of Energy Efficiency and Renewable Energy found that investments of twelve billion dollars made by the office since the mid-1970s have yielded more than $388 billion in total undiscounted net economic benefits to the United States.

However, public R&D spending in the United States has been stagnant for decades as a percentage of gross domestic product. If government investment is looking for the best rate of return, as sound investors do, R&D may be an underappreciated “asset class” that should increasingly be targeted by the United States and its partners.

William Tobin is an assistant director at the Atlantic Council Global Energy Center, where he focuses on international energy and climate policy.

The post The IRA two years on: A signpost of the new economic policy consensus appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Learn more

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

The gulf between economic data and official pronouncements grew through the second quarter of 2024. Property markets, stock prices and consumer sentiment all indicated weakness while China showcased engagement with foreign investors and private Chinese firms to signal intent to boost activity. But new policy actions were not market friendly in the period before the July 2024 Third Plenum economic planning meetings. There were a few encouraging signs for foreign investors, including pledges to discipline local protectionism and arbitrary regulations, but these have been heard before, and “promise fatigue” is a serious problem. Most of the clusters we track showed limited progress or further divergence from OECD norms. On trade, China refused to acknowledge the legitimacy of the overcapacity concerns the world was alarmed about.

The second quarter generally reflected the takeaway from the July plenum meetings: China will leverage whatever it can to drive technological advancement, and national security will override efficiency at home and engagement abroad. New rules to address excess local regulation contain expansive national security carveouts, as do pilot measures to allow foreign investment in data centers and telecom. Beijing’s commitment to direct state support to vast swaths of the economy was reinforced this quarter, with the state planning plenum manifesto as a capstone.

Read the full issue brief below

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

Sinographs Jul 23, 2024

Key takeaways from China’s Third Plenum 2024

By Hung Tran

The communiqué of the Third Plenum of the CCP Central Committee lacks major policy initiatives to address the country’s near-term growth challenges.

China Economy & Business

Issue Brief May 15, 2024

China Pathfinder: Q1 2024 update

By GeoEconomics Center and Rhodium Group

In the first quarter of 2024, Beijing pushed forward with a flurry of efforts 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.

China Fiscal and Structural Reform

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

The post China Pathfinder: Q2 2024 update appeared first on Atlantic Council.

What accounts for this market correction? The most important factor has been the perception that the US Federal Reserve is behind the curve, having missed the opportunity to cut the federal funds rate in last week’s Federal Open Market Committee (FOMC) meeting. This perception was reinforced by weaker than expected employment numbers on August 2. Nonfarm payrolls increased by only 114,000 in July, and the unemployment rate rose to 4.3 percent from 4.1 percent in June. The fact that the unemployment rate (on a three-month moving-average basis) has risen by more than 0.5 percentage points from its low of 3.5 percent in July 2023 has heightened fears of an imminent recession, according to the so-called Sahm rule. As a consequence, market interest rates declined substantially with two-year US Treasury yields falling to 3.8 percent, causing the gap against the effective federal funds rate of 5.3 percent to widen the most since the global financial crisis in 2008. Furthermore, the federal funds rate is also far above the policy rate of 3.95 percent, according to the Taylor Rule (developed by economist John Taylor in 1993 to calculate what the federal funds rate should be given current economic conditions). These gaps appear to validate the view that the Federal Reserve is behind the curve.

Having painted itself into this corner, there are no good options for the Federal Reserve going forward. Waiting until the September FOMC meeting to start cutting rates—as implied by the July meeting—could risk having additional weak economic data prolong the market selloff, undermining business and consumer confidence and hurting economic activity. Implementing a rate cut before September could send the message that things are not well, triggering worse fears among investors. Cutting by fifty basis points—instead of the traditional pace of cutting twenty-five basis points per meeting—would also confirm that the Federal Reserve has been wrong in delaying easing for too long. On balance, using the September meeting with more data to make an appropriate cut—of fifty basis points, if necessary—would be the least bad option, minimizing the risk of the Federal Reserve inadvertently feeding into the present market panic.

This “September fifty” option seems to be supported by a close look at the overall economic conditions. The July employment data could be distorted to some extent by Hurricane Beryl and problematic seasonal adjustment factors. The increase in the unemployment rate was caused by a rise in the number of workers entering or reentering the labor force—the prime-age (twenty-five to fifty-four years) labor force participation rate surged to 84 percent—and not by a decline in employment. Furthermore, the Purchasing Managers Index for the important services sector recovered to 51.4 in July from 48.8 in June. In fact, the Federal Reserve Bank of St. Louis gross domestic product “nowcast model” estimates 2.54 percent growth in the third quarter, accelerating from the 1.14 percent pace in the second quarter. Weakening employment numbers warrant close attention to growth prospects, but a recession is yet to become the base case scenario.

Moreover, the global market selloff has also been driven by the normalization of outsized expectations for the high-tech sector and one-way betting for low Japanese interest rates and yen exchange rates. It could, therefore, be regarded as fundamentally healthy. For example, the US “magnificent seven” high-tech stocks, including Nvidia and Apple, have accounted for most of the market price gains over the past year or so, significantly stretching their market valuations. Their recent disappointing earnings reports have triggered the correction, shedding nine hundred billion dollars in market value.

In the case of Japan, investors have expected interest rates to remain low compared to the United States and for the yen to be weak against the dollar. Consequently, investors have borrowed substantially in yen to put on carry trades—investing in higher-yielding bonds, including in the United States and emerging markets. As the Bank of Japan hiked policy rates to 0.25 percent last week—for the second time since 2007—and outlined a plan to unwind its massive bond purchase program, the yen has strengthened by 10.5 percent against the dollar from its thirty-eight-year low of 166.99 yen/dollar in June. The appreciation of the yen has been magnified by short covering on the part of carry-trade investors—and this is expected to go on for some time given the estimated huge carry-trade positions, underpinning the yen in foreign exchange markets. A stronger yen would reduce the profits reported by many Japanese corporations, many of which rely on overseas markets for their profits, negatively impacting Japanese stock markets. To a lesser extent, the renminbi has also recovered to a seven-month high of 7.13 yuan/dollar due to short-covering of yuan-based carry trades.

On balance, the sharp equity market selloff may be painful to investors, but it could turn out to be a timely and healthy correction. Meanwhile, it is important that the Federal Reserve uses its long-planned review of its monetary policy operating framework to learn from its recent mistakes. (It has been behind the curve twice: keeping the federal funds rate too low for too long in 2022, and too high for too long now.) Going forward, the Federal Reserve must adopt a forward-looking policy framework instead of being fixated on current economic data.

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

Data visualization created by Alisha Chhangani.

The post Monday’s market rout is a painful but fundamentally healthy correction appeared first on Atlantic Council.

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.

The post Tran cited in South China Morning Post on Belt and Road Initiative loans appeared first on Atlantic Council.

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

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

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

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

Synchronized steering

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

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

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

1. Green reindustrialization

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

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

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

2. Rewarding effort

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

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

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

3. Balancing budgets

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

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

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

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

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

Sticking the landing

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

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

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

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

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

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

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

Learn more

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

Passing over green fields

For the most part, CFIUS only has jurisdiction to review foreign investment in existing US businesses, often referred to as cross-border mergers and acquisitions (M&A) or brownfield investment. Its inability to review most greenfield investments, or foreign investments that establish a new business, is purposeful.

Since CFIUS’s creation in 1975 there have been calls to give it authority over greenfield investments But every time CFIUS rules have undergone legislative updates, Congress has decided to retain the Committee’s focus on M&A. This has generally reflected lawmakers’ desire to prevent CFIUS from being used as a protectionist tool or from discouraging beneficial forms of foreign direct investment (FDI). Most economists and policymakers view greenfield investment as more beneficial to economic growth than cross-border M&A.

For years, the United States has been careful to emphasize in its outreach to other countries that investment screening should apply to investment in existing businesses only. Most governments with screening mechanisms agree; among the twenty-five Organisation for Economic Co-operation and Development countries with such mechanisms in 2023, eighteen countries, or 72 percent of them, do not review greenfield investments.

A real estate exception

When Congress updated the CFIUS process in 2018 (through the Foreign Investment Risk Review Modernization Act, or FIRRMA), it retained the committee’s historical focus on M&A activity—with a few important exceptions.

The committee now has review authority over real estate transactions that grant foreign investors access to or control over land located in close proximity to sensitive sites. These sites are defined in the regulation through an appendix to the implementing rules and are comprised of key critical infrastructure installations, such as ports and some military bases.

The rationale behind this change was straightforward: The US government needed additional authorities to address any attempts by foreign adversaries to buy or otherwise gain access to prime real estate from which they could spy or launch attacks on critical infrastructure.

In September 2012, for instance, then President Barack Obama used CFIUS authorities to issue a divestment order against a Chinese company that had invested in a wind farm near a US naval base in Oregon used for weapons testing and training. CFIUS was able to intervene because the Chinese company had invested in a US business. This case helped to make these kinds of collocational risks clear to US lawmakers, but before FIRRMA, there were no federal government authorities to block the sale or lease of land to foreign nationals near sensitive government sites. FIRRMA closed that regulatory gap.

Update or sea change?

So, what does CFIUS’s June 8 proposal add? On the surface, the new proposals are less new rules and more of a technical update. The proposed rules simply add a list of about fifty sensitive sites to the real estate rules’ appendix, expanding CFIUS’s jurisdiction to any land acquisition by foreign buyers that occurs close to a listed government site. For most instillations, “close” is defined as within a mile radius; for the most sensitive sites, “close” covers a one-hundred-mile radius.

This is the second time that the list of sensitive sites has been updated. The first update was made in August 2023 after a controversial proposed greenfield investment by a Chinese firm of North Dakota farmland located about twelve miles from a military site was found to be outside the scope of CFIUS’s original jurisdiction. The newly proposed rules come shortly after the Biden administration issued an executive order in May requiring a Chinese firm to divest its holdings in a crypto mining operation in Wyoming located within a mile of Warren Air Force Base. This was the first use of CFIUS’s real estate authorities to formally block a transaction that was structured as a real estate purchase and subsequent greenfield investment.

When the new rules were announced, some immediately called for CFIUS to use these new authorities to block controversial greenfield investments, such as the Chinese-owned Gotion’s development of an electric battery plant in Michigan. However, there are two reasons to be skeptical that these new authorities could be used in such a manner.

First, the Gotion land purchase occurred prior to the proposed rule change. Typically, CFIUS regulatory changes are not applied retrospectively, though the final rule should make this explicit. If CFIUS chose to attempt to apply the rules retrospectively, it would invite a lengthy legal battle.

Second, CFIUS real estate authorities provide the committee with jurisdiction over the real estate transaction, not the nature of the business activities that are planned to occur on the site in question. That is, the national security risk review of the transaction is supposed to address risks arising from colocation only, and not create a jurisdictional hook that would allow for a more comprehensive review of broader security risks associated with the specifics of the proposed greenfield investment.

In other words, a faithful interpretation of CFIUS’s real estate rules requires that transactions only be mitigated or blocked if a risk arises from the foreign entity owning or gaining access to the land under review. Whether the land is used to make cutting-edge technology or to grow cucumbers is beside the point.

For CFIUS to stop a transaction like Gotion’s from moving forward, it would need to find that access to the investment site generated a clear national security risk. The Gotion plant is located within one hundred miles of a US National Guard base that hosts joint trainings with the Taiwanese military, but there are no clear indications that the terrain in that area facilitates useful intelligence collection of activities on that base from the Gotion facility.

Likely effects

Given the narrow, technical nature of these updates to CFIUS’s authorities, it may be tempting to conclude that these expanded real estate rules will have little effect on foreign real estate acquisitions. Indeed, as the figure below illustrates, real estate FDI in the United States is low in volume and has recently experienced substantial declines.

But these figures only track FDI in land sales. They don’t track investment associated with greenfield investment that depends on acquiring or leasing land.

Considering how restrictions on land transactions could negatively affect greenfield investment, it becomes clear how these new rules could bite. They substantially expand the US land mass that is subject to CFIUS review, especially with the expansion of the number of sites for which an “extended range” of up to one hundred miles is reviewable. (See here for an especially useful map).

In today’s geopolitical environment, it is very hard to imagine CFIUS clearing any Chinese real estate transactions that fall under its jurisdiction. Espionage risks may be low-probability, but they are also of high consequence. This, plus the fact that discovering intelligence-gathering operations is challenging by design, suggests that the US government will likely be highly risk-averse when it comes to Chinese real estate purchases in designated areas.

In other words, CFIUS real estate authorities may operate functionally as a ban on Chinese greenfield investment in any area located close to a sensitive site. If that is true, then the real question will be how the US Treasury ensures that the process for identifying covered sites remains focused on narrow national security concerns and does not become overly expansive.

Sarah Bauerle Danzman is a resident senior fellow in the GeoEconomics Center’s Economic Statecraft Initiative.

The post China’s ability to buy US land near military bases just got more restricted appeared first on Atlantic Council.

The post Lipsky cited in Bloomberg on US efforts to persuade emerging market countries to publicly criticize China’s export practices during the G20 appeared first on Atlantic Council.

The post Lipsky cited in Reuters on U.S. Treasury Secretary Janet Yellen’s engagement at the G20 summit appeared first on Atlantic Council.

The post Lipsky featured in Mercatus Center podcast on tools of financial statecraft appeared first on Atlantic Council.

The post Donovan and Nikoladze cited by Washington Post on sanctions evasion appeared first on Atlantic Council.

Introduction
The geopolitics of infrastructure
The economic realities
Coordination of project identification and implementation
Recommendations
Conclusion

Introduction

Infrastructure development is a central component of the West’s global engagement strategy. This effort, if done effectively, could be a strategic, economic, and geopolitical feat. The development of sustainable and secure infrastructure carries the potential to create economic prosperity for countries aspiring to move up the global value chain, support the world’s green transition, provide an alternative to China’s exploitative investments, and strengthen the Western-led order.

The Group of Seven (G7) countries have varying plans for infrastructure development in cooperation with various partners around the globe, with particular focus on the Global South. Launched in 2022, the G7’s Partnership for Global Infrastructure and Investment (PGII) aims to mobilize $600 billion in capital for development projects by 2027.¹ In Europe, the European Union’s (EU) Global Gateway will invest 300 billion euros by 2027 in global infrastructure projects on behalf of the bloc.² Italy’s Mattei Plan, launched in January 2024, brings a direct focus on infrastructure development in Africa.³ Further abroad, the Group of Twenty (G20) partners signed the India-Middle East-Europe Economic Corridor (IMEC) memorandum in 2023, which aims to directly counter China’s Belt and Road Initiative (BRI) and cut down transit time between India and Europe.⁴

These initiatives are a good start. However, all G7 members face various challenges that could ultimately hamper progress on these initiatives, most notably: geopolitical challenges, limited funds, skittishness from private sector investors, and lack of coordination. For these initiatives to have a lasting impact, the G7 and likeminded partners must closely coordinate to both avoid and overcome these pitfalls.

Some efforts to better coordinate development projects have already begun. Along with its investments and focus on leveraging private capital, the United States led in the creation of the Blue Dot Network, “a multilateral initiative aimed at advancing robust standards for global infrastructure and mobilizing investment for projects in developing countries.”⁵ In addition, the US-EU Trade and Technology Council (TTC) has launched coordinated connectivity projects between the United States and the EU in third countries including Kenya, Costa Rica, Jamaica, the Philippines, and Tunisia.⁶

Holding the G7 presidency for 2024, Italy has made infrastructure development and strengthening relations with the Global South, and in particular Africa, central to its priorities. The 2024 G7 Leaders’ Summit in Apulia, Italy, in June 2024 again reaffirmed the group’s commitment to PGII and investments across Africa, with announcements including the creation of a secretariat to coordinate investments and aid information sharing and a greater shared focus on unlocking investment for green infrastructure projects.⁷

Now, G7 countries must focus on transforming the summit’s conclusions into reality and making real progress on development coordination. This issue brief provides an actionable set of recommendations to advance the G7’s ambitions.⁸ It examines the geopolitical impetus for infrastructure development, the economic realities of infrastructure, and the state of coordination on project implementation before providing recommendations to take forward for the rest of Italy’s G7 presidency and beyond.

The geopolitics of infrastructure

The G7’s focus on development is rooted in the shared understanding that G7 countries must fundamentally reset relations with the Global South. Historically, countries in the Global South, particularly in Africa, have been on the receiving end of unfair and extractive relationships with the West.

The result has been growing mistrust and disillusionment, and many countries now view China as a better partner than Europe or the United States. A 2022 study conducted by the University of Cambridge noted that around seventy percent of people not living in liberal democracies held positive views of China, and those in the developing world held more favorable views of China than of the United States.⁹ Another 2023 survey saw China’s approval rating in Africa rise to its highest levels in a decade, with ten-point increases in some countries.¹⁰

On infrastructure development specifically, China has outcompeted the West for years. China’s outreach to the Global South has been generally successful, and the BRI has evolved into an established brand. For example, in 2021 China pledged $40 billion over three years to Africa (though this was a reduction from an earlier pledge of $60 billion), and Beijing has out-invested the United States in Africa every year since 2013.¹¹ Though Chinese investments have yet to surpass their pre-pandemic heights, China’s rate of investment is again rising, and Africa was the largest recipient of BRI investment in 2023.¹² In part, as a result, Beijing is also poised to overtake Europe’s total trade with Africa by 2030.¹³

There are downsides to partnering with China, however. Its values-ambivalent approach is not built for sustainability and comes with a well-documented debt trap. For example, Zambia, which had more than 50 percent of its foreign loans from China, went into default and was unable to afford interest payments on loans financing construction projects in the country including ports, mines, and power plants (though China and Zambia have agreed to a restructuring of Zambia’s debt).¹⁴ Similarly, in Kenya, the government held back paychecks to its civil-service workforce to save cash to pay foreign loans.¹⁵

G7 countries are making progress on closing this partnership gap with China. Leaders at the Apulia Summit reaffirmed their ambition to meet the spending target of $600 billion by 2027, and the summit’s conclusions have a clear focus on infrastructure development, including with an announcement of a secretariat to facilitate the coordination of development projects.¹⁶ Leaders made further announcements at a side event where Italy joined the US- and EU-led consortium on projects in the Lobito Corridor in southern Africa, and Western companies like Microsoft and Blackrock pledged more investments across Africa and beyond.¹⁷

The summit also saw the participation of countries including Algeria, Brazil, Kenya, and Tunisia, among others—something Prime Minister Georgia Meloni lauded as delivering on a pledge to make outreach to the Global South a cornerstone of Italy’s G7 presidency.¹⁸

The summit also highlighted that the West’s values-based approach can be a strategic asset to building sustainable global partnerships. A focus on good governance and environmental and labor standards allows for long-term success and, in turn, economic growth. The G7 recognizes the importance of engaging with Africa specifically, with the 2024 Communiqué positioning the PGII, the Global Gateway, and the Mattei Plan as frameworks to “promote [the West’s] vision of sustainable, resilient, and economically viable infrastructure in Africa underpinned by transparent project selection, procurement, and finance.”¹⁹

This is a good start, but there is still room for improvements. Some of the West’s recent outreach has received similar criticisms to previous efforts, for example, failing to consult the very countries these efforts are meant to engage. In particular, African leaders noted Italy failed to consult them before announcing the Mattei Plan.²⁰ Moreover, the West’s tedious approach to infrastructure development can be perceived as an obstacle, not an asset, especially if it is not applied consistently.²¹

G7 countries should make greater efforts to convene with PGII partners in the region including the private sector, civil society, and government—to sustain debate and discussion about the West’s ambitions and the reasoning behind its values. At the same time, more regular and targeted engagements can, in turn, expose Western public and private financial institutions to the realities of partner markets and address the misconceptions of perceived risks. It’s a win-win for both sides. Where possible, the framing should be adapted to showcase the importance of the long-term sustainability of projects, especially compared to the non-durability of Chinese infrastructure. This engagement will also be a useful tool to address criticisms that Western initiatives are organized without the feedback and involvement of partner countries.

Finally, while competition with China will be a defining element of Western global infrastructure projects, geopolitics cannot eclipse all else. Recipient countries are looking for projects for their benefit to move up the global value chain and to spur domestic growth—not to be a pawn in other parties’ geopolitical rivalries. States can and have the option to accept projects from different sources, including from China. In response, policymakers should be cognizant that countries might be interested in partnering with both China and the West, and should not be forced into a binary, mutually exclusive choice of one or the other.

It will be important, then, for transatlantic policymakers to work out how to both compete against and partner with China. This will be critical specifically in the area of information and communications technology (ICT) development, where using “untrustworthy” vendors has been an area of focus. Policymakers should be clear about where and when non-G7 countries are involved in projects, and in what respects that will not preclude partnership.

The economic realities

Geopolitics may be a key impetus for development initiatives, but policymakers must also contend with economic realities that have long-plagued development projects. Economic stability in recipient countries is important for investments, but that stability is not always a luxury the West can expect. The International Monetary Fund’s regional economic outlook from spring 2024 for sub-Saharan Africa, for example, notes “the fiscal position of many sub-Saharan African countries has deteriorated, a trend exacerbated by repeated shocks and the ensuing demand for fiscal support,” which adds to political and economic uncertainty.²² The cost of borrowing for African states is also four to eight times higher than for Western countries, making raising capital prohibitive.²³

The reality is that currencies can collapse and interest rates can rise, but the need and opportunities for investments will remain. The West, therefore, cannot wait to invest in projects until after implementing structural reforms to partner states’ finances and economies.

G7 countries, the United States in particular, have stressed the importance of the private sector to achieve its financing goals. The Apulia Summit placed additional emphasis on the necessity of private-sector capital for the success of PGII. Side events on the PGII have taken place at every G7 summit since the PGII was announced, and since 2023, have prominently featured participation from major investors and companies including Citi, Nokia, Global Infrastructure Partners, Blackrock, and Microsoft—usually with investment announcements in tow.²⁴ Policymakers should appreciate and foster a bottom-up approach to project identification from the private sector and its appetite to invest.

However, leveraging private capital to help fund infrastructure projects comes with its own challenges. Investments into large-scale infrastructure projects are inherently risky, and shaky local markets only add to the unease felt by private-sector investors as currency devaluations risk erasing investments.

G7 members will therefore need to play a greater role, in some form, as guarantors of investments to help reduce the cost of borrowing and alleviate some of the risk. This comes with its own difficulties, as unlocking government-backed funds is not a straightforward process. Certain firms may not be eligible for funding depending on where they are located. And while it makes sense for European taxpayer funds to go to European firms, for instance, multinational firms can become caught up in the bureaucratic web, impeding their involvement with investment projects. Nevertheless, governments must figure out how to play a role here. The European Union, for instance, has a AAA credit rating, and can take on the role of a guarantor for private-sector investment.²⁵ The US International Development Finance Corporation (DFC) has provided political-risk insurance up to $25 million for investments in Ukraine.²⁶ The case of Ukraine is not a one-to-one comparison to investments in the Global South, but offers a useful example to consider. This is not meant to provide a blank check to the private sector for risky investments. However, investment projects cannot wait for long-term structural reforms that will impact geoeconomic changes like foreign-exchange rates. Instead, investors need to work within current economic realities.

Greater efforts are also needed to address change Western misconceptions of African markets and perceived risks that may not truly reflect realities on the ground. The metrics used by the West to measure projects, specifically environmental, social, and governance (ESG) standards, do not always have as strong a foothold in recipient countries, making investment look riskier or undesirable. Balancing the focus to communicate the impetus for these metrics—while maintaining a degree of flexibility and not completely sacrificing all ESG baselines—will be an important needle for policymakers and investors to thread.

Coordination of project identification and implementation 

Shared project standards are an opportunity for greater coordination. The 2023 Hiroshima G7 summit provided a starting point, highlighting forty projects of common interest.²⁷ Italy’s G7 presidency looked to further this effort. As Meloni outlined at the G7 summit side event focusing on the PGII, Italy’s ambition was to create “structured synergies and coordinated activities to maximize efforts and investments” between G7 members’ various projects.²⁸

The 2024 Apulia Summit specifically pledged greater effort at coordination through three prongs: establishing a secretariat “for effective implementation and investment coordination with partners,” supporting investment platforms to “enhance information sharing, transparency, and public policies on investments in Africa,” and working in particular on green investments in Africa.²⁹ These efforts are all good starts, but they remain wide in their ambition and vague in actual substance.

Coordination on project identification should be an early priority for the PGII secretariat. As G7 countries and the private sector will necessarily look to identify more of these projects, it will be useful to have shared criteria for projects to meet quality and sustainability standards. A shared understanding of what projects G7 members are looking to support, and metrics to assess projects, would also help the private sector in more easily identifying projects in which to invest. The Blue Dot Network is a good starting point for this effort, but so far only a few European G7 countries are on its steering committee.

Additionally, coordination between the United States and the EU through the TTC to support connectivity projects provides another useful starting point for this effort. Established in 2021, the TTC has become the backbone of this US administration’s efforts to strengthen its relationship with Brussels. Despite its initially limited scope, it has morphed into a clearinghouse for discussions not only on transatlantic trade and technology coordination, but also on sanctions against Russia and support for projects in third countries to support internet connectivity.³⁰ Supporting connectivity projects at the TTC is useful, but it is limited to smaller projects. Taking coordination from the TTC to the G7 level would allow participation and coordination with countries like the United Kingdom and Japan.

In terms of project selection and implementation, the G7 must also ensure money is available for maintenance, and enough staff is available to follow-up and to make projects sustainable. Ongoing efforts must leverage available funding not just to start projects, but to fund them through their full cycle, and staff them at a level that supports medium- to long-term maintenance. Often, this will include building relationships with on-the-ground in-country partners, and then training and subsequently employing local civilians to shoulder these responsibilities. It is simply not feasible for European, US, Japanese, British, or Canadian project managers to shoulder this burden. In this respect, it is equally important to get buy-in from national and local governments in recipient countries. Locals with knowledge about projects, communities, and factors on the ground will be critical to the maintenance and durability of such projects. The G7 conclusions rightly noted the importance of working with local partners. Now, a secretariat should take forward that effort in earnest.

Maintenance also means investing in skills. This is just as important for implementation and maintenance as investing in technology or brick-and-mortar buildings. Project identification must not look past the funds and time needed to train partners on the ground. For G7 members it will be important, especially on projects in which the United States and EU are involved, to standardize, de-duplicate, or divide training efforts.

Recommendations

At the 2024 Apulia summit, G7 countries made some progress on global infrastructure development in the context of the PGII. Implementation must now follow pronouncements. Italy should lead through the rest of its G7 presidency to see that real progress is made and to ensure this remains a priority in forthcoming summits (much like the role Japan played on artificial intelligence), and each G7 member must also work to meet its national commitments. To make greater coordination a reality, the G7 should undertake the following recommendations.

• Expand the Blue Dot Network Steering Committee. The European Union and/or all EU member states that are part of the G7—Italy, Germany, and France—should join the Blue Dot Network. The Blue Dot Network’s steering committee is currently composed of Australia, Japan, Spain, Switzerland, Turkey, the United Kingdom, and the United States (Canada, Czechia, and Peru are network members and do not contribute funds).³¹ All G7 members, and the EU, should become members of the steering committee. European membership in the Blue Dot Network should not be limited just to G7 EU members, and the EU could take on a role representing all EU member states.

• Invest in the PGII secretariat and commit to the adequate staffing of development institutions. A PGII secretariat can serve as an important hub for coordination, but it must be staffed adequately. G7 countries should assign national-level envoys to the secretariat, or at least fold them into the offices responsible, such as IMEC. Much of the work to take forward the agreements at the G7 will also fall to domestic institutions and development finance institutions. However, staffing and financing shortages have limited their effectiveness. G7 members should pledge a benchmark for spending on development financing.

• Establish regular convenings in or with partner countries. G7 members should commit to hosting regular meetings with partners and their private sectors, civil societies, and governments. The Hiroshima G7 meeting highlighting the PGII was a good start, but the initiative should now be further developed with a partner-first mindset. G7 member officials should host annual meetings in partner countries to make the case for the West’s efforts. This would signal a departure from the West’s historically paternalistic approach to engagements with African partners, and the Global South generally. Outreach and consistent engagement at the ambassadorial level would also be useful.

• Identify which third countries can take part in which projects. Currently, there is no clear framework for which third countries can take part in specific development projects or what limits exist to partnering with third countries, including those like China. Where issues like human rights and national security come into play, G7 countries may differ in their strategies for engaging with third countries. At the same time, there should be clearer frameworks for private companies and governments in terms of in which projects each can take part.

• Build in long-term maintenance and implementation of projects at the development stage. Projects should begin with the end in mind. If there is no way to measure success or to educate and employ local populations, these projects will turn into basic assistance with no longevity. G7 countries should agree that investment projects under the PGII umbrella should mandate a long-term implementation and maintenance plan with substantial involvement and buy-in from the partner country. Countries want economic success and want to move up the global value chain; they don’t want to be seen as mere development recipients. It is up to the G7 to ensure such upward movement happens.

• Map and publish all PGII-related projects. The PGII secretariat should map out all investments under the PGII umbrella, along with projects of interest. This could serve as a clearing house, especially for the private sector to identify opportunities for investment. This would also create a strong public relations tools showcasing the West’s impact and investment footprint. This effort could also be utilized to facilitate the submission of new investment projects by the private sector and potentially lead to consolidated funding for joint investments promoted or pursued by G7 members.

Conclusion

Giorgia Meloni called the dialogue around the PGII “one of the most significant achievements of the G7” to deliver “concrete action” to Africa and the Global South.³² The G7 has made progress, but such a conclusion is premature. The G7 is well on its way to turning its ideas and visions for new partnerships with the Global South into action. Putting the resources and people behind those visions will ensure that they come to life.

James Batchik is an associate director at the Atlantic Council’s Europe Center, where he supports programming on the European Union, the United Kingdom, Germany, Italy, and the center’s transatlantic digital and tech portfolio.

Rachel Rizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center. Her research focuses on European security, NATO, and the transatlantic relationship.

Nick O’Connell is the deputy director for public sector partnerships at the Atlantic Council. He also contributes regularly to the Atlantic Council’s Italy project, a collaboration between the Europe Center and Middle East Programs.

New Atlanticist Apr 24, 2024

Dispatch from Rome: Political stability gives Italy a chance to step into the spotlight

By Jörn Fleck, Rachel Rizzo, James Batchik, Nicholas O’Connell

With newfound steadiness at home, Rome can make its priorities for the West heard, especially the security of the Mediterranean and outreach to Africa.

Economy & Business Europe & Eurasia

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

New Atlanticist Feb 5, 2024

Italy’s Mediterranean pivot: What’s driving Meloni’s ambitious plan with Africa

By Alissa Pavia

The Mattei Plan for Africa was presented on January 29-30 to a delegation of more than twenty-five African leaders. It seeks to establish an Italian agenda that prioritizes Africa’s needs and avoids predatory practices.

Africa Economy & Business

The Europe Center promotes leadership, strategies, and analysis to ensure a strong, ambitious, and forward-looking transatlantic relationship.

Learn more

The post Doing as the Romans do: Recommendations for the infrastructure development agenda for Italy’s G7 presidency appeared first on Atlantic Council.

The post Dollar Dominance Monitor featured by Reuters on BRICS de-dollarization efforts appeared first on Atlantic Council.

The post Transatlantic Economic Statecraft Report cited in the International Cybersecurity Law Review on semiconductor supply chains appeared first on Atlantic Council.

The post Tran cited by Business Insider on Saudi Arabia petrodollar alternatives appeared first on Atlantic Council.

Compared to last year’s economic free-fall, Argentina’s situation is indeed looking up. President Javier Milei and his team have embarked on a serious fiscal adjustment initiative and are making a determined effort to bring inflation down from record levels. These policies have met with considerable early success, but the austerity measures needed to reduce the fiscal deficit have led to massive social disruption and serious street protests against the government.

Despite these early achievements, the real issues facing Argentina remain low productivity, a weak growth outlook, and large external financing needs in the foreseeable future. Together, they call into question whether Argentina will be able to crawl out from under its large debt burden and access markets to obtain fresh financing beginning in 2025, as projected by the latest IMF staff report. This forecast corresponds to an exceedingly optimistic scenario, in which continued reforms lead to an improvement in Argentina’s twin deficits, culminating in a strong pickup in capital flows in the medium term.

In reality, it is more likely that the reform momentum will be slowed by hardening opposition in the National Congress of Argentina, in particular in the Senate, where Peronist provincial governments still hold sway. Further exchange rate depreciation, the lack of a strong rebound in labor markets, and accumulating pain from continued austerity will also impair Milei’s hopes of gaining a parliamentary majority of his own during next year’s midterm elections.

A drubbing at the polls could throw Argentina back to square one. Both of the last two governments were hobbled by weak election outcomes halfway through their presidents’ terms. Despite Milei’s popularity with a large part of the Argentinian public, failure to array Congress behind his movement could again leave Argentina with a lame duck government and a half-completed reform agenda.

In such a situation, the envisaged liberalization, if not outright dollarization, of Argentina’s exchange rate regime—which still seems to be one of the president’s key objectives—is bound to fail. The country would need a strong and growing economy to sustain the kind of fiscal discipline that is required for a stable exchange rate regime, and this will not be possible without deep changes to Argentina’s economic laws and structure, starting with the government’s own footprint.

Such changes require a societal consensus toward market-friendly reforms, but also toward the appropriate distribution of incomes in case growth takes off. In Argentina, such middle ground between radical reform and government largesse has been elusive for decades, and it is unlikely to be found unless the main political camps are prepared to compromise.

Without dismissing this possibility outright, it is much more likely that the economic hardship currently experienced by ordinary Argentineans will drive voters back toward the main opposition party. The Peronist party will, without doubt, promise large handouts to core constituencies that abandoned them during the last elections, frustrated by high inflation and rising unemployment. And as the economic environment is stabilizing, many voters will have forgotten who was responsible for Argentina’s precarious situation in the first place.

The IMF should therefore remain cautious in its discussions with the current government. The institution was wrong to lower its standards for the current program, which granted Argentina a fairly easy restructuring of its repayment terms, an operation that is in principle ruled out by the IMF’s own statutes. Going forward, the fund should be leery of granting Argentina fresh money, digging itself even deeper into a hole that is already threatening to upend its own balance sheet (and possibly imposing losses on shareholders whose per-capita income is still below Argentina’s).

Instead, any new relationship with Argentina should be based on conditionality that ensures sustained growth and the eventual repayment of Argentina’s debt. As it failed to do in 2022, the IMF should insist that both political camps sign on to a meaningful reform program. Otherwise, it risks a reprise of the Macri experience, when IMF funds provided the incumbent government with a financial war chest to support its reelection which the next opposition-led government did not feel obliged to repay when it came to power.

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.

The post Milei’s biggest challenge is to foster the societal consensus that Argentina needs to thrive appeared first on Atlantic Council.

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

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

America and Saudi Arabia in 1974

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

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

A brave new world

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

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

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

The dollar’s global dilemma

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

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

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

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

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

Learn more

Dollar Dominance Monitor

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

The post Is the end of the petrodollar near?  appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

Learn more

The post India outpaces the rest of the G20 in gold purchases appeared first on Atlantic Council.

The post Tannebaum cited by The Banker on US secondary sanctions and foreign banks in Russia appeared first on Atlantic Council.

The post Lipsky quoted by Newsweek on stakes of G7 Summit appeared first on Atlantic Council.

The post Lipsky quoted by VOA on stakes of G7 Summit appeared first on Atlantic Council.

The post Lipsky quoted by PBS on stakes of G7 Summit appeared first on Atlantic Council.

The post Lipsky quoted by AP on stakes of G7 Summit appeared first on Atlantic Council.

The post Lipsky quoted by the Wall Street Journal on stakes of G7 Summit appeared first on Atlantic Council.

The post Lipsky quoted by CNN on stakes of G7 Summit appeared first on Atlantic Council.

The post Norrlöf interviewed by Project Syndicate on international role of the US dollar appeared first on Atlantic Council.

• Introduction
• Research questions
• Methodology
• Historical cases of successful US military friend-sourcing
• Assessment
• Recommendations
• Acknowledgments
• About the author
• Appendix 1

Introduction

In the United States, the military procurement bureaucracy tends to sponsor development of new technologies to fill requirements. The bureaucracy also largely seeks domestic sources for all new charismatic military megafauna: aircraft, ships, ground vehicles, and missile systems. Security “cooperation” in US policy and practice is largely a one-way process, neglecting the benefit of learning and sourcing from other countries. However, Russia’s invasion of Ukraine, and China’s concomitant threats from India to Korea, point to the need for coordinating the industrial capabilities of allies. As the United States faces simultaneous competition with two revisionist, nuclear-armed, major-power rivals, not to mention a challenging budgetary and fiscal environment, the additional research and development (R&D) costs assumed by the Department of Defense through its disregard of foreign suppliers, while never ideal, are no longer tenable.

Law, regulation, and policy can conspire against good economic thinking, though with clear exemptions. The Department of Defense Authorization Act for 1983 prohibited the construction of naval vessels in foreign shipyards, unless the president first informs Congress of a national security need otherwise (10 U.S.C. §§ 7309–7310). The Buy American Act of 1933 demands preference for domestic manufactures in federal procurement, though this is waived for imports from dozens of allied countries through reciprocal agreements (41 U.S.C. §§ 8301–8305). Note, though, that these laws say nothing of where products are designed, merely where they are manufactured. Further, the Federal Acquisition Streamlining Act of 1994 mandates a “preference for commercial products . . . to the maximum extent practical,” with “market research . . . before developing new specifications for a procurement” (10 U.S.C. § 3453). Official policy periodically reemphasizes this mandate for off-the-shelf procurement.¹

Much of the procurement bureaucracy in the Defense Department seems not to understand the exemptions and the mandates for off-the-shelf procurement of military capabilities. In contrast, the US Special Operations Command, imbued with its own procurement authority, has been far more open to procuring military systems off the shelf, and then heavily customizing them against specific military needs. The US Coast Guard, housed under the Department of Homeland Security, has also long preferred off-the-shelf solutions, often of foreign design and even manufacture—and with much less customization. Indeed, decades of procurement debacles and the economics of international commerce indicate that broad domestic preference is wrongheaded. At least three reasons point to the need for broader sources of supply:

• Quality: With military off-the-shelf solutions, many of the qualities are observable, from performance in testing to actual use in battle. In developmental programs, quality is not so observable ex ante, and may disappoint ex post. Global procurement invites buyers to find the best equipment available anywhere, and often from countries with competitive advantages in particular industries.
• Urgency: Off-the-shelf solutions may be sought as interim solutions to immediate military problems. If not restrained by production capacities or bottlenecks, they will arrive presently. What is purchased immediately may then suffice for anticipated problems, becoming enduring solutions, if the political and technological conditions do not too greatly change in the long run. In contrast, technological development requires greater lead time, delaying fielding.
• Economy: Off-the-shelf solutions may come at lower upfront prices, if the development costs are spread among multiple national customers, or otherwise already amortized. With domestic development, the cost is disproportionately borne by the sponsoring government, and this roughly averages 20 percent of the life-cycle cost of more advanced systems. Spending on R&D competes with spending on procurement, but, in fielding capabilities, the measure of merit is procurement. Simultaneously, when immediate needs are adequately filled by off-the-shelf procurements, monies can be husbanded for developing systems targeted at more challenging, long-range problems. Later, the wider supply base for the off-the-shelf system, which should remain largely interoperable with foreign versions, will contribute to lower sustainment costs.

Because autarky is illusory, greater “friend-sourcing” can provide US forces with quick access to proven, economical solutions, while maintaining the option for domestic production when that is strategically desirable.² Informal consortia of allied buyers could then naturally divide responsibilities for development and production, through an emergent but controlled market process. Allowing US forces more opportunities to acquire military technologies abroad would then restructure security cooperation as a two-way process, with the avid participation of friendly countries. As Ukrainian President Volodymyr Zelenskyy recently described Kyiv’s emerging military-industrial cooperation with the United States, “Ukraine does not want to depend only on partners. Ukraine aims to and really can become a donor of security for all our neighbors once it can guarantee its own safety.”³ Access to that sort of battled-hardened experience is part of the return on US assistance.

Research questions

Historical case studies can provide tangible evidence as to how well friend-sourcing approaches have fared in the recent past. The results can demonstrate whether actual procurements should more closely follow this course of action, already supported by law, policy, and economic theory. This study then poses two important and timely research questions. In the United States, since the end of the Cold War, how has the procurement of off-the-shelf systems developed for allied militaries:

• Affected the quality, availability, and cost of national military capabilities?
• Affected the long-term market for national, military-industrial R&D?

Methodology

To answer these questions, this paper seeks to identify all recent cases of off-the-shelf military procurements in the United States, subject to some boundaries. The set is limited to major end systems—aircraft, ships, ground vehicles, and missile systems—because the international trade in subsystems among friendly countries is already much more liberal. Also, the set includes only those US procurements undertaken since the end of the Cold War because global security dynamics changed radically at that point. Note that this excludes from consideration, for example, the US Army’s procurement of its Austrian-designed Family of Medium Tactical Vehicles, and the US Marine Corps’ procurement of LAV-25 armored vehicles, as these both began in the 1980s.

This paper further restricts the set to systems already in use by US forces, so that a firm decision for adoption, and some record of operation, can be observed. The study includes, however, customizations of off-the-shelf systems, as most countries have needs for subsystems (radios, racks, left- or right-hand drive, etc.) specific to their own military services, and modest customization is common in the international arms trade.

After review of histories and the author’s consultations with a wide set of experts on US military procurement, this paper identifies only nine cases—two missile systems, four aircraft, one ship, and two armored vehicles—in this set (see Appendix 1 for a summary):

• The RGM-184A Naval Strike Missile (NSM)
• The Norwegian Advanced Surface-to-Air Missile System (NASAMS)
• The UH-72A Lakota helicopter
• The MH-139A Grey Wolf helicopter
• The HC-144 Ocean Sentry maritime patrol aircraft
• The C-27J Joint Cargo Aircraft
• The Sentinel-class Fast-Response Cutter
• The RG-31 mine-protected vehicle
• The Stryker LAV III Interim Armored Vehicle

Neither the author nor the Atlantic Council intends to endorse or oppose the specific platforms mentioned or the procurement choices made. Rather, the following section outlines how these systems were procured and what advantages the acquiring service derived from the purchase. The following assessment section gathers lessons from the case studies in aggregate to inform how the Department of Defense should consider friend-sourcing more military procurement.

Historical cases of successful US military friend-sourcing

RGM-184A Naval Strike Missile

The RGM-184A NSM is a 400 kilogram, jet-powered, sea-skimming, anti-ship cruise missile. In September 2014, seeking a lightweight but lethal anti-ship missile for its littoral combat ships (LCSs), the US Navy test-fired Kongsberg’s NSM from the USS Coronado. In 2015, the Navy undertook a competitive procurement to equip its LCSs. Kongsberg and Raytheon announced a teaming arrangement to bring the Norwegian missile to the United States.⁴ Boeing initially offered an extended-range RGM-84 Harpoon, and Lockheed Martin a surface-launched version of its AGM-158C Long-Range Anti-Ship Missile. The latter two firms, however, withdrew their entries in 2017. In May 2018, the Navy selected the NSM for its Independence-class LCSs, its Freedom-class LCSs, and its Constellation-class frigates. The Marine Corps subsequently selected the NSM to equip its new land-based, mobile anti-ship missile batteries, with two NSMs mounted on each robotic Joint Light Tactical Vehicle (see below), deemed the Navy-Marine Expeditionary Ship Interdiction System (NMESIS).

The missiles are mostly built in Norway, as they have been in production there since 2007, and they cost “slightly less than the Raytheon Tomahawk Block IV cruise missile.”⁵ In a press release, Raytheon noted that undertaking final assembly and testing of an already operational missile “saves the United States billions of dollars in development costs and creates new high-tech jobs in this country.”⁶ More labor, at possibly higher cost, would be required in the United States if production were fully domesticated, and Kongsberg and Raytheon have discussed a second production line to deliver yet more missiles.⁷ Navigation is provided by satellite, inertial, and terrain contour matching; terminal guidance relies on imaging infrared and a target-image database. With the latter technologies, the NSM is designed to strike specific, vulnerable points on an enemy ship, and detonate with its void-sensing fuse at the point of maximum damage. A single missile can thus render even a large warship hors de combat.

The NSM was initially developed by and for Norway. Missiles for mobile coastal defense batteries were quickly sold to Poland. Since then, the NSM has been adopted as well by Australia, Belgium, Canada, Indonesia, Latvia, the Netherlands, Malaysia, Romania, Spain, and the United Kingdom. In summary, with the NSM, the Navy and Marine Corps obtained one of the best anti-ship missiles in the world, from a running production line, and at a cost below that of its best alternative in inventory. The US Navy and Air Force have continued to fund development of other, longer-range cruise missiles.

Norwegian Advanced Surface-to-Air Missile System

The NASAMS (pronounced NAY-sams) is a ground-based, anti-aircraft missile system. NASAMS was developed in the 1990s by Kongsberg and Hughes Aircraft to replace the Nike Hercules batteries of the Royal Norwegian Air Force. (Raytheon acquired Hughes Aircraft in 1997.) NASAMS integrates Raytheon’s MPQ-36A Sentinel trailer-mounted radar and AIM-120 Advanced Medium-Range Air-to-Air Missile (AMRAAM) with Kongsberg’s launcher and battle-management system. In an apparently sole-source deal, the US Army procured several launchers for the medium-range air defense of Washington, DC, in 2005, and they have served in that role ever since, at a variety of locations in Virginia, the District of Columbia, and Maryland.⁸ The NASAMS case is remarkable in that the Norwegian-US team integrated two off-the-shelf components from a US manufacturer into its system before providing that system as an off-the-shelf product back to the US military.

The United States was the third user of NASAMS, after Norway and Spain. NASAMS is now in service with thirteen countries, including Australia, Chile, Finland, Hungary, Indonesia, Lithuania, the Netherlands, and Oman.“⁹ In 2022 and 2023, the United States, Norway, Lithuania, and Canada all provided NASAMS units to Ukraine.¹⁰ The Canadian purchase is notable because Canada itself had no ground-based air defenses; the Canadian federal government simply identified a cost-effective and already-available system to send.¹¹

In summary, with the NASAMS, the US Army obtained a medium-range air defense system that remains at the forefront of air defense against the most challenging (Russian) threats, from a running production line, and at a cost that global customers still willingly pay. The US Army and Navy have continued to fund several other families of medium- and long-range air defense missiles.

UH-72A (EC145) Lakota utility helicopter

The EC145 is a twin-turboshaft, utility helicopter capable of carrying nine passengers. In its Light Utility Helicopter program of 2005, the US Army sought a proven helicopter for logistical and medical missions within the United States. In its request for proposals (RFP), the Army specifically sought only off-the-shelf aircraft, and received such offers from Bell, AgustaWestland (now Leonardo), and Eurocopter (now Airbus Helicopters). In June 2006, the Army selected a version of Eurocopter’s EC145, and designated it the UH-72A Lakota. The EC145 first flew in 1999 and was itself developed from the MBB/Kawasaki BK 117, which had first flown in 1979.

All UH-72s have been assembled at Airbus’s factory in Columbus, Mississippi. The program has experienced no significant delays. The UH-72 was competitively sourced, and the Army has been sufficiently satisfied with its performance and cost-effectiveness that the service has purchased 481 of the aircraft. Along the way, the Army awarded Airbus further orders under the original contract to fully recapitalize its fleet of training helicopters.¹² The Army’s Lakota was subsequently upgraded into the UH-72B, as Airbus continued to develop its EC145 into the H145M.¹³

Military versions of the EC145 have also been in service with the military forces of thirteen other countries: Albania, Belgium, Bolivia, Cyprus, Ecuador, France, Germany, Hungary, Kazakhstan, Luxembourg, Serbia, Thailand, and the Cayman Islands. The US Army has several times rebuffed suggestions that the domestic-service helicopters could be deployed overseas, asserting that adding armor and decoys would be uneconomical. However, in December 2023, Airbus and the German Defense Ministry announced a deal for at least sixty-two H145Ms, configured as either commando transports or missile-firing anti-tank helicopters.¹⁴ In this way, the case provides an example of a US military service overestimating its need for technological development when an off-the-shelf product would suffice.

In summary, with the EC145, the US Army obtained a proven helicopter in wide military service around the world, relatively quickly, and at a price that won a competitive tender. The US Army continued to fund rotorcraft development, though more notably of tilt-rotor aircraft through its Future Long-Range Assault Aircraft program.

MH-139A (AW139) Grey Wolf helicopter

The AW139 is a twin-turboshaft, utility helicopter capable of carrying up to fifteen passengers.

In the late 1960s, Bell Helicopter developed its UH-1 Huey helicopter, a workhorse of the Vietnam War, into the twin-engine UH-1N Twin Huey, to meet a requirement of the Royal Canadian Air Force.¹⁵ The US Air Force began buying Twin Hueys in 1970, for a variety of utility functions. About forty-five years later, the USAF was ready to replace them, seeking up to eighty-four aircraft for passenger transport and other utility functions. The aircraft had two particularly important roles: flying commandos to any missile silos in Wyoming, Montana, and North Dakota that might come under attack, and evacuating government officials from Washington, DC should the capital city again come under attack.¹⁶ The USAF initially planned a sole-source award to Lockheed Martin’s Sikorsky for UH-60s. Under the Economy Act of 1932 (31 U.S.C. § 1535), an agency can select a system already in service with another branch of government in lieu of a competitive procurement. Congressional objections soon scuttled that idea, whether to provide others an opportunity to bid or simply because the UH-60 might not have been the best-value solution.¹⁷ In September 2016, the USAF released a request for information (RFI) from industry, and in December, a draft RFP.¹⁸

The Air Force asked for a proven helicopter, and in response, five companies or teams offered four types of aircraft. Sikorsky offered its HH-60U Pave Hawk, already in service with the USAF. Sierra Nevada offered to rebuild existing, out-of-service US Army UH-60As to a -60U configuration. Airbus offered its UH-72A, already (see above) in service with the US Army. Textron’s Bell Aircraft offered its UH-1Y, already in service with the US Marine Corps, which was developed in the 1990s under a perhaps questionable sole-source contract.¹⁹ Leonardo teamed with Boeing to offer a military version of the Italian company’s AW139. That aircraft had been developed initially by Agusta (later AgustaWestland, now Leonardo) and Bell in the late 1990s, though Agusta bought Bell’s interest in the program in 2005.

The Air Force rejected the Airbus and Bell offerings outright as too small and short-ranged for the missile security mission. In September 2018, the service chose the AW139. At the announcement, Air Force Secretary Heather Wilson told the assembled that “strong competition drove down costs for the program, resulting in $1.7 billion in savings to the taxpayer.”²⁰ In this instance, the Federal Acquisition Streamlining Act beat the Economy Act at economy. At first delivery, in December 2019, the service named it the MH-139A Grey Wolf.²¹ Flight testing started in 2020, but did not conclude for several years. Leonardo and Boeing agreed to some requested modifications, and the aircraft had some unexpected difficulties with FAA certification.²² Low-rate production started in Philadelphia in March 2023.“²³ The Grey Wolves are today built on the north side of Philadelphia, where Leonardo has been building AW139s since 2007, and they are then customized on the south side of Philadelphia, by Boeing.

Prior to the Air Force’s purchase, AW139s were flying with at least three air services in the United States: the New Jersey State Police (since 2012), the Maryland State Police (2012), and the Los Angeles City Fire Department (2013). Miami-Dade Fire Rescue joined that group in 2020. Air forces or other public flying services in twenty-four other countries also operate AW139s.

In summary, with the AW139, the US Air Force obtained a proven helicopter in wide military service around the world, with a two-year delay, though at a price that won a competitive tender. The Air Force had not spent significant sums previously on rotorcraft development, and, with relatively few requirements for rotary-wing aircraft, the service has not since.

HC-144 (CN-235) Ocean Sentry maritime patrol aircraft

The CN-235 is a twin-turboprop, fixed-wing cargo aircraft capable of carrying fifty-one passengers or thirty-five paratroopers. In May 2003, the US Coast Guard selected the CN-235-300M maritime patrol aircraft from the European Aeronautic Defence and Space Company (EADS) as part of its “Deepwater” program to recapitalize much of its aircraft and ship fleets.“²⁴ In February 2004, Deepwater contractor Lockheed Martin ordered the first two aircraft from EADS on the Coast Guard’s behalf.²⁵ The service had specifically requested a proven, off-the-shelf aircraft to replace its HU-25 Guardian jets, Dassault Falcon 20s similarly purchased off the shelf in the early 1980s and originally developed in the early 1960s. The CN-235 was developed, starting in 1980, by a joint venture of Spain’s Construcciones Aeronáuticas SA (CASA, then part of EADS, now Airbus) and Industri Pesawat Terbang Nusantara (IPTN, now Indonesian Aerospace). The first flight was in 1983, and production began in 1986.

Deliveries to the USCG proceeded slowly, with the availability of funding. The first unit arrived in December 2006, and the eighteenth in October 2014, at which point the Coast Guard retired its last HU-25. The aircraft were largely built in Spain but fitted out with equipment specific to the Coast Guard at EADS’s facility in Mobile, Alabama. The USCG had initially intended to procure thirty-six, but the availability of surplus C-27Js (see the next case study) led the service to reduce its plan by half. By September 2017, the Coast Guard’s HC-144 fleet had flown for one hundred thousand hours—more than that of any country with CN235s besides France and South Korea. At that point, more than two hundred CN-235s were flying in more than twenty-four countries.²⁶

The US Air Force also flies a few CN-235s within its Special Operations Command.²⁷ Notably, Air Force Special Operations also flies twenty Dornier 328 twin-engine turboprops, termed C-146A Wolfhounds; and a few CN212 Aviocars from CASA, termed C-41As.²⁸

In summary, with the CN-235, the US Coast Guard obtained a proven turboprop aircraft in wide military service around the world, at the pace it desired, and at an ongoing total cost that the service continues to support. The Coast Guard has generally not spent significant sums on aircraft development, and specifically not multiengine, fixed-wing aircraft development, preferring off-the-shelf purchases.

C-27J Joint Cargo Aircraft

The C-27J Spartan is a twin-turboprop, fixed-wing cargo aircraft capable of carrying sixty passengers or forty-six paratroopers.

In the early 2000s, the US Army and the US Air Force individually were seeking ideas for twin-engine turboprop transport aircraft. The Army sought to replace its C-23 Sherpas, C-12 Hurons, and C-26 Metroliners with a common fleet. The USAF sought to supplement its C-130s with a smaller aircraft capable of flying from shorter fields, particularly in Iraq and Afghanistan. In March 2006, Under Secretary of Defense Ken Krieg instructed the two services to combine all these requirements into plans for a single airplane, the JCA.²⁹

Lockheed Martin offered a shortened version of its four-engine C-130. In August 2006, the Army (which was managing the program for the Air Force as well) eliminated that aircraft from the program. CASA, teamed with Raytheon, offered its C-295 aircraft, a larger derivative of the CN-235, developed in the 1990s. Alenia, teamed with L3 Communications, offered its C-27J Spartan. The latter had begun development in 1996 as an improvement of the Aeritalia (later Alenia, later Leonardo) G.222. The USAF had purchased ten G.222s in 1990, designating them C-27As. The C-27J would feature more powerful engines and the glass cockpit of the C-130J, which explains the choice of modifying letter. The first flight was in September 1999, and the Italian air force ordered twelve that November.“³⁰

In June 2007, the US Army and US Air Force jointly chose the C-27J as the JCA.³¹ The Army planned to buy seventy-five for the National Guard, and the Air Force seventy for both the Air National Guard and its component of Special Operations Command. The Army soon found the aircraft very useful for relieving the workload of its Chinook heavy helicopter fleet.³² The Air Force, however, was never enthused about splitting the mission with the Army, and questions of the economy of the arrangement persisted.³³ In 2009, Defense Secretary Robert Gates decided to transfer all the aircraft to the Air Force. In 2012, Defense Secretary Leon Panetta decided just to retire the entire fleet, as the United States reefed back its enthusiasm for counterinsurgency. Over the next two years, fourteen of the surplus aircraft were provided to the US Coast Guard, and another seven went back to the Army for its Special Operations Aviation branch.³⁴

Prior to the US order, the C-27J had been ordered by Italy, Greece, Bulgaria, and Lithuania. Australia, Chad, Kenya, Mexico, Peru, Romania, Slovakia, Slovenia, and Zambia ordered aircraft subsequently.³⁵

In summary, with the C-27J, the US Army and Air Force initially obtained a proven turboprop aircraft in wide military service around the world, relatively quickly, and at a competitive price that they were willing to pay. Those aircraft continue to fly for the United States, just with different services or branches than initially intended. That is more a matter of changing requirements than the quality, availability, or cost of the aircraft. Regarding development funding, the US Air Force has only once spent a large sum on new multiengine fixed-wing aircraft since the C-17 Globemaster III program in the 1990s. Its recent orders for KC-46 Pegasus aerial refueling aircraft included development funds, but under the fixed-price deal, Boeing (the contractor) would eventually come to assume most of that cost through repeated overruns.

Sentinel-class (Damen Stan 4708) fast response cutter

The Damen Stan 4708 is a 42 meter patrol ship designed for a variety of naval and maritime constabulary missions.

In March 2007, the US Coast Guard terminated its contract with Lockheed Martin and Northrop Grumman to modify its 110-foot Island-class cutters with a 13 foot midship hull extension, intended to produce a more capable ship with an extended service life. The Island-class ships had been built in the 1980s by Bollinger Shipyards of Louisiana to an off-the-shelf design of the 1960s by Britain’s Vosper Thornycroft, which had been sold to several other naval forces, including those of Qatar, Abu Dhabi, and Singapore.³⁶ The concept was reasonable in principle, as hull plugs are not uncommon in naval architecture and shipbuilding. The problem was that the Island-class ships were already proving susceptible to late-in-life hull cracking, but neither the service nor the contractors were fully forthcoming with one another about the difficulties. After taking delivery of eight of the rebuilt ships, the Coast Guard terminated the program, and indeed withdrew the eight from service.³⁷

In September 2008, the USCG awarded a contract, after an open competition, to Bollinger to build a replacement class of “fast response cutters.” The Coast Guard had expressly requested an off-the-shelf solution, with at least two vessels from the parent design in patrol boat service for one year, or one vessel in patrol boat service for at least six years. Bollinger brought a design based on the Damen Stan (“Standard”) 4708 patrol vessel, by Damen Shipyards of the Netherlands. With options, the fixed-price contract called for twenty-four to thirty-six cutters. The first, USCGC Bernard C. Webber was launched in April 2011 and commissioned in April 2012. The Coast Guard was sufficiently pleased with the cost and quality that the service now has fifty-four in service, and another eleven in sea trials, under construction, or planned. Bollinger’s work has been noticed, bringing forth suggestions that the US Navy could also purchase 4708s to replace its Cyclone-class patrol boats, and perhaps for other uses.³⁸

Three ships of the design had entered service in 2004 and 2005 in South Africa as the Lilian Ngoyi class of environmental inshore patrol vessels. In its explanation of the decision, the Coast Guard described Damen as an “internationally recognized ship designer with more than 30 shipyards and related companies worldwide [and] 4,000 vessels in service since [it was] founded in 1929.”³⁹ The 4708 was itself a development of the Damen Stan 4207, which has served in the navies, coast guards, or maritime constabularies of Albania, the Bahamas, Barbados, Bulgaria, Canada, Honduras, Jamaica, Mexico, the Netherlands, Nicaragua, the United Kingdom, Venezuela, and Vietnam.

In summary, with the Sentinel class, the US Coast Guard obtained a proven patrol ship whose preceding designs were in wide military service around the world, and at a price that led to procurement of scores more. The first ship was not available for forty-three months after contract signing, which is neither particularly fast nor slow by historical US standards. By avoiding much development spending with the Damen Stan 4708, the USCG saved those funds for its next-larger class of cutters in the Deepwater recapitalization program, of a wholly new design: the Heritage-class offshore patrol cutter.

RG-31 Charger (Nyala) mine-resistant armored vehicle

The RG-31 Nyala is a four-wheeled, all-wheel-drive, armored troop carrier, specifically designed for resistance to land mines. In 1996, the US Army purchased a few RG-31 mine-protected vehicles to equip its land-mine disposal squads on peacekeeping duty in Bosnia. Later described as a “rolling bank vault” of a troop carrier, the RG-31 had been developed in South Africa from the Mamba, an earlier mine-protected troop carrier that was built on a Unimog truck chassis and powered by a Mercedes-Benz six-cylinder diesel.⁴⁰ The “Bush Wars” of the 1970s and 1980s had culminated by the 1994 election that marked the end of apartheid, but part of the legacy was a remarkable industrial capability for developing armored vehicles. However, through a series of licensing arrangements and corporate mergers, the marketing rights for the RG-series vehicles in North America resided with GDLS-Canada. The vehicles were thus built in South Africa, but fitted out in Ontario, at the same plant that produced Strykers (see below).⁴¹

By the middle of 2003, the US-led coalition’s occupation of Iraq had elicited attacks by insurgents with leftover land mines and more improvised explosive devices (IEDs). Eager to get into the market of supplying the bomb squads, General Dynamics Land Systems looked globally in 2003 for an off-the-shelf solution and remembered its license for the RG series of vehicles.⁴² The US Army then ordered a small number of additional RG-31s. Service on the ground in Iraq created impressions of quality. In an urgent request to Quantico in 2003, the 1st Marine Brigade in Anbar Province requested one thousand mine-protected armored vehicles “similar to the South African RG-31, Casspir, or Mamba.”⁴³

In June 2004, General John Abizaid, the commander of US Central Command, which oversaw all military operations in both Iraq and Afghanistan, sent a message to the Joint Chiefs of Staff explaining his situation and requesting help. His most poignant statement was that “IEDs are my No. 1 threat. I want a full court press on IEDs . . . a Manhattan-like Project.” In November 2004, the Army ordered a further fifteen RG-31s. The vehicles were priced well below $1 million each—far below the price of a Stryker or Bradley troop carrier. The Army’s enthusiasm grew in February 2005, when the service entered into a $78 million contract for another 148 RG-31s from Canadian Commercial Corporation, the national armaments marketing firm, on behalf of GDLS. In that contract, the armored trucks were oddly termed “ground effect vehicles,” and the Army’s official nickname would be Charger. Deliveries took some time, as the supply line stretched almost the length of the Atlantic Ocean. Deliveries were scheduled to continue, however, through December 2006.⁴⁴

The first fatality in an RG-31 did not occur until May 2006. Early on, the US armed forces also ordered vehicles from Force Protection Industries of South Carolina. These were not off the shelf, but rather, had been developed domestically with technology licensed from the South African government. Eventually, the Army and the Marine Corps ordered over one thousand RG-31s, and thousands of other vehicles termed MRAPs—Mine-Resistant, Ambush-Protected vehicles—from multiple domestic producers.

In 2005, the Army and the Marines began work on an ambitious project for the Joint Light Tactical Vehicle (JTLV)—a vehicle only slightly larger than a Humvee, but with the protection of an MRAP. Developing the JLTV would ultimately require ten years, and full-rate production would not begin until 2019. During this time, US troops were protected from land mines by MRAPs, including RG-31s, and the origins of all that work reside in South Africa.

In summary, with the RG-31, the US Army obtained an armored vehicle long proven against land mines, relatively quickly, and at a price far below that of its other troop-carrying armored vehicles. While procuring the RG-31, and afterward, the US Army and Marine Corps would spend large sums developing the JLTV.

Stryker Light Armored Vehicle III

The LAV III is an eight-wheeled, all-wheel-drive, armored troop carrier, designed for higher road speeds and lighter weight than comparable tracked vehicles.

In June 1999, less than a week after assuming office, US Army Chief of Staff General Eric Shinseki signaled his intention to restructure much of the service.⁴⁵ The immediate impetus came from the Army’s difficulty over the preceding several months with deploying its Task Force Hawk, of attack helicopters and accompanying ground troops, from Germany to Albania for the Kosovo War. As analysts at RAND later described the problem, the Army needed to “expand ground force options to improve joint synergies.”⁴⁶ As Shinseki would more clearly say, its light forces were too light for fighting opponents with heavy weaponry, and its heavy forces too heavy for strategic mobility.⁴⁷ Neither bookend of capability had properly contributed to the overall war-fighting effort.

In October 1999, Shinseki described a plan to rebuild the Army around motorized formations equipped with wheeled armored vehicles small enough to fit on C-130 Hercules transport aircraft.⁴⁸ In February 2000, General Motors (GM) Canada and GDLS announced that they would together enter the pending competition with a version of the Canadian LAV III, itself a development of the Piranha series of armored vehicles, first developed in the early 1970s by the Swiss firm MOWAG (Motorwagenfabrik AG). Back in 1983, the US Marine Corps had procured a version of the Piranha I, armed with a 25 millimeter (mm) cannon, for reconnaissance and screening duties.

GM Canada held the license from MOWAG to build the vehicles in London, Ontario. The Army would later also receive offers from United Defense LP (UDLP) for a combination of remanufactured M113A2 tracked troop carriers and M8 medium tanks, from ST Engineering for Bionix tracked troop carriers, and another from GD for six-wheeled, Austrian-designed Pandur armored vehicles. Neither UDLP nor ST Engineering seem to have taken account of Shinseki’s strong and openly stated preference for wheels, though UDLP did suggest that a split purchase could include its tracked tank.

In March 2000, the Army reequipped the 3rd Infantry Brigade of the 2nd Infantry Division—a heavy brigade with Abrams tanks and Bradley fighting vehicles—at Fort Lewis, Washington, with LAV IIIs borrowed from the Canadian Army, and a variety of other vehicles under consideration.⁴⁹ In April 2000, the Army released an RFP for the Interim Armored Vehicle (IAV). The program was so named because almost simultaneously, the Army launched its Future Combat Systems (FCS) program to reequip all its heavy brigades (and eventually the “interim” brigades as well) with a common fleet of medium-weight vehicles of entirely new design. In March 2002, the Army selected a team of Boeing and SAIC to oversee development of the fourteen different vehicular and aerial systems, manned and unmanned, within the FCS.⁵⁰

In November 2000, after reviewing the four more-of-less off-the-shelf proposals, the Army awarded GM and GD a contract for 2,131 vehicles, in a variety of variants of the LAV III, to equip six brigades by 2008. Shinseki had wanted the first vehicles by the end of 2001, but at contract award, that schedule was clearly infeasible.⁵¹ The US Army’s order was far larger than any yet received, and the US vehicle required a significant redesign from the Canadian standard, with more armor (resistant to 14.5 mm armor-penetrating rounds) but less firepower (a remote 12.7 mm machine gun rather than a manned 25 mm turret). Thus, the first new-production Strykers to equip further brigades would not arrive until 2003. In those numbers, the price was considered reasonable, at roughly $1.42 million each. This considerably exceeded the procurement price of the M113 alternative, but the Stryker’s life-cycle costs were expected to be lower.⁵²

In November 2003, the 3rd Brigade from Fort Lewis deployed to Iraq with Strykers. Also that year, GD consolidated the design-and-production arrangement by buying both GM Defense Canada and MOWAG. The next year, Shinseki’s successor as chief of staff, General Peter Schoomaker, became similarly enthused about the Stryker. In seeking what he called an “infantry-centric army,” in which troops were not defined by their means of conveyance to the battlefield, he specifically noted that Stryker brigades brought twice as many dismounts to the field as brigades equipped with Abrams and Bradleys.⁵³ The Strykers were also performing well in combat. Through early 2004 in Iraq, they had survived attacks from at least fifty-five IEDs, twenty-four RPGs, and a 500 pound car bomb without a single fatality.

On the other hand, the Army’s effort to field a version of the Stryker with a 105 mm assault gun did not fare as well. The service purchased enough to equip each of eventually eight Stryker brigades with twelve guns, but retired all the vehicles in 2022. Then again, the Army’s goal of “Future Combat Systems” as survivable as Abrams tanks but somehow fitting on C-130 aircraft did not survive past 2005.⁵⁴ Development continued for several years, but without tangible progress. In April 2009, Defense Secretary Robert Gates canceled most of the FCS program, which had not produced any operational vehicles, despite $19 billion in spending and six years of effort.⁵⁵

Because the vehicles were considered an interim solution, the Army initially chose to forego developing its own maintenance depot for Strykers, and to instead rely substantially on GDLS through an arrangement the US military calls contractor logistics support (CLS). The Army’s reliance on CLS was, in retrospect, a costly one, but it did subsequently facilitate modifying the vehicles for greater survivability, after battlefield lessons in Iraq and Afghanistan.⁵⁶ After the FCS program was clearly terminated, the Army began assuming more of the maintenance burden organically.

While only the US Army employs its customized Stryker series, LAV IIIs have been procured to equip land forces in Canada, Chile, Colombia, New Zealand, and Saudi Arabia. Piranha IIIs have been procured to equip land forces in Belgium, Botswana, Brazil, Denmark, Moldova, Ireland, Romania, Spain, Sweden, and Switzerland. In 2011, GDLS began producing an upgraded version, the LAV 6, for the Canadian Army and the Saudi National Guard. In 2019, GDLS began building a development of the LAV 6, the Armoured Combat Support Vehicle (ACSV), to replace the Canadian Army’s M113s and LAV IIs. In 2022 and 2023, the United States sent surplus Strykers to Ukraine, and Canada sent new ACSVs.⁵⁷ In November 2023, the United States offered a coproduction deal to build Strykers, including air-defense variants, in India for the Indian Army.⁵⁸

In summary, with the LAV III, the US Army obtained an armored vehicle in wide service around the world, though somewhat more slowly than hoped, and at a price and life-cycle cost deemed acceptable. The Army’s heavy reliance on contractor logistics support was, in retrospect, a costly decision, but one which centralized management of upgrades at an important juncture. The Army spent a modest sum on development of the LAV IIIs, which required customization for its particular preferences. However, this was a small fraction of the funds spent developing the Future Combat Systems, the later and then-cancelled Ground Combat Vehicle, and the current effort with the Optionally Manned Fighting Vehicle. None of these programs have delivered vehicles to the field, but Strykers continue to serve.

Assessment

systems were procured starting between 2003 and 2008, during the comparatively free-trading George W. Bush administration, for which military-industrial cooperation with allies was a priority. Two of the systems were adopted in 2018, during the comparatively protectionist Trump administration. Plans for accepting off-the-shelf concepts for those two requirements, however, got their start during the preceding Obama administration. While the US Air Force’s twenty-year drama of aerial tanker procurements from Boeing—and not Airbus—does provide a counterpoint, all the military services but the Space Force have smoothly adopted at least one major system of foreign design. The summary record of these procurements has been largely positive.

Buying foreign military hardware off the shelf has generally brought the US military proven systems of lasting quality.

In the first seven cases described, the US Army, Navy, Marine Corps, Air Force, and Coast Guard bought off-the-shelf systems to provide enduring capabilities, in lieu of developing new systems, and all seven are still in US service. The Army bought the RG-31 to provide a present capability, while also funding (with the Marine Corps) the development of enduring capabilities, culminating in that of the Joint Light Tactical Vehicle. For years along the way, the RG-31 provided very valuable protection to US troops against land mines. The Army similarly bought the Stryker LAV III to provide an interim capability, but it never succeeded in developing an enduring replacement. The Stryker thus continues in the Army’s force structure and inventory more than twenty years on. As the Army’s first program manager for Stryker recently put it, “The Army likes the vehicle, and still likes the vehicle”—for if it did not, it would not persist in service.⁵⁹

Note also that the Defense Department would not have entrusted the air defense of the federal capital to NASAMS for eighteen years if it had meaningful questions about its capabilities.

This finding in evidence comports with the logic of the market. Off-the-shelf products generally feature observable quality. Indeed, if one is trying to sell an important system to the Americans, it is wise to bring a quality product. Any US military service is an important customer to whom a sale conveys great reputation.

Buying foreign military hardware off the shelf has mostly fulfilled US military needs comparatively quickly.

The RG-31 was procured in an emergency and was available in small quantities within months. The NASAMS was not quite procured in an emergency, but its immediate availability was appreciated, with fresh memories of the aerial attack on the Pentagon in 2001. The NSM was sought urgently, in that the rising threat from the Chinese navy could not be adequately opposed with the US Navy’s existing anti-ship missiles. The Stryker (or any interim armored vehicle) was sought quickly, because the Army chief of staff was embarrassed by his service’s failure to contribute during the Kosovo War. Its service in Iraq was impressive, but only because it was available three years after contract award. That proved adequate under the circumstances, but General Shinseki initially had much quicker delivery in mind.

In all the other cases, the driving motivation for an off-the-shelf procurement was either economy or assured quality. This does not mean that speed was wholly unimportant. The MH-139A arrived after a flight-testing delay of a few years, and the Sentinel-class cutters also did not arrive quickly. In none of those cases, however, did the procuring service experience operationally damaging delays.

This finding also comports with the logic of the market. Off-the-shelf products generally can be provided more quickly, sometimes because the production process is running, and always because significant product development lead time is not required.

Buying foreign military hardware off the shelf has generally brought the US military cost-competitive matériel.

Three of the cases were not fully competitive procurements. The NSM was chosen as the Navy’s next anti-ship missile after Boeing and Lockheed Martin withdrew from the competition, apparently because neither could quite offer the combination of capabilities the Navy sought in a ship-killing missile for a small ship. The case of the NASAMS seems to have been a sole-source procurement, without a record of a competition. The case of the RG-31 was similarly a sole-source emergency purchase.

The remaining six cases were all competitive procurements, which indicates that foreign-designed systems have repeatedly delivered value for money to the US armed forces.

This finding further comports to the logic of the market. Any US military service is a customer with great buying power. As noted above, concluding the sale reinforces the seller’s reputation, which can be leveraged for many years in pursuing other sales. For these two reasons, offerers have strong incentives to bring good deals to American buyers.

Buying foreign military hardware off the shelf has had no strong effect on US capacity for military-industrial R&D.

The nine off-the-shelf procurements neatly fall into five industries. None have seen a strong effect from this pattern of spending.

• In the two cases of missile manufacturing, the United States purchased two different missile systems, the NSM and NASAMS, from the same original designer, Kongsberg of Norway. On both projects, Kongsberg has cooperated with one of the US national champions in guided missiles, Raytheon Technologies. Over that time of the ongoing procurement, the US Defense Department has spent many more billions on missile development, for both offensive and defensive missions.
• In two cases of rotorcraft manufacturing, the Army bought hundreds of EC145s, and the Air Force is planning to buy scores of AW139s. The Army could have paid a contractor to design a wholly new aircraft for utility and training purposes, but the marginal advantage in an industry with a slow cycle of technological development could not be cost effective. The Air Force’s requirements may have been somewhat more demanding, but a new design for a fleet of less than one hundred helicopters would be similarly foolish.
• In two cases of fixed-wing transport aircraft manufacturing, the Coast Guard, the Army, and the Air Force took delivery of just eighteen CN-235s and twenty-one C-27Js. Developing new aircraft for small fleets would be a very bad use of money. The special operations commands of the US services understand this well, and thus sources most of their aircraft from existing designs.
• In the one case of shipbuilding, the Coast Guard’s off-the-shelf purchase of the 300 ton Sentinel-class cutter freed up money for the development of the 3000 ton Heritage-class cutter—a much larger project. Additionally, none of this spending by the Coast Guard seems to have affected the Navy’s spending on ship design and development.
• In two cases of armored vehicle manufacturing—those of the RG-31 and the Stryker—the Army did continue to spend large sums on follow-on systems: the JLTV and the FCS.

Recommendations

Since the end of the Cold War, the US armed forces have quite successfully taken into service nine major, off-the-shelf systems of foreign design. Again, this is good because a preference for the already available for federal procurement is federal law. Most of these products have been manufactured in the United States, and all have been serviced there. This is reasonable because the United States has huge industrial capacity and some strategic interest in domestic servicing. More pointedly, this technology transfer has effectively constituted security assistance from allies—a valuable concept too often overlooked by military policymakers.

Formulating a strategic framework

The federal government can better avail itself of the advantages in quality, speed, and economy offered by allies’ proven solutions, by adopting a two-part analytical framework for considering their procurement.

Consider the global extent of the market

Seven of the nine systems in this study were widely adopted by military forces around the world before a US military service purchased them. In all other cases, the procuring services had long lists of satisfied customers to consult for insights into the equipment. For future procurements, if the needs of the service do not genuinely exceed the global state-of-the art, the best design should be sought from any friendly source. As several of these cases demonstrate, for large production runs, production can be brought to the United States, if desired.

Measure the technological speed of the industry

Seven of the systems in this study represented modest technological developments. Only the naval strike missile constituted a great advancement over preceding options on the market. In all other cases, the procuring services were purchasing systems from industries with modest cycle speeds of technological development. Four of the procurements were from industries with substantially commercial underlying technologies and observably slow paces of change: helicopters and multiengine fixed-wing aircraft. If firms around the world are investing over the long-term for gradual technological progress, then a program to develop a wholly new system is duplicative.

Educating the procurement bureaucracy

Despite the logic, the procurement bureaucracy—outside US Special Operations Command and the Coast Guard—may remain disinclined to seek proven solutions, and especially those of foreign provenance. In the short run, this puts the onus of securing best value on the political leadership of the military departments and defense agencies. For better quality, speed, and economy, these leaders must meet military desires for novel equipment with demands for frank justification and global market research. This approach fits within the civil-military model of military innovation, which holds that beneficial change most often comes when “statesmen intervene in military service doctrinal development, preferably with the assistance of maverick officers from within the service.”⁶⁰

This last point addresses a longer-term approach. In the apparatus of any administrative state, career bureaucrats greatly outnumber appointees.⁶¹ Even if they are economically minded, the politicians cannot oversee everything. The “positive arbitrariness” of their occasional intervention can produce useful results, but it is also no way to build enduring institutional capacity.⁶² Officials beyond the mavericks need further schooling in the mandate for and economy of buying military systems off the shelf. This means education in the market research techniques of routinely surveying global markets for military off-the-shelf solutions that can inform processes for developing requirements for new procurements. In theory, educational opportunities exist through the Defense Acquisition University, the Eisenhower School of the National Defense University, and the military acquisition elective courses at the various other war colleges.

The benefits could be far-reaching. Procuring what others have already developed can permit the military to focus its R&D funds on its most challenging problems. Then, when war comes, procuring agencies and industrial enterprises will better understand, as organizations, how to put others’ designs into production here to meet the immediate needs of mobilization.

Acknowledgments

The Atlantic Council is grateful to Airbus for its generous sponsorship of this paper.

About the author

James Hasik is a political economist studying innovation, industry, and international security. Since September 2001, Hasik has been advising industries and ministries on their issues of strategy, planning, and policy. His work aims to inform investors, industrialists, technologists, and policymakers on how to effect, economically, a secure future.

Appendix 1

Forward Defense, housed within the Scowcroft Center for Strategy and Security, generates ideas and connects stakeholders in the defense ecosystem to promote an enduring military advantage for the United States, its allies, and partners. Our work identifies the defense strategies, capabilities, and resources the United States needs to deter and, if necessary, prevail in future conflict.

Learn more

The post Friend-sourcing military procurement: Technology acquisition as security cooperation appeared first on Atlantic Council.

The post CBDC Tracker cited by Foreign Policy on central bank digital currency development appeared first on Atlantic Council.

The post Lipsky quoted by Foreign Policy on stakes of G7 Summit appeared first on Atlantic Council.

The post Dollar Dominance Monitor cited by Nasdaq on global currency exchange and reserve composition appeared first on Atlantic Council.

The US elections are quickly approaching. But while there may be a shift in administrations, critical minerals are poised to remain a central theme in US policy: Deep bipartisan support for remaking global supply chains and reducing dependence on China’s current dominance in processing have virtually election-proofed focus on the issue.

Rich in minerals and with a strategic location, African countries should be benefiting from this growing US interest. But currently—due to the investment-intensive nature of greenfield projects, the United States’ and Europe’s increased focus on self-reliance, and competition from other countries with more established mining industries—African countries risk largely losing out on this historic opportunity to attract more investment in the minerals that will fuel future industries,

To ensure that supply chains are restructured to best advance both US and African strategic interests, the US government must accelerate an integrated approach that combines investment facilitation, technological innovation, and capacity building.

New mines take a long time and a large amount of capital to build. Such challenges have hindered non-Chinese capital flows into African markets for decades; but non-Chinese investors and governments are aware of the strategic role the continent could and should play in the global shift to cleaner energy sources. For example, 56 percent of global cobalt reserves, key to electrical vehicle manufacturing, can be found in African countries, particularly in the Democratic Republic of Congo. While investment in critical-mineral infrastructure has grown in recent decades, a significant financing gap persists, estimated to be up to $108 billion each year.

The United States and the European Union (EU) are unable to finance infrastructure projects through the government-to-government lending model that China typically employs; thus, the emphasis is put on the private sector to make large-scale investments that must be financed from the firms’ balance sheets or through the capital markets rather than from government coffers. Yet, many Western companies view Africa through a lens of risk, which could be attributed to persisting negative narratives about African markets and people and the heightened scrutiny of global brands by nongovernmental organizations. Western companies’ concerns about political risk and corruption often override their assessments of opportunities. This is in sharp contrast with companies, such as ones from China, the Middle East, or even Turkey, that seem to focus more steadily on the opportunity in African economies created by young populations, rapid digitalization, and wide diversification, motivating these companies to work to mitigate the risks as they encounter them.

Another challenge for African countries hoping to attract Western investment for mining is the growing onshoring focus of the United States and EU. Western countries have resurrected industrial policy in a big way in recent years, ramping up billions in financing and guarantees for mining projects as the strategic vulnerability posed by dependence on Chinese supply chains becomes clearer. African and Western governments are united in their goal to change the current supply chain.

In response to China’s approach to critical minerals, onshoring, nearshoring, and friendshoring have proven a bipartisan priority in the United States. And, on both sides of the Atlantic, hundreds of billions of dollars are being pumped into this effort. This can be seen in the US Inflation Reduction Act (IRA), the US CHIPS and Science Act, and both the EU’s Net-Zero Industry Act and its batteries regulation of 2023, which all seek to make progress toward net zero and reduce dependence on China’s role in critical-mineral supply chains. The expanded processing capacity that will result from IRA-incentivized investment in the United States will require more inputs and, therefore, a dramatic expansion in mining—over three hundred new mines will be needed to meet electric-vehicle battery demand alone by 2035.

African countries will be home to many of these new mines. Including them in US friendshoring efforts in the years ahead will require investment that is responsibly structured to overcome historical sins. The history of mining and colonialism in Africa—with its extractive, exploitative, and environmentally damaging legacy—has fostered a deeply emotional context for conversations about the future of the industry on the continent. But while mining was part of an ugly past, it is also a necessary part of a brighter and greener future. To advance this vision, Western governments, investors, and development partners must ensure that economic benefits are broadened to meaningfully include local communities, national companies, and environmental and academic groups.

Africa, as a region, has vast potential to build value-adding mining industry capabilities; but potential, if left untapped, won’t attain the economic growth African countries are searching for. Tangible economic progress will require billions of dollars of investment. Washington must invest in its partnership with African countries by derisking increased investment from the private sector and by encouraging the adoption of transparent, equitable, and sustainable practices.

If governments, investors, and development partners don’t make dramatic changes in the next five years (during this administration and the next one) African nations may miss this opportune moment to leverage historic levels of demand for critical minerals to fuel industrial growth, foreign-exchange generation, skills acquisition, and job creation—and the United States may fail to counter Chinese influence in the supply chains that are critical for sustained US global competitiveness and national security. 

Read more

Report

Jul 1, 2024

From greenfield projects to green supply chains: Critical minerals in Africa as an investment challenge

By Aubrey Hruby

This report provides a snapshot of Africa’s mineral wealth and mining industries, draws out the similarities between the mining and infrastructure investment attraction challenges, describes the competitive landscape African nations find themselves in, and makes innovative recommendations—namely to the US government—to rapidly accelerate investment in sustainable mining industries in African markets.

Africa Economy & Business

Aubrey Hruby is a nonresident senior fellow with the Atlantic Council’s Africa Center and co-founder of Insider and Tofino Capital.

The post Increasing investment in African mining should be a higher priority for the United States appeared first on Atlantic Council.

The post Lipsky quoted and CBDC Tracker cited by US News on Saudi Arabia decision to join China-led CBDC project appeared first on Atlantic Council.

The post Lipsky quoted and CBDC Tracker cited by Reuters on Saudi Arabia decision to join China-led CBDC project appeared first on Atlantic Council.

The post Event with Treasury Assistant Secretary Brent Neiman featured in AP appeared first on Atlantic Council.

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.

The post Dollar Dominance Monitor cited by Yahoo Finance on central bank foreign reserves composition appeared first on Atlantic Council.

The strength of India’s economy is one reason for the BJP’s favorable position in the polls. When Modi became prime minister in 2014, India had the tenth largest economy in the world. Today, it has the fifth. So what might the world expect from a “Modi 3.0” in terms of economic priorities if the elections pan out as expected? And would this political stability mean an end to policy uncertainty?

The administration appeared to be sprinting in the lead-up to March 16, when the election’s model code of conduct came into effect to discourage policy announcements that could influence voters before the contest. On March 10, the government signed a free trade agreement with the European Free Trade Association, and on March 15 it announced a new policy to open the Indian market to the world’s leading electric vehicle companies. It also approved three new semiconductor projects, revised prices for liquefied petroleum gas, and formalized rules to implement the Citizenship Amendment Act before the March 16 deadline.

This flurry of activity could continue after the election. Modi has reportedly asked his cabinet to develop an ambitious hundred-day agenda for a third term. Assessing the BJP’s election manifesto and other signals, the following are some of the likely economic priorities for Modi 3.0.

Intensified efforts to grow India’s footprint in global value chains, including in pharmaceuticals, medical devices, electric vehicles, green energy, and electronics. The government will likely refine its incentives—including the flagship production-linked incentives—based on the experience gained in their design and implementation. Policymakers are also likely to continue their trade push, with a free trade agreement with Oman reportedly awaiting signature after the elections, and talks with the United Kingdom, the Gulf Cooperation Council, and the European Union, among others, at different stages of progress.

A third term could also involve efforts toward factor market reforms, including a revived push to see through the labor market reforms initiated in 2019. However, such reforms will require substantial political capital. Their progress will therefore be contingent on the size of the BJP’s majority in parliament and on support from state governments, which have substantial mandates over their implementation.

Continued emphasis on physical and digital infrastructure and on the energy transition. The government will likely maintain a high budgetary allocation toward initiatives to expand and modernize its infrastructure, including Gati Shakti and the National Logistics Policy. These initiatives will involve the accelerated development and modernization of highways, railways, airports, and ports.

The government will also continue building digital public infrastructure (DPI) based on the India Stack. The DPI approach for payments has enabled a rapid increase in financial inclusion. The government might next prioritize access to credit for individuals and small businesses.

While petroleum will remain a key part of the energy mix, the government is likely to maintain its goal of using green energy sources for much of India’s growing energy requirements. Policymakers will seek to continue prioritizing solar—including a massive effort to increase the use of rooftop solar in homes—as well as “green molecules” (hydrogen, ammonia, and methanol), batteries, and electric vehicles. Nuclear energy, especially small modular reactors, could be a new area of focus.

Safeguarding and empowering groups most vulnerable to economic shocks. The administration could deploy a mix of current and new programs—involving benefits, credit, skilling, and employment guarantees—aimed at women, the youth, the poor, farmers, and small-business owners. Such groups are simultaneously the most vulnerable to economic shocks, especially given global technological trends and the ongoing transformation of India’s economy, and among the most electorally powerful.

The administration has already asked the International Labor Organization to help develop a living wage framework to replace the current minimum wage approach. The government is also looking into widening social safety nets to better cover informal workers.

Further growing India’s global profile and leadership. The government will likely redouble its efforts to represent the voices and interests of the Global South and to obtain a permanent seat on the United Nations Security Council. While this might seem to be a purely geopolitical goal, there are associated economic factors as well. The government will continue to partner with like-minded nations in areas such as security, diversifying supply chains, and critical and emerging technology. Closer to home, the administration will look to build on its relationships with the governments of Bangladesh, Bhutan, Nepal, and Sri Lanka to continue growing connectivity, commerce, and other linkages in South Asia.

India’s economy is expected to become the third largest in the world in the coming years. However, the administration will likely face challenges both abroad and at home as it seeks to keep its economy growing at around 7 percent of gross domestic product per year. To name just one example, the United States and Europe ramping up their industrial policies could dampen manufacturing growth in India by limiting foreign direct investment and exports.

Domestically, even if the Modi administration returns to power with a strong mandate, there will be times of policy uncertainty. For instance, some policymakers support a more open approach to trade and others favor protectionism. Some policymakers might even modulate at times between openness and protectionism.

Such seeming confusion is natural in a large and diverse democracy with a myriad of interest groups but it nonetheless will present challenges. Additionally, perspectives and priorities will vary across different arms of government, depending on the specific constellation of stakeholders each represents. But observers would do well to focus on the overall trajectory rather than be distracted by temporary fluctuations.

Taken together, if the election manifesto and ongoing policy discussions are any indication, Modi 3.0 has the makings of a transformative term for India and the world.

Gopal Nadadur is a nonresident senior fellow at the Atlantic Council’s South Asia Center and is also vice president for South Asia at The Asia Group.

The post What India and the world could expect from a Modi 3.0 appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

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

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

Ryan Murphy contributed research to this piece.

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

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

Learn more

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

Currently, the primary land-based trade route between Europe and China is the Northern Corridor, a rail-freight system that runs through Russia with a cargo capacity of over one hundred million tons. But following Russia’s full-scale invasion of Ukraine, the Northern Corridor has become a political and financial liability, particularly for NATO allies and partners anxious to reduce dependence on Russia and countries in the West who are reluctant to support Russia and aiming to counter the Kremlin’s adventurism.

In searching for an alternative to the Northern Corridor, one option is the Trans-Caspian International Transport Route (TITR), otherwise known as the Middle Corridor, a multimodal network of railways and ports that begins in China and runs across Central Asia, the Caucasus, and the Black Sea before reaching Europe.

Trade along the Middle Corridor grew from 530,000 tons in 2021 to 2.3 million tons in 2023. In the first six months of 2023, the TITR had reported a 77 percent increase in tonnage over the same time period in 2022, while Northern Corridor tonnage fell by 56 percent. The World Bank estimates with adequate infrastructure investment, TITR trade volume could be as high as eleven million tons by 2030. It is no coincidence that the dramatic increase in the Middle Corridor, along with the precipitous drop in Russian-based freight traffic, has occurred in the period following Russia’s full-scale invasion of Ukraine.

While the TITR may offer a reasonable solution for reducing trade along the Northern Corridor, there are many challenges.

Notably, the TITR’s infrastructure isn’t very modern or integrated across borders, meaning its ability to handle increased freight volume is limited. One source even reported that TITR has only 5 percent of the Northern Corridor’s capacity. Thus, it will be necessary to build out and expand the system. The TITR also suffers from long lead times, often exceeding fifty days. It also presents higher costs: The multimodal nature of the route (rail and seaborne) requires costly transfers of loads from one method of transportation to another, while the number of countries along the route increases administrative costs. These challenges also reduce efficiency and increase shipping time. In fact, these delays and higher costs have subsequently pushed shippers back to the Northern Corridor or to seek alternative maritime routes to the Middle Corridor.

Several countries along the route—notably Azerbaijan, Georgia, Kazakhstan, and Turkey—are stitching together an integrated rail and shipping network that transcends this politically volatile and geographically challenging region. On March 31, 2022, the governments of these countries signed a declaration to improve cooperation along the route. On May 11, 2022, rail executives from Azerbaijan, Georgia, Kazakhstan, and Turkey met in Ankara to discuss the Middle Corridor project. There, they approved an action plan that included measures to modernize the trade network, harmonize tariffs and trade policies, and make cross-border interactions more efficient.

Within a year after the 2021 reinvigoration of the Turkic Council (now called the Organization of Turkic States), Azerbaijan, Turkey, and Kazakhstan signed the Baku Declaration, which was designed to reinforce “existing coordination between the three countries and strengthen regional connectivity.” Kazakhstan provides the longest rail access, and its Caspian port city of Aktau will be expanded to meet demand. On the western side of the Caspian Sea, Azerbaijan’s Baku port—supported by an expansion and modernization program—will forward freight to Georgia and Turkey.  

The Baku-Tbilisi-Kars (BTK) railway, also called the “Iron Silk Road,” plays an important role in moving loads westward from the Caspian Sea. Opened in October 2017, BTK travels between Azerbaijan and Turkey via Georgia, a connection that had been closed since the early 1990s due to the Nagorno-Karabakh conflict. Another critical component in the TITR is Georgia’s Black Sea coast, specifically the ports of Batumi, Kulevi, Poti, and Supsa, which provide the route’s final sea-based segment. There are modernization projects underway here, specifically in Poti’s port facilities, and Georgia is cooperating with Azerbaijan and Kazakhstan to develop a new shipping route between Poti and Romania’s Constanța Port. The fifth major port along Georgia’s Black Sea coast, Anaklia, is currently being revitalized, and at one point (according to plans) was slated to be the largest port in the Black Sea.

Western countries have shown interest in developing the Middle Corridor. The route would help provide the infrastructure necessary for the European Union’s economic diversification strategy. In 2022, Danish shipping firm Maersk and Finnish company Nurminen Logistics began increasing their presence along the route. Austria’s OBB Rail Cargo Group has also shown interest in expanding its contribution to east-west trade via the TITR. And at the October 2023 Germany-Central Asia Summit, Berlin announced it will help develop the Middle Corridor under the EU Global Gateway Initiative; the EU also announced that financial institutions have committed to investing ten billion euros in support. The Germany-Central Asia Summit is a sign that the transatlantic community is finally recognizing the region’s strategic importance; Washington has also begun to make such a recognition, in the 2024 National Defense Authorization Act’s Black Sea Security and Development Strategy and in the US Congress passing the most recent package of US support to Ukraine.

China has also shown interest in the Middle Corridor. For example, China had invested in an earlier Anaklia revitalization project when Mikheil Saakashvili was president of Georgia—although subsequent administrations shelved it. This has not lessened Anaklia’s appeal, as Beijing’s interest in the Middle Corridor complements its Belt and Road Initiative (BRI). Indeed, China contributed $1.5 billion for an industrial park at Alat, adjacent to the Port of Baku, in Azerbaijan. Investments to strengthen the Middle Corridor’s infrastructure provide Beijing with greater political and economic influence in Central Asia and the South Caucasus. Russia has tolerated this foray into its “near abroad” for now, likely because a chastened and dependent Kremlin is reluctant to disrupt its burgeoning partnership with Beijing. However, considering Russia’s sensitivity to great-power intrusions into what was once part of the Soviet Union, one can only speculate how long before there is some pushback from Moscow.

While Russia is viewed as the immediate threat to regional stability, the Middle Corridor’s stakeholders are also distrustful of Beijing because of the poor press about the BRI. Thus, there is an opportunity for the private and public sectors in the United States, EU, and Turkey to invest in building resilient supply chains with clear strategic benefits, notably a politically acceptable alternative to the Northern Corridor.

Further support for the TITR from Washington, Brussels, and Ankara would send a strong message to the stakeholder nations as well as to Beijing and Moscow. This would also demonstrate to the regional nations that long-term stability and economic growth can be achieved through closer cooperation with NATO countries and the EU. The United States and its allies have an opportunity to positively impact security and engender goodwill along the Middle Corridor through enhanced trade and infrastructure investment.

Arnold C. Dupuy is a nonresident senior fellow at the Atlantic Council IN TURKEY, a faculty member of the US Naval Postgraduate School, and chair of the NATO Science and Technology Organization’s SAS-183, “Energy Security Capabilities, Resilience and Interoperability.” Follow him on LinkedIn.

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

The post There’s an alternative to Russian-based trade routes—but it needs support from the US, EU, and Turkey appeared first on Atlantic Council.

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

Over-reporting the Euro’s share

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

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

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

Underestimating the international use of the RMB

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

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

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

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

Conclusions

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

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

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

The 3SI, comprising thirteen Central and Eastern European nations from Estonia to Greece, promotes digital, energy, and infrastructure connections across the region’s north-south axis. It boasts an investment fund and 143 discrete projects across member countries. But despite an enthusiastic beginning, big and bold strategic projects to realize the 3SI’s grand vision have yet to take shape. NATO’s forward posture in response to Russian aggression and the need to bolster the Alliance’s ability to mobilize resources across its eastern front offer a strong impetus to both achieve and expand on the 3SI’s ambitions for connecting the three seas by working with the Alliance and other EU countries to build the N3 corridors.

NATO’s transport needs

At age seveny-five, NATO boasts two new members and a forward posture along its eastern front to confront a resurgent Russia with imperialist designs. The Alliance’s enhanced forward presence, aimed at achieving deterrence by denial of territory, makes it essential to be able to quickly position forces on the front lines and expeditiously move these forces along the front as needed. Most of Europe’s existing rail and road corridors run in the east-west direction. There is an urgent need to complement these latitudinal passageways with the prompt deployment of longitudinal thoroughfares for mobilizing forces along NATO’s eastern front and to deepen the economic integration of Central and Eastern Europe.  

Meanwhile, Russia’s ongoing malign activity in the Black Sea subjects NATO’s southeastern front to persistent and provocative Russian aggression. Russia has long used aggression to cement its position on the Black Sea, from the de facto annexation of the Abkhazia and Tskhinvalki (South Ossetia) regions from Georgia in 2008, the annexation of Crimea from Ukraine in 2014, and advances toward Odesa since 2022. Moscow’s Black Sea power projection is further bolstered by the Russian garrison that has been stationed in Transnistria since 1992. Now, Russia is expanding its rail network across Ukrainian territory that Moscow has annexed. Given the threat Russia poses to NATO’s southeastern front, the deployment of N3 strategic corridors is essential to bolstering the Alliance’s ability to mobilize resources to the region. 

EU-Ukraine economic integration

Western Ukraine’s expeditious integration—infrastructural, legal, economic, and social—into the European project offers it the most prudent and realistic security assurances in the near to medium term. An N3 strategic rail and road corridor from Gdańsk to Constanța through western Ukraine would be an opportune and impactful manifestation of Ukrainian integration into Europe. This proposed corridor would not only include highways and railways, but would also offer important rights-of-way for power and digital cables as well. Such a strategic corridor would bind the biggest NATO and EU members facing Russia and bordering Ukraine. The Gdańsk-Constanța corridor would not only connect the two major ports but also the respective capitals, Warsaw and Bucharest, via Ukrainian cities Lviv, Ivano-Frankivsk, and Chernivtsi. A short eastern spur may also connect Chișinău, the Moldovan capital, to the N3 corridor. The Ukrainian route offers substantial cost advantages over previous proposals, which would traverse the Carpathian Mountains.  

Bucharest to Warsaw rail journeys at present follow a circuitous route via Budapest and Vienna. A new N3 strategic corridor, in addition to obvious economic and military dividends, would boost regional tourism by catalyzing sociocultural integration among the Polish, Romanian, and Ukrainian peoples. 

Corridors of power

The N3 corridors would link the leading defense and economic port cities of Constanța, Gdańsk, and Trieste on the Black, Baltic, and Adriatic seas, respectively. Romania represents a stable and reliable anchor for NATO, the EU, and the 3SI on the Black Sea and is projected to be the largest European natural gas producer by 2027. Constanța, situated south of the Danube Delta, is both Romania’s leading commercial port and its primary naval base. Romania represents the European beachhead to the Caucasus and Central Asia as it connects the Danube, Europe’s longest commercial river, to the Black Sea.   

Poland boasts the largest economy and military of the NATO/3SI countries bordering the Baltic Sea, Russia, and Ukraine. Gdańsk is Poland’s principal seaport and naval yard, and over the past decade, it has also become the fastest-growing European port. Gdańsk could act as an important junction linking the prospective N3 corridor with the underway 3SI projects Rail and Via Baltica connecting Finland and the Baltic nations.    

Trieste, meanwhile, enjoys unmatched access to Europe’s industrial heartland, including northern Italy, Switzerland, Germany, Austria, and parts of Eastern Europe. Consequently, it’s the most advantageously situated seaport to be Europe’s gateway to the Indo-Pacific. It also houses Italy’s major naval yards. Italy, though not a member of the 3SI, is the dominant Adriatic-Mediterranean nation and an important member of both NATO and the Group of Seven (G7).      

NATO and the EU should designate the N3 corridors as their individual and collective high priority flagship projects in their Strategic Concept and Strategic Compass planning documents, respectively. Additionally, both should closely engage with 3SI nations and Italy to make N3 corridors operational with due haste. NATO should consider directing a portion of its proposed $100 billion fund for Ukraine to N3 corridors to leverage greater investments from close allies and partners. N3 corridors may arguably offer the highest returns on the EU’s investment in Ukraine reconstruction and in its Global Gateway initiative as an alternative to China’s Belt and Road Initiative. Consequently, in addition to direct EU funds, both the European Bank for Reconstruction and Development and the European Investment Bank should accord N3 corridors preference in their respective investment portfolios. EU and 3SI nations, to further amplify the impact of N3 railroad corridors, should also apportion comparable weight to developing Danube River commercial transit to optimal levels.   

The Unites States, an early and enthusiastic supporter of the 3SI, should lend its full weight behind the N3 corridors in fortifying NATO and diversifying global supply chains away from China. It should call for prompt operationalization of N3 corridors at both NATO and US-EU Trade and Technology Council meetings. It should also ensure that the G7’s Global Partnership for Infrastructure Investments accords high priority to N3 corridors. Additionally, the United States and Europe should collectively encourage partner nations in West Asia and the Indo-Pacific to invest in N3 corridors. 

The United States, Europe, and NATO need to buttress their collective economic and military resilience to confront both Russia’s military aggression and Chinese economic coercion. The N3 corridors would serve both goals. They would not only better mobilize the full might of Central and Eastern Europe’s defense and military capacities but also potentially transform the region’s engagement with the global economy. No time should be spared in putting this strategic project into action.       

Kaush Arha is president of the Free & Open Indo-Pacific Forum and a nonresident senior fellow at the Atlantic Council and the Krach Institute for Tech Diplomacy at Purdue.

Adam Eberhardt is the deputy director of the Centre for East European Studies at Warsaw University.    

Paolo Messa is a nonresident senior fellow at the Atlantic Council and founder of Formiche.      

George Scutaru is the CEO of New Strategy Center and a former national security advisor to the President of Romania.

The post Bridging the Baltic, Black, and Adriatic seas would serve both European and NATO interests appeared first on Atlantic Council.

The post Bauerle Danzman quoted by Council on Foreign Relations on Nippon Steel-US Steel CFIUS review appeared first on Atlantic Council.

The post Tran quoted by AP on shift of Taiwan exports from China to US appeared first on Atlantic Council.

The post ACFP featuring Raimondo and Vestager cited by CBS News on US tariffs on Chinese EVs appeared first on Atlantic Council.

The post Bhusari and Nikoladze cited by Le Grand Continent on role of the US dollar in international trade appeared first on Atlantic Council.

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

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

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

The post China Pathfinder: Q1 2024 update appeared first on Atlantic Council.

The post Lipsky quoted by CNN on Europe’s response to US tariffs on Chinese EVs appeared first on Atlantic Council.

The post Bauerle Danzman quoted by ABC News on new US tariffs on Chinese EVs appeared first on Atlantic Council.

On May 7, Forward Defense Nonresident Senior Fellow LTG Charles W. Hooper spoke at the 18th DLA Piper Global Real Estate Summit in Chicago. The summit discussed the state of world markets and resources and identify ways the ever-changing real estate industry can continue to rebound and thrive. 

Fellow

Charles W. Hooper

Nonresident Senior Fellow

Forward Defense Scowcroft Center for Strategy and Security

China Security Partnerships

Forward Defense, housed within the Scowcroft Center for Strategy and Security, generates ideas and connects stakeholders in the defense ecosystem to promote an enduring military advantage for the United States, its allies, and partners. Our work identifies the defense strategies, capabilities, and resources the United States needs to deter and, if necessary, prevail in future conflict.

Learn more

The post Hooper spoke at the 18th DLA Piper Global Real Estate Summit in Chicago appeared first on Atlantic Council.

The post Russia Sanctions Database cited by RUSI policy brief on sanctions circumvention appeared first on Atlantic Council.

The Select Committee’s report, published in December with minimal fanfare, proposes that the United States reset the terms of economic relations with the People’s Republic of China (PRC), prevent US capital and technology from aiding China’s military buildup and human rights violations, and build US technological leadership alongside allies and partners. This bipartisan blueprint, though not perfect, is a useful foundation for US policy toward the PRC for the next Congress and the next administration—regardless of who wins the November elections.  

The authors of this article come from different political perspectives, but we agree that it’s time for a comprehensive economic strategy to advance US interests and deter the PRC’s ability to do them harm. Building on the Select Committee’s work, here are eight principles to inform a comprehensive playbook.

1. Be affirmative, agile, and systemic

Defense alone is not enough to prevail in the United States’ strategic competition with the PRC. The economic playbook needs to be affirmative in its outlook, agile in its execution, and systemic in its analysis. Those qualities will be required to simultaneously strengthen the US industrial base, foster innovation and new technologies, and pursue a positive economic agenda with partners and allies while taking the necessary defensive actions.

2. Get industrial policy right

Policymakers should look to history and geopolitics to develop a prudent two-pronged approach to industrial policy that focuses on strengthening the US domestic manufacturing base in targeted sectors (e.g. semiconductors) and investing in innovation and broad industrial infrastructure and training. Investment in research and development and a favorable tax and regulatory environment may be more effective than direct subsidies, which, although potentially needed in narrow circumstances, are more susceptible to industry capture and extra-economic considerations.   

3. Arrest the PRC’s market distortions and manipulations

The PRC has not lived up to the commitments it made when it joined the World Trade Organization (WTO) in December 2001. Nowhere is this more obvious than with respect to the PRC’s brazen and persistent excess capacity in electric vehicles, solar panels, steel, semiconductors, and pharmaceuticals, just to name a few. It is imprudent for the United States to afford China the same tariff treatment as other WTO members. However, merely revoking the PRC’s permanent normal trade relations status and reverting to Smoot-Hawley tariffs would be inefficient, outdated, and counterproductive. The Select Committee report puts forth a more sophisticated and effective approach by creating a new tariff column for China and renewing certain WTO safeguard mechanisms. This offers a promising foundation for a more modern and modulated trading framework with the PRC and should be put in action in close coordination with Group of Seven (G7) and Quadrilateral Security Dialogue members.

4. Stop US capital and technical knowhow from aiding the adversary

Export control measures on semiconductors and other advanced technologies put forth by the Biden administration and Congress to thwart the PRC’s military modernization are an important start. Next should come screening of outbound investments to prevent US investors from unintentionally aiding China’s military and human rights violations. This calls for a modulated approach involving both specific entities and sectors. Additionally, the US government should work with domestic and allied academic and research institutions on a principled, pragmatic, and robust cross-border research protocol to preclude the PRC’s intellectual theft and unauthorized technology transfer. 

5. Pursue a positive economic agenda with partners and allies

Punitive measures such as tariffs, investment restrictions, and export controls are necessary but insufficient for winning the strategic competition. A positive economic agenda with partners and allies is needed to incentivize the private sector—both in the United States and overseas—to diversify important supply chains away from China. The Select Committee report promotes bilateral trade negotiations with Taiwan, the United Kingdom, and Japan based on the high standards set out in the US-Mexico-Canada trade agreement. If a new free trade agreement is practically or politically challenging, the report suggests targeted agreements with trusted trade partners in areas such as the medical sector or critical minerals. As part of this effort, a comprehensive review and modernization of the Bretton Woods institutions to better reflect geoeconomic realities is urgently needed. 

6. Win the transition to the green economy

The road to the green economy rests wholly within the geopolitical and geoeconomic contest between the United States and the PRC. The United States should leverage its substantial advantages over the PRC in traditional and renewable energy and technology to address the immediate energy security needs of its partner nations while also offering them a credible energy transition toward a greener economy.

To ensure that its energy supply chains remain secure and that it remains energy independent, the United States should aggressively pursue sectoral agreements and minerals security partnerships recommended by the Select Committee report. Furthermore, the United States should remain vigilant against climate engagement with the PRC without due reciprocity and must avoid unwittingly facilitating the PRC’s declared intent to monopolize and dominate future green industries.

7. Set the trends around standards for the digital economy

As the world’s largest digital economy, the United States bears the responsibility to articulate the rules, norms, and practices of digital governance—including over artificial intelligence—that favor Western values over China’s model of censorship and control. The United States must lead on digital standards in order to keep its superiority in technology and financial markets. 

8. Modernize US policies, instruments, and institutions

Unlike defense and diplomacy, there is no identified lead US agency to engage and prevail in the economic competition with the PRC. The diverse and often discordant set of economic policies, instruments, and institutions engaged in the effort are frequently found wanting in both efficacy and efficiency. In short, US institutions are underprepared for the complexity of economic competition with the PRC. The United States has a long history of modernizing its government levers to address the challenges it confronts, from the 1986 Goldwater-Nichols legislation to reinforce the military chain of command after problems surfaced during military operations in Iran and Grenada, to post-9/11 reforms to federal intelligence and law enforcement agencies. A similar endeavor is needed to improve US economic diplomacy, coordination, and engagement.

Prevailing over the PRC in economic competition calls for total national commitment and engagement. It requires a comprehensive, nuanced, and tailored playbook utilizing not only the proverbial hammer and scalpel, but all the multipurpose tools in the toolbox. The Select Committee has done the nation a service by unequivocally identifying the PRC as an adversary and a rival, and it put forth a useful framework with pragmatic recommendations to bolster national economic security. Its report represents a useful transition from the initial chapter prioritizing industrial policy and tariff measures to the next chapter of working with allies and partners to prevail in the global marketplace.

Domestic prosperity depends on the United States leading the global economy. Now is the time to develop and execute a new US economic playbook to maintain that lead. 

Kaush Arha is a nonresident senior fellow at the Atlantic Council’s Global China Hub and previously served as the senior advisor for global strategic engagement at USAID and the G7 Sherpa for the Blue Dot Network during the Trump administration.

Peter Harrell is a nonresident senior fellow at the Carnegie Endowment for International Peace and previously served as senior director for international economics with a joint appointment to the National Security Council and National Economic Council during the Biden administration.

Clete Willems is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and previously served as deputy assistant to the president for international economics and deputy director of the National Economic Council during the Trump administration.

The post A new US economic playbook to lead the world economy and counter China appeared first on Atlantic Council.

On May 4, Transatlantic Security Initiative senior fellow Elisabeth Braw was interviewed on Nový svět about her latest book.

Fellow

Elisabeth Braw

Senior Fellow

Scowcroft Center for Strategy and Security Transatlantic Security Initiative

NATO Resilience & Society

The Transatlantic Security Initiative, in the Scowcroft Center for Strategy and Security, shapes and influences the debate on the greatest security challenges facing the North Atlantic Alliance and its key partners.

Learn more

The post Braw interviewed on Nový svět appeared first on Atlantic Council.

The post Dollar Dominance Monitor cited by Yale University report on US economic influence appeared first on Atlantic Council.

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

empowerME

empowerME at the Atlantic Council’s Rafik Hariri Center for the Middle East is shaping solutions to empower entrepreneurs, women, and youth and building coalitions of public and private partnerships to drive regional economic integration, prosperity, and job creation.

Explore the initiative

The post MENA’s economic outlook from the Atlantic Council’s IMF/World Bank Week appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

The post Bauerle Danzman quoted in the Washington Post on TikTok divestment bill appeared first on Atlantic Council.

The post “Retaliation and Resilience: China’s Economic Statecraft in a Taiwan Crisis” report quoted in Semafor Principals newsletter appeared first on Atlantic Council.

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.

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

The post Delivering results for the South: The Bretton Woods system we need appeared first on Atlantic Council.

The post Goldwyn quoted in Asharq Al-Awsat on cutting inflation in Egypt appeared first on Atlantic Council.

The post Donovan and Nikoladze cited by Politico on oil trade between China, Russia, and Iran appeared first on Atlantic Council.

The post Mühleisen quoted in Bloomberg on IMF debt restructuring policy reform appeared first on Atlantic Council.

The post Lipsky quoted in Politico on geopolitics at IMF-World Bank Spring Meetings appeared first on Atlantic Council.

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.”

Watch the event

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.”

Watch the event

• 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.”

Watch the event

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.

Watch the event

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.

Watch the event

“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.

Watch the event

• 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.”

Watch the event

“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.

Watch the event

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.”

Watch the event

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. 

Watch the full event 

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.

Watch more

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.

Watch the event

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.

Watch the event

• 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.

The post ACFP featuring IMF Managing Director Georgieva cited in Politico on challenges facing the global economy appeared first on Atlantic Council.

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.

The post IMF managing director: ‘Think of the unthinkable’ appeared first on Atlantic Council.

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

The post IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy appeared first on Atlantic Council.

The post ACFP featuring IMF Managing Director Georgieva cited in Reuters on US interest rate concerns appeared first on Atlantic Council.

The post ACFP featuring IMF Managing Director Georgieva cited in Bloomberg on status of global economy appeared first on Atlantic Council.

The post ACFP featuring IMF Managing Director Georgieva cited in Financial Times on status of global economy appeared first on Atlantic Council.

The post Tran cited by Bretton Woods Committee on Chinese manufacturing overcapacity appeared first on Atlantic Council.

The post Bauerle Danzman interviewed by Marketplace on CHIPS Act and TSMC investment appeared first on Atlantic Council.

The post Wald featured in Bloomberg: JPMorgan makes the case that high rates are actually driving inflation appeared first on Atlantic Council.

The post Tran interviewed by CNBC on Chinese manufacturing overcapacity in high tech and green energy goods appeared first on Atlantic Council.

The post Tran cited by Reuters on Chinese manufacturing overcapacity appeared first on Atlantic Council.

The post Graham cited by Bloomberg on Chinese manufacturing overcapacity in high tech and green energy goods appeared first on Atlantic Council.

The post Graham cited by Bloomberg on Chinese manufacturing overcapacity and electric vehicle (EV) exports appeared first on Atlantic Council.

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

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

New solutions are needed for Ukrainian grain exports

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

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

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

Positive economic statecraft can help Africa ensure food security

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

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

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

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

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

Learn more

The post Ukraine’s grain exports are crucial to Africa’s food security appeared first on Atlantic Council.

The post “Retaliation and Resilience: China’s Economic Statecraft in a Taiwan Crisis” report featured in Radio Free Asia appeared first on Atlantic Council.

The post Lipsky quoted by The Japan Times on Yellen China visit and debt restructuring appeared first on Atlantic Council.

The post China Pathfinder cited by South China Morning Post on China’s progress toward a market-based economy appeared first on Atlantic Council.

The post “Retaliation and Resilience: China’s Economic Statecraft in a Taiwan Crisis” report cited in Export Compliance Daily on Chinese alternative payment networks appeared first on Atlantic Council.

The post “Retaliation and Resilience: China’s Economic Statecraft in a Taiwan Crisis” report featured in Pro Farmer daily newsletter appeared first on Atlantic Council.

The post Graham cited by Barron’s on Chinese manufacturing loans appeared first on Atlantic Council.

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.

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

Report Jun 21, 2023

Sanctioning China in a Taiwan crisis: Scenarios and risks

By Charlie Vest and Agatha Kratz

New research on possible options and their costs of G7 sanctions on China in the event of a Taiwan Crisis.

China Economic Sanctions

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

New Atlanticist Feb 22, 2024

Forging a positive vision of economic statecraft

By Daleep Singh

The United States must institutionalize how it uses economic tools in the context of today’s great power competition.

China Economic Sanctions

The post How China could respond to US sanctions in a Taiwan crisis appeared first on Atlantic Council.

The post Donovan and Nikoladze featured by Business Insider on illicit oil trade between Russia, China, and Iran appeared first on Atlantic Council.

The post Bauerle Danzman cited by Hinrich Foundation on Nippon Steel acquisition of US Steel and friendshoring appeared first on Atlantic Council.

The post Bauerle Danzman quoted by Akron Beacon Journal on Nippon Steel acquisition of US Steel and friendshoring appeared first on Atlantic Council.

The post Graham cited by the Telegraph on Chinese electric vehicle (EV) exports and competitor responses appeared first on Atlantic Council.

The post Graham cited by the Telegraph on Chinese electric vehicle (EV) exports appeared first on Atlantic Council.

The post Graham cited by Frankfurter Allgemeine Zeitung on Chinese electric vehicle (EV) exports appeared first on Atlantic Council.

On March 22, Transatlantic Security Initiative senior fellow Elisabeth Braw was featured on Silicon Curtain to discuss globalization and her newest book.

Fellow

Elisabeth Braw

Senior Fellow

Scowcroft Center for Strategy and Security Transatlantic Security Initiative

NATO Resilience & Society

The Transatlantic Security Initiative, in the Scowcroft Center for Strategy and Security, shapes and influences the debate on the greatest security challenges facing the North Atlantic Alliance and its key partners.

Learn more

The post Braw featured in Silicon Curtain on globalization appeared first on Atlantic Council.

The post Graham quoted by Nikkei Asia on Chinese pharmaceutical sector and US de-risking efforts appeared first on Atlantic Council.

On March 17, Transatlantic Security Initiative senior fellow Elisabeth Braw was featured in Formiche discussing her new book and new forms of globalisation (source in Italian).

Fellow

Elisabeth Braw

Senior Fellow

Scowcroft Center for Strategy and Security Transatlantic Security Initiative

NATO Resilience & Society

The Transatlantic Security Initiative, in the Scowcroft Center for Strategy and Security, shapes and influences the debate on the greatest security challenges facing the North Atlantic Alliance and its key partners.

Learn more

The post Braw quoted in Formiche on globalisation appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

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

Learn more

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

The post Webster quoted in The Wire China on state of global hydrogen industry appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Learn more

The post How banking regulations affect US foreign policy appeared first on Atlantic Council.

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.

Learn more

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